The days when big US technology companies could easily slice tax bills in Europe are coming to an end.
For decades, businesses like Apple that generate significant revenue abroad flocked to Ireland, the Netherlands, and Luxembourg, where they counted on amenable fiscal regimes to reduce their tax, even if they had minimal operations on the ground.
European competition commissioner Margrethe Vestager sent the strongest signal yet that she will not abide these strategies when she demanded Apple pay an estimated €13bn in back taxes.
“Every global company that is exposed to EU taxes in individual nations now has to look back and ask whether any of their agreements are subject to similar attacks,” said Thomas Cooke, a professor at Georgetown’s McDonough School of Business.
“This is the first signal of a long play that’s going to take place over many, many months.”
Every time an iPhone or iPad is purchased in London, Paris, or Milan, Apple books the profit at a subsidiary in Cork.
The process is part of a decades-long arrangement with the Government that has allowed the company to pay lower taxes on these European sales.
The commission ruled that Ireland gave Apple illegally favourable tax treatment, letting it pay an effective tax rate on European profits of 1% in 2003 and down to 0.005% in 2014. Apple and Ireland vowed to appeal.
Apple’s Irish tax arrangement was considered “the most brazen” among multinational US technology companies, said Aisling Donohue, a partner at tax and business advisory firm MGPartners in Ireland.
While other companies should be concerned, they aren’t likely to face as much scrutiny, she said.
Still, Ms Vestager’s move is part of a broader push to close loopholes that European regulators think give foreign companies an advantage.
Google parent Alphabet has also been a beneficiary of Ireland’s tax regime, using the so-called ‘Double Irish’ mechanism to save billions in tax on its international earnings. Ireland is phasing this out, although companies have until 2021 to adjust.
Amazon.com has used a similar process to effectively send profit through Luxembourg. In Europe, the e-commerce giant told authorities that the intellectual property behind its web shopping platform was immensely valuable, justifying the billions in tax-free revenue it collected there since moving its technology assets to Luxembourg a decade ago.
In the US it played down the value of those same assets to explain why it paid so little in taxes for licensing them. That prompted investigations on both sides of the Atlantic and Amazon changed its policy in 2015, largely eliminating the practice.
“You can’t bank on achieving the savings in post-tax profits that you might have once expected,” said Jolyon Maugham, a British trial lawyer specialising in tax cases at Devereux Chambers.
“That makes the pursuit of such strategies rather more difficult to justify.”
About six months ago, Netflix told an investor that the company will likely pay higher international tax rates than other large US technology companies currently pay.
Netflix, which recently began expanding aggressively abroad, said it views other US tech companies’ international tax strategies as unsustainable, according to a source.
“Multinationals with aggressive tax planning strategies can expect to pay more tax,” Sarah Jane Mahmud, a Bloomberg Intelligence analyst, wrote in a recent research note.
“EU reforms will require income to be taxed where generated through, among other things, new restrictions on use of controlled foreign companies,” she said.
While €13bn represents the EU’s estimate of how much unpaid tax Ireland should claw back from Apple, the final amount, which also will include interest, is still not set in stone.
“Who knows what the final figure will be,” Eamonn O’Dea of the Revenue Commissioners told RTÉ’s Morning Ireland. He said that the EU’s comments are “very, very confusing”.
Even if Apple has to pay billions and other tax strategies fizzle, Ireland’s 12.5% corporate rate means it is still likely to trump the US as a preferred corporate tax domicile. The iPhone maker has been there since opening a factory in Cork in 1980.
The timing of Europe’s decision, ahead of the US presidential election, means tax reform in the US may become a more prominent issue.
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