By Kyla Eastling (CMC ’18)
Tax avoidance by multinational corporations (MNCs) has long been a controversial topic in international law. Recently, individual nations have begun to reform their tax codes to better regulate MNCs operating in their jurisdiction. The European Commission, however, is attempting to supersede the authority of individual nations’ tax laws. Last month, the Commission charged that Apple owed Ireland $14.5 billion in unpaid taxes. Ireland, however, claims that Apple is not responsible for paying any back-taxes because it has already paid what is legally owed under Irish tax law. Apple and Ireland have both promised to appeal the decision. This case could be a critical development in a system of international tax law that has struggled to keep up with an increasingly globalized economy.
This is not the first time that an MNC has come under fire for alleged tax avoidance. Controversy easily arises given the many parties with varied interests involved in taxing these companies. MNCs profits are mostly taxed in their home nation. In general, however, every country collects some taxes from a company operating within its borders. When foreign profits are eventually returned to the home country in a process called repatriation, the amount owed is commonly adjusted to account for the foreign taxes paid. Therefore, tax policies in one country have direct effects on the taxes collected by home countries. Though this system might seem fair, many companies like Apple have worked to find clever loopholes and practices to avoid paying billions of dollars in taxes in their home country.
Two common ways companies legally avoid the higher tax rates of their home country are borrowing money to reduce taxable income and practicing inversion. Companies can purchase bonds to pay back their investors without repatriating their profits. The interest payments on these bonds are tax deductible. Inversion is a process by which companies move their tax addresses to a foreign country with a lower corporate tax rate, like Ireland, usually by acquiring a smaller company. The United States Department of Treasury has recently ramped up efforts to combat tax avoidance. Earlier this year, the Treasury Department released new rules that make it more difficult for the companies to effectively strip their home-country earnings through inversion.
Similarly, the EU has been independently working to regulate multinational companies in regards to tax avoidance. The European Commission has previously called for back taxes from companies such as Starbucks and Amazon. Though each member state in the EU can legally choose its own tax system, their tax laws must respect the fundamental freedoms provided for by the EC Treaty, which bars countries from giving selective advantages to a company. State aid is banned since it effectively distorts competition and trade between member states.
In the case of Apple and Ireland, the European Commission found that by using loopholes in the Irish tax code, Apple paid a corporate tax rate as low as 0.005% which had “no factual or economic justification.” The Commission alleges that Ireland issued special tax rulings to calculate Apple’s tax liability. This practice violates EU tax law in a matter that constitutes state aid. The $14.5 billion in question makes this case the largest example of the EC attempting to retroactively prosecute a multinational company using a member state’s law.
The Finance Ministry of Ireland denies any wrongdoing as it claims that special tax rulings regarding Apple did not violate Irish tax law. Tim Cook, Apple’s CEO, has argued that the ruling therefore usurps member states’ power to interpret and enforce their own tax laws, “effectively proposing to replace [them] with a view of what the European Commission thinks the law should have been.” Ireland is concerned that this ruling could jeopardize its authority over its own tax system, one known to be popular with multinational companies. Though Ireland may receive a boost in tax revenue, this ruling could have a negative effect on Ireland’s economy in the long run.
A principal question in this case is what tax jurisdiction Apple was under. Should Apple be held liable for indirectly violating EU tax law if it complied with Irish tax law? If this case is decided in favor of the European Commission, other MNCs which thought they were following tax law may be similarly vulnerable to back taxes. The tax benefits of doing business in an EU country could be reduced, as the EU tax laws could supersede any member state laws.
Though this charge is specific to Apple and Ireland, its ramifications apply widely to the global community. It raises the question of what is truly under the member states’ discretion in terms of tax law. There may not be an obvious answer, but it is clear that international tax policy may be in need of revision to reflect the globalized nature of today’s businesses.