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If EU Can Squeeze $14.5B from Apple...

In case you missed it, the EU is insisting Ireland reclaim billions in past taxes rom Apple (http://www.wsj.com/articles/eus-tax-decision-invites-more-scrutiny-of-apple-1472676741). Apple doesn't want to pay, and Ireland doesn't want to insist; but the EU does. Assuming this stands, I fear it will make already-complex international tax arrangements more difficult, and, worse, harder to remove the risk from. Is anyone exploring alternatives already, or is everyone waiting to see where this ends?

Answers

Topic Expert
Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

Both the Irish and US governments are vociferously opposing the EU holding. The tax ruling to Apple was issued by a sovereign nation. This EU effort is also likely part of the BEPS (Base Erosion Profit Shifting) effort the OECD (and driven by Europe) is pushing and that US Treasury opposes in part dealing with sourcing of income. In essence it's a tax grab by the EU that is challenging the sovereign power of its member states. Separately, Ireland should counter by showing the benefits to Ireland (and therefore the EU) by Apple having invested so much money (Jobs; payroll taxes; VAT; individual income tax; families with jobs; etc.). Furthermore, the European countries collect more money from indirect taxes (like VAT) than from income taxes. Yes -- this is bad -- but I don't think people are yet planning for this type of risk other than potentially being hesitant to expand investments in the EU.

User's Picture

Anonymous (Comptroller) | Aug 31, 2016

In case you missed it, the EU is insisting Ireland reclaim billions in past taxes rom Apple (http://www.wsj.com/articles/eus-tax-decision-invites-more-scrutiny-of-apple-1472676741). Apple doesn't want to pay, and Ireland doesn't want to insist; but the EU does. Assuming this stands, I fear it will make already-complex international tax arrangements more difficult, and, worse, harder to remove the risk from. Is anyone exploring alternatives already, or is everyone waiting to see where this ends?

Bruce Lynn
Title: Managing Partner
Company: The FECG LLC
(Managing Partner, The FECG LLC) |

The EU's argument about "illegal state aid" appears to rest on the theory that Apple (and other companies?) got sweetheart deals not available to everyone.

I would suggest that this penalty is an opening salvo in the EU's BEPS argument. Sovereign nations maybe free to set tax rates / laws, but, as members in the EU they are not allowed to benefit from these laws at the expense of other members.

Hypothetically if everyone were able to execute the techniques utilized by Apple Ireland could find itself in a situation where taxes paid could be insufficient to fund the services demanded of a country by its own citizens since Apple's tax rate is way below the rate set to fund those services. Of course Ireland could raise other taxes supposedly.

As for the US, its position about receiving less in taxes than what would be due under its current rates assumes that the deferred taxes due are eventually paid. Under current law it is unlikely that any amount will be paid given Apple (and other companies) claims that they have no plans to repatriate any of their (cash) earnings.

This assumption will be tested when / if there is another "tax holiday", read reduction in the cash out required to pay taxes due.

Bottom line: current tax laws will be changing as governments try to minimize past tax arbitrage games. For corporates they may want to insure there is "enough" liquidity on hand (i.e. cash + unused credit lines) in 2017 to pay the piper.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Companies are already reacting to the new landscape in reaction to the recent OECD BEPS initiative (Base Erosion and Profit Shifting) and not because of the EU state tax aid challenges. The OECD and EU are separate authorities and present coincident challenges but the EU is basing its attack using BEPS principles.

While the EU law on illegal state tax aid (i.e., favorable tax treatment by a country of select companies) is a legitimate concept, the way they are attempting to apply it is arguably not. In essence, the definition of what comports with the transfer pricing arm's length principle has evolved over time with the latest iteration reflected in increased operational substance requirements under BEPS. Past transfer pricing standard practice where a paper cash box subsidiary with no employees would fund R&D, thereby entitling it to reap the fruits and profit of any inventions from that research, is no longer considered arm's length. The EU wishes to retroactively apply this new arm's length definition to Ireland's past transfer pricing rulings with Apple and similar rulings by other EU countries with other companies.

The uncertain legal question that will be fought over the coming years in European courts is whether this new arm's length definition can be retroactively imposed on Ireland and Apple. Unfortunately, transfer pricing rulings are often decided in a capricious fashion depending on a judge's whim of what is meant by the arm's length principle.

Interestingly, while US populist politicians (mainly from the Democratic Party) routinely berate US multinationals for not paying their "fair share" of taxes, the Obama Administration is taking the side of US multinationals against the EU because EU success in this regard will ultimately mean less tax revenue for the US. So, paying a fair share means pay it to my country, not to another country. For practitioners, it is well known that tax principles are routinely ignored when it comes to fights between tax authorities.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Would love to hear from our tax practioners if or how this is going to affect firms that have decided to go the tax inversion route.

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