European Commission

Comment: ECJ decision should not let Apple off the hook

15th July 2020 by George Turner

The decision of the European Court of Justice (ECJ) on the Apple case means that Ireland will have to pay back €13bn in taxes they were told to collect from the company by the European Commission. The Commission’s ruling, which was annulled by the court, found that Apple had managed to gain a substantial tax advantage through an agreement they came to with the Irish authorities over the tax treatment of certain subsidiaries the company operated in the country. The Commission argued that the tax benefit gave Apple an unfair advantage, and so should be returned to Ireland.

Today’s ruling from the ECJ is therefore not about whether or not Apple has engaged in tax avoidance, but whether the European Commission was right to find that the government of Ireland had enabled Apple’s tax avoidance scheme by granting the company a tax ruling which should not have normally been available to companies operating in Ireland.

The fact that Apple has been engaging in tax avoidance is beyond doubt. According to the company’s own corporate filings, Apple paid just five per cent on its profits generated outside of the US between 2008 and 2015.

The company argues that the low tax bills it faces in countries like the UK are due to the fact that its products are designed in the United States, where most of its taxes are paid.

However, this argument is simply not borne out by the facts. According to our research, Apple’s own corporate filings from the last five years disclose that the company declared close to 70% of its profits outside of the United States.

It is true that the company has faced a much higher tax bill on the minority of profit it declares in the US. That is because most of its non-US profits have historically been shifted into companies which are not tax resident anywhere in the world.

This structure is very well documented by various investigations that have been carried out by government agencies and legislatures.

Three of the companies that are the focus of today’s ruling by the ECJ, Apple Operations International, Apple Sales International, and Apple Operations Europe were examined by the US Senate Permanent Subcommittee on Investigations in 2013, which concluded that they were part of a “complex web of offshore entities” designed to “avoid billions of dollars in U.S. income taxes”.

In the context of the vast nature of Apple’s tax avoidance scheme, the European Commissions focus on tax rulings made by Ireland was always a relatively narrow point, but this narrowness reflects the fact that the EU does not have many tools to deal with these kinds of issues. Tax policy has always been closely guarded by member states.

The high stakes involved in this dispute came about because Apple was using Ireland as a conduit to remove profits from countries around the world. Whatever the outcome of today’s ruling, no-country outside of Ireland would have been impacted by it.

For that reason, the judgement should serve as a reminder that governments need to urgently press ahead with reforming the international tax system and to implement domestic reforms to ensure that profits are taxed appropriately in their jurisdiction and make sure that the kind of corporate trickery deployed by companies like Apple is a thing of the past.

Apple’s scheme presents a particularly pressing issue because there is no backstop to Apple’s tax avoidance scheme such as the Digital Services Tax. Whereas other digital companies, such as Google and Facebook, will soon be faced with additional charges to make up for their profit shifting.

Photo by Marcin Nowak on Unsplash

Financial services lobbyists request EU delay anti-avoidance measures

23rd April 2020 by Alex Dunnagan

A consortium of financial services lobbyists has written to the European Commission calling for a delay to the implementation of anti-avoidance measures due to be rolled out on 01 July.¹ As first reported in Law360,² the letter – also sent to the OECD and to Finance Ministers in the EU and the UK – claims that due to the unfolding Covid-19 pandemic, businesses are unable to devote enough time to complete their preparations for the reporting required.

In a separate letter seen by TaxWatch, the European Banking Federation (EBF) requested a three-month postponement of the requirement to provide information on customer bank accounts to tax authorities.

The sixth version of the EU Directive on administrative cooperation, or DAC6, aims to provide the tax authorities of EU Member States and the UK with additional information to assist in closing tax loopholes. DAC6 requires EU and UK intermediaries to file information on “reportable cross-border arrangements” to their home tax authorities. One test of whether an arrangement must be reported is if its “main benefit” is to gain a tax advantage. The definition of what an intermediary includes is broad, and includes any individual or company who sells cross-border tax arrangements, i.e. accountants, tax advisers, lawyers, banks.³ ⁴

The implementation of DAC6 has already been challenging. The way EU directives work is that they set out an objective, and give EU states a choice of how to achieve it.⁵ DAC6 was passed by the European Commission in June 2018, though individual member states were slow to implement the Directive as domestic legislation, with almost half of the EU member states missing the 31 December 2019 deadline to implement DAC6. However, should a member state fail to implement an EU Directive as domestic legislation, the Directive itself acts as a backstop – effectively meaning that regardless of action taken at a national level, businesses should have been aware that DAC6 would be coming into effect.

This is reflected by Big Four accountancy firms that have been recommending for over a year that affected institutions should begin their implementation efforts, even before member states have transported the EU Directive into local law.⁶ ⁷ Despite the two years that relevant parties have had to prepare for DAC6, lobbyists are suggesting that as some people are off work due to having the coronavirus illness, or have childcare duties as a result of school closures, that the intermediaries affected by DAC6 will be unable to comply with the requirements.

The request asks for a postponement of reporting deadlines until 2021, with a review at the end of September 2020 to see if a further extension is required.

The EBF, one of the groups lobbying for a delay of DAC6, wrote separately last week to both the European Commission and the OECD, requesting a three month postponement of the deadline for information exchange under the Common Reporting Standard (CRS). This requirement, based on the US Foreign Account Tax Compliance Act, is a global initiative to combat tax evasion, and was implemented in the UK on 01 October 2018. The CRS is used to determine the personal financial information that must be shared regarding assets, income, and taxable amounts across international borders, and is reported annually. The added transparency on a global basis provided by the CRS should allow for enhanced enforcement actions, not only against tax evaders, but also against those involved in money laundering and terrorist financing.⁸

Again, the reason given was that workforces are struggling with technology constraints due to working from home. This request is more controversial, given the fact that the CRS has been in place for several years, and is global in its scope. The other nine signatories of the 20 April request have not put their names to this letter.

This is not the first time that interest groups have sought to use the coronavirus to delay tax measures. Earlier this month we reported on how TechUK, the industry group that represents Facebook and Google amongst others, had asked the UK government for a delay to the start of the Digital Services Tax, saying that companies will be unable to cope with the burden of extra compliance during the crisis. A similar campaign is being waged to defer the Indian digital tax.⁹

The coronavirus pandemic is undoubtedly having an effect on the ability of companies to conduct business. However, given the huge amount of resources required by governments fighting the impacts of the virus, is now really the time to delay measures designed to combat corporate tax avoidance, tax evasion, and money laundering?

The full letter requesting a delay to DAC6 can be found here – Request to European Commission to recommend/endorse the deferral of EU DAC6 reporting obligations

Photo by Calvin Hanson on Unsplash

1The associations who signed the letter, dated 20 April 2020, are ACC, AFME, AIMA, EACB, EBF, EFAMA, EFSA, ESBG, Insurance Europe and Invest Europe.

2EU Should Suspend New Anti-Avoidance Rules, Lobbyists Say, Law360, 21 April 2020, https://www.law360.com/financial-services-uk/articles/1265736/eu-should-suspend-new-anti-avoidance-rules-lobbyists-say?about=financial-services-uk

3Council Directive 2018/822/EU of 25 May 2018, https://ec.europa.eu/taxation_customs/sites/taxation/files/dac-6-council-directive-2018_en.pdf

4DAC6: EU Mandatory Disclosure Regime, Deloitte, https://www2.deloitte.com/uk/en/pages/tax/articles/dac6-eu-mandatory-disclosure-regime.html

5A good explainer of how EU Directives work has been produced by Full Fact, How the EU works: EU law and the UK, Full Fact, 11 March 2016, https://fullfact.org/europe/eu-law-and-uk/

6EU Mandatory Disclosure Requirements – Update, KPMG, 08 February 2019, https://home.kpmg/xx/en/home/insights/2019/02/etf-394-eu-mandatory-disclosure-requirements-update.html

7DAC6: The clock is ticking… Less than 1 year until go-live, Deloitte, 02 July 2019, https://blogs.deloitte.ch/tax/2019/07/dac6-the-clock-is-ticking.html

8The OECD common reporting standard (CRS): FATCA is going global, Gibson Dunn, 11 June 2015, https://www.gibsondunn.com/wp-content/uploads/documents/publications/Schmid-Grunert-OECD-common-reporting-standard-BLM-02.2015.pdf

9Tech giants such as Google, Facebook seek to defer Indian digital tax – sources, Reuters, 31 March 2020, https://uk.reuters.com/article/uk-india-tax-digital/tech-giants-such-as-google-facebook-seek-to-defer-indian-digital-tax-sources-idUKKBN21I1XY

European Commission responds to TaxWatch call to investigate Google

5th June 2019 by George Turner

The European Commission has replied to TaxWatch’s call to launch an investigation into the tax structure of Google. The Commission has said it will consider the information provided by TaxWatch as part of its ongoing investigation into tax agreements in Ireland and the Netherlands.

TaxWatch wrote to the European Commission on 26 April to highlight the structure that Google has put in place to avoid paying taxes in Europe. Google charges all of its European customers via a subsidiary in Ireland, Google Ireland Limited. That company pays out large royalty payments for the use of Google’s intellectual property to a company in the Netherlands, which in turn pays out almost all of the revenue it receives as a royalty to a company registered in Ireland but tax resident in Bermuda.

The royalty payments are substantial, comprising 46% of Google Ireland’s revenues in 2017, the last year where accounts are available. The structure minimises profits and tax liabilities in Europe, whilst making sure that profits appear in Bermuda, which has a 0% corporation tax rate.

TaxWatch questioned whether the scale of royalty payments made by Google to its Bermuda subsidiary was in line with the arms-length principle. This principle is used by tax authorities to establish whether a company is artificially shifting profits to tax havens, and whether the government of the Netherlands and Ireland had come to any special arrangements with Google to allow them to make such payments.

Responding to TaxWatch’s letter, Max Lienemeyer, Head of the State Aid: General Enforcement and Scrutiny Unit of the European Commission’s Competition DG, told TaxWatch that the Commission had an ongoing investigation into tax rulings granted by Ireland and the Netherlands, and was seeking to establish whether certain tax agreements had resulted in a selective advantage being given to particular companies.

Mr Lienemeyer thanked TaxWatch for the information provided, and said it would be considered as market information in the light of their ongoing investigation into transfer pricing deals.

In addition to raising this issue with the commission, TaxWatch has put forward a proposal on how countries could change domestic legislation to ensure that royalty payments made by large multinational companies to tax haven subsidiaries are subject to income tax.

Photo by Sara Kurfeß on Unsplash