European Court of Justice. March 2023. CC.
Apple has been ordered to pay €14 billion after the European Court of Justice ruled that the company received unlawful tax benefits from the Irish government. The court highlights how the tech giant, like many others, had funneled its European profits through Ireland, paying almost no tax.
Apple exploited a loophole in the Irish tax system known as the 'Double Irish.' It’s a finicky thing. So, to spare you the headache, here is Vanessa Houlder from the FT:
The double Irish exploits the different definitions of corporate residency in Ireland and the US. Dublin taxes companies if they are controlled and managed in Ireland, while the US’ definition of tax residency is based on where a corporation is registered.
Companies exploiting the double Irish put their intellectual property into an Irish-registered company that is controlled from a tax haven such as Bermuda. Ireland considers the company to be tax-resident in Bermuda, while the US considers it to be tax-resident in Ireland.
The result is that when royalty payments are sent to the company, they go untaxed - unless or until the money is eventually sent home to the US parent company.
Source: FT
Apple effectively plopped all its profits into an Irish subsidiary, making them tax-exempt. From 2004 to 2014, this strategy shielded €110.8 billion of non-US profits from taxation.
In Apple’s quiet Irish office, not much seemed to happen. But within those walls, all of Apple’s IP was kept, and the billions of euros tagged to it flowed through.
Other American multinationals used this Irish system to park $1 trillion in offshore tax havens. Many relocated their operations to Ireland, including Google, Meta, Intel, and Pfizer. But the whole operation was draining the profits from the world around them.
The Irish government wasn't necessarily pulling in much more revenue. The tax rates were too low for that. But the economy and the state coffers found other ways to gain.
Legal services specialising in intellectual property and capital management have seen significant growth. Major pharmaceutical companies, heavily reliant on intellectual property, have established substantial manufacturing operations.
Paul Krugman famously dubbed it “leprechaun economics.” Billions in capital assets were shifted into Ireland, labeled as 'investment.' Exports that never touched Irish soil inflated net export figures. This phenomenon invited both envy and skepticism regarding Ireland’s economic growth.
The ECJ ruled that Apple's tax advantage was illegal, as it constituted state aid. The iPhone maker received an "unfair and selective advantage" by funneling its profits into tax-exempt subsidiaries. This practice is generally illegal in the EU because it gets in the way of fair competition.
This same decision was reached in 2016 but overturned in 2020 on several issues. The key one was this: how much income could really be tied to the Irish subsidiaries? Not much happened in those Irish offices. So, why should the profits belong to them? If the profits were not attributable, they could be exempt.
EU Competition Commissioner called the ruling a "big win for European citizens and tax justice." She added that such cases "could no longer occur," as tax loopholes like the Double Irish have been closed, including in Luxembourg, the Netherlands, and Cyprus.
The Irish regime penalised last week has been out of force since 2015. EU directives, including the OECD global minimum tax rate, have helped block any more holes.
But the ECJ’s decision could reopen plenty of historical cases.
Mr Daly, Reader in Tax Law at King's College London, stated, "We had many Irish-incorporated companies that were not resident in Ireland but held intellectual property." However, now that the ECJ has ruled that the assets were not held offshore but in Ireland, "This calls into question almost all tax arrangements that used this regime."
With the original issues settled, is there still the will to chase other companies like Apple for those untaxed profits?
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