EU treaty law clearly states that taxation is a national competence, not an EU one

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By Cormac Lucey, in the Times, Irish edition, 2 September 2016

Dublin recently defeated Kerry by two points in a thrilling All-Ireland football semi-final. Dublin controlled large swathes of the game, showing superb skills and athleticism, but Kerry showed amazing strength just before half-time when they scored two goals against the run of play. The match raised an interesting question — is it better to dominate a football match or to enjoy a short spell where you score heavily?

The government faces a similar question as it considers this week’s ruling by the European Commission that Apple owes it up to €13 billion in back taxes. Should it stick to dominating the foreign direct investment (FDI) match and appeal against the decision? Or should the government grab €13 billion that it didn’t expect and put its longer-term FDI appeal at risk?

Writing in The Irish Times, Fintan O’Toole said that the state had been given an unexpected and strangely unwanted opportunity to reinvigorate itself. “It has been presented with a one-off chance to create the kind of public project that would entitle Ireland to call itself a republic,” he said.

Unsurprisingly, given the historical fundraising methods of its paramilitary wing, Sinn Fein is also urging that we take the money and run.

There is no doubt that the commission’s ruling raises several issues, but it’s important to first understand the background. Apple Sales International (ASI) is a company incorporated in Ireland whose directors met abroad. As ASI was registered in Ireland the American tax authorities considered it tax resident here, but because it was directed from abroad the Irish tax authorities considered it non-Irish.

It thus managed to largely escape taxation anywhere, having secured tax rulings from Revenue in Ireland in 1991 and 2007 confirming this position. Tax law was changed in 2014 to close this loophole: the general rule now is that an Irish incorporated company will be treated as Irish tax resident.

One key question is whether it is fair to retrospectively levy a huge tax bill when the corporation concerned has already, according to the relevant tax authorities, paid all taxes due.

The commission’s press statement this week admitted that such tax rulings were perfectly legal. “They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions,” it said.

What value has such a ruling if it can be retrospectively overturned in such spectacular fashion?

A second question concerns the nature of Apple’s tax liability. Under American law, tax of 35 per cent falls due when Apple Sales International repatriates money to the United States. It can therefore be argued that Apple’s tax treatment has not really reduced its tax liability: it has just deferred it. Looked at this way ASI’s eventual tax bill is owed to authorities in the US and not the European Union.

This explains the angry reaction of Senator Charles Schumer, the New York Democrat, who is in line to preside over the senate should Democrats win control in November. “This is a cheap money grab by the European Commission, targeting US businesses and the US tax base,” he said.

So what should the Irish government do? Voices on the left argue that we should take the money and run, but that would be very short-sighted. Fifty years ago Belfast was a much more prosperous city than Dublin. Today the situation is reversed.

In my view that is largely down to our success in attracting foreign direct investment from corporations such as Apple. According to the Department of Finance more than one quarter of Ireland’s economic output (gross value added) in 2011 came from the FDI sector. The proportion today is probably higher.

Michael Noonan, the finance minister, is therefore correct to prioritise the long-term security of our relationship with foreign investors over the short-term benefit of grabbing €13 billion from them. His stance will cause him political problems but he is more than capable of taking a personal hit for the economic interests of the national team.

There is another important reason why Mr Noonan should appeal against this week’s ruling. EU treaty law states that taxation is a national competence, not an EU one. By ruling that Apple should pay back taxes in excess of 7 per cent of Ireland’s national debt, Margrethe Vestager, the competition commissioner, has intervened rather obtrusively into our tax affairs to address an issue that has already been fixed.

She argues that Apple was unfairly advantaged by the tax ruling it got from the Revenue and that her decision therefore falls within the remit of competition policy, but if the Irish authorities taxed Apple on the profits it generated here and if other tax authorities — especially in the US — have not yet taxed the company, why must Ireland collect €13 billion?

tax holiday

The commission argues that the “selective tax treatment of Apple in Ireland is illegal under EU state aid rules”, but it is unclear exactly how the Revenue gave Apple selective tax treatment. Is it not equally arguable that Revenue applied Irish tax law to Apple and assisted the American company by giving it tax rulings in order to clarify matters?

Furthermore Seamus Coffey, an economist based in University College Cork, said that Ms Vestager was attributing 60 per cent of Apple’s global profits to its Cork operations. If that is so — and I have no reason to doubt his calculations — it would suggest that the €13 billion figure is based on implausible computational foundations.

The problem is that an appeal is unlikely to be successful. Lord Mance, a member of the UK Supreme Court, has cautioned that the European Court of Justice, which would hear the case after it goes to the EU general court, has too much institutional investment in the development of the EU to “discharge the checks and balances role successfully”.

With this week’s ruling, June’s vote for Brexit and Europe’s ever-worsening migration and terror problems, the balance of national advantage in remaining inside the EU is eroding fast.

Published in The Times (Ireland edition)

September 2nd 2016

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