Last week’s surprise ruling by the European Court of Justice ordering US tech giant Apple to make good on €13 billion in back taxes to Ireland presents the country with a predicament most governments would envy.
Apple made use of a now defunct tax scheme that helped the company avoid paying taxes in Ireland, which is a haven for multinational companies doing business in the EU due to its traditionally favourable corporate rates. The legal tax loophole covered the years 1991 to 2014. In 2016, following a two-year investigation, the European Commission formally accused Ireland of using the tax scheme as a state-aid program that violated EU rules.
In an unusual twist, the EU member state sided with Apple against the Commission, as the Irish government at the time wanted to forgo the money as part of an effort to make Ireland an attractive base for big global companies. It spent years fighting in court to prevent accepting the taxes, winning on appeal in 2020 – a decision that last week’s judgement overturned in a final ruling.
The back-tax bill amounts to more than 2% of Ireland’s annual GDP, or roughly 10% of all the gross tax revenue the country took in last year. That kind of windfall — plus interest and other possible fees — does not come around so often, posing Irish leaders with the question of what to do with it. The Irish government said last week it would accept the ruling but added that the issue central to the Apple case is “now of historical relevance only.”
Still, the decision upends years of precedent that could shape future tax issues in the EU, while emboldening the Commission to intervene in a legal area that has long been the domain of member states. In an interview with The Parliament, Stephen Daly, a scholar in tax law at King’s College London, assessed the implications of the case for Ireland, the EU, Apple – and corporate governance more broadly.
In short, Daly said that multinational companies may not have to fear consequences of past tax behaviour, but will need to take care going forward, given the Commission’s new-found right to weigh in on such matters.
The following interview has been edited for length and clarity.
The ruling has generated mixed reviews — some saying this is a big deal, others not. What do you make of it?
To be fair, it's a bit of all of the above. People might try to dilute the significance of this by saying that it relates to a historic tax structure in Ireland, which no longer exists.
So multinationals who adopted that structure, they theoretically would be concerned because Apple's tax structure may have looked very similar to theirs, and therefore they may end up being challenged by the Irish revenue commissioners or the European Commission. However, there are several reasons to think those multinationals will not have to pay any more taxes in Ireland.
The first is that there are limitation rules. So as a matter of Irish tax law, the revenue commissioners can only look back four years. That takes us to 2020. There shouldn't have been anybody with this structure in 2020. The second thing is the European Commission can look back 10 years. So, it can look back to 2014, however, there aren't going to be that many companies that still had this structure in place from 2014 through 2020.
For those two reasons, I would say that those multinationals, which adopted similar structures to Apple, probably won't have to concern themselves about paying any more taxes. For that reason, people may say that the judgment is kind of limited in its impact on Ireland's tax system.
But it is a very significant judgment, right? It's significant for several reasons. One, €13 billion of taxes is going to have to be paid, plus interest. That makes it significant. The second thing is that it is significant because it gives us chaos. The judgment itself totally contradicts precedent, which the very same court handed down over the last two years.
We thought it was going to be a fait accompli, and we thought that the Commission was going to lose the Apple case just as it lost all the other cases before the European Court of Justice. And yet we get a different outcome. So, it's significant because the case law is now a mess.
The third reason the case is significant is that it gives the Commission free license to engage in intrusive investigations into tax administration. So, the premise of the case against Apple was that the Irish revenue commissioners had misapplied their own law – and the Commission succeeded in showing to the court that Ireland had misapplied its own law.
Therefore, any time that there has been a potential misapplication of domestic law, the Commission can now investigate. That means not just where there's been a tax ruling, but presumably any time that there's been other advice, guidance issued to taxpayers where there's been tax settlements, tax amnesties, even when there's been a tax assessment which was accepted by the tax authority – any time that there's been a misapplication of the law, which means it doesn't require that the tax authority acted in some way which was improper. It could be any time that there's been a reasonable interpretation of the law adopted by the taxpayer and the tax authority, which in fact turns out to be incorrect.
If that’s the case, how much does this change the relationship between the EU and its members?
So tax sovereignty is the one of the few remaining barriers to true EU integration, and it is something that member states have resisted. They do not want to give up their ability to construct their own tax systems. So, each member state has a veto over any legislative proposal which tries to harmonize taxes or tax administration. This case runs roughshod through the basic principle which underpins that. So now, whilst the Commission cannot harmonize legislation, it can quite intrusively encroach into tax administration.
What happens to the money now?
The [Irish] government can use it however it wants. The money was held in an escrow account, and apparently this is going to take some months to unwind, and it hasn't actually performed as well – the value has gone down slightly.
But the government can do whatever it wants with that. And, in fact, this has always been one of the fundamental issues with using state aid in the way that it has been used, because Ireland now gets to keep the spoils. The damage has been done to the internal market supposedly, and yet Ireland gets to keep the money. The money doesn’t go to the EU budget.
If you believe that Ireland was wrong in the first place to give the money – give the subsidy to Apple – and if you think that Ireland deliberately did so in order to encourage buying direct investment in Ireland, then Ireland's got a double win, right? Because it's got Apple investing in Ireland, and there's now 6,000-plus employees in Ireland. At the same time, Ireland doesn't even have to suffer the loss of any subsidy which is supposedly given in the first place.
It is one of the problems that has been always there with the state aid rules. You know, it's totally perverse, because you're supposed to be sanctioning the wrongdoer, and in fact you're actually compensating them. And the wrongdoer in this case is the Irish. It's the state. But they get to keep this windfall.
What do multinationals need to be aware of to avoid Apple’s fate?
The first thing to note is that the world has moved on quite significantly from even 2013.
We now have a global minimum tax on corporations. It doesn't matter where you set yourself up. Corporations are now going to have to pay a minimum effective tax. There is no hiding place anymore for multinationals.
Who are the winners in this case?
The lawyers. The lawyers are always the winners. This has been a very lengthy investigation and then litigation. It all started in 2013, so there are going to [be] people [who have been] advising the Irish government and Apple, and also the Commission, for over a decade. They don't lose any money out of this.
It's a good one for us legal academics as well, because there is nothing interesting when a court arrives at an orthodox decision that everybody saw coming. There's nothing to write about, there [are] no newspaper columns, no interviews, no academic articles.
What’s next for EU tax enforcement?
The task force on tax planning practices was, it appears to me, disbanded several years ago, so it doesn't look like there's anybody left on the Commission to do the investigations into tax rulings.
The world has moved on [and]the Commission has kind of moved on as well. It's got other priorities.