Joanna Diane Caytas
JD Candidate, Columbia Law School 2017
The post-2008 public debt crisis alerted the Eurozone – and Europe as a whole – to its dangerous love affair with the outdated notion that states cannot go bankrupt and therefore can take on quasi-unlimited levels of debt. Greece and Cyprus called this bluff in 2012-13 with dramatic consequences. Ever since, the continent has been in search of ways and means to bring under control unsustainable levels of sovereign borrowings that cannot be passed on to the banking and financial sector without laying the foundation for equally expensive bailouts. Just as predictably, banks and other financial institutions have been caught between the rock of core capital requirements and the hard place of sometimes legislatively mandated government pressure to invest in government debt, and ceased significant lending altogether. This predicament has developed in tandem with an increasingly shrill public debate about favoritism towards banks at the expense of taxpayers. With OECD judging European debt levels to be an even higher security risk to global economic growth and prosperity than the U.S. national debt, Europe now suffers political exposure to the consequences of public realization of half a century of reckless deficit spending to sustain the Potemkin village of a comprehensive welfare state.
As is characteristic for politicians in a pickle that is unresolvable within existing frameworks, consensus was promptly reached that, in order to maintain the spending end of the tax-and-spend prescription, revenue needed to be increased by orders of magnitude. Given political realities, it became clear that squeezing the middle class any further was not a viable proposition. So, a widely known yet little publicized fact was discovered by leaks and revelations in an international financial scandal seeking to expose OECD’s perennial nemesis, offshore financial centers: preferential advance tax rulings by minor European jurisdictions such as Switzerland, Luxembourg and several others seeking to position themselves as European domiciles for major global corporations seeking to minimize overall tax exposure. Of course, tax rulings are commonly used and applied across the EU, just with less competitive effect. But having established awareness in the public consciousness that corporate citizens are “not paying their fair share,” the EU sought to position itself further as a driving force within OECD’s attempts since 1998 at uniform taxation in order to eliminate “harmful tax competition.” The EU realized that, in light of its Member States’ fiscal autonomy, there was simply no way to force them into abandoning tax competition. Or was there? Indeed there was – although it required amazing acrobatics by applying Law and Economics to taxation in entirely unprecedented ways: by calling lower taxes “state aid” that distorts competition and is unlawful under Art. 107 (1) TFEU.
Since media allegations surfaced about favorable tax treatment of certain companies by way of advance tax ruling practices of individual Member States, the European Commission’s Directorate General for Competition, most recently under Commissioner Margarethe Vestager, has been investigating those practices since 2013 as an abuse of rights. In the three years since, the Commission has investigated Fiat, Starbucks, the Belgian excess profit exemption and Apple, started two further investigations of Amazon and McDonalds, and is likely to open additional proceedings in the imminent future.
Of course, domiciliation of regional corporate headquarters of non-EU corporations invites a race to the bottom on the part of tax jurisdictions in exchange for the job and wealth creation undertaken by corporations locally. Since Apple chose Cork, Ireland as its European headquarters in the 1980s, it has expanded its workforce there from 60 to almost 6,000 under a tax arrangement that stretched from 1991 till 2015. On August 30, 2016, the Commission ordered Ireland to recover from Apple € 13 billion plus interest for the last 10 years for allowing Apple to pay a maximum tax rate of just 1%. Ireland does not wish to collect these taxes. In 2014, Apple had paid only 0.005% while the standard Irish corporate tax rate is 12.5%.
On May 19, 2016, the Commission published a Notice on the Notion of State Aid to clarify its position with regard to tax rulings. Shortly thereafter, on June 3, 2016, the Directorate General for Competition published a Working Paper on State Aid and Tax Rulings. Then, on August 24, 2016, the U.S. Department of the Treasury released a white paper on The European Commission’s Recent State Aid Investigations of Transfer Price Rulings to further substantiate the U.S. position. This position had been previously conveyed by Secretary Jacob Lew in a letter of February 11, 2016 to Commission President Jean-Claude Juncker that set forth the Department’s primary concerns with the Commission’s investigations. Specifically, Treasury argued that:
- the Commission’s approach was new and deviated from existing EU case law as well as from Commission decisions in stating unexpectedly that generally available tax rulings constitute impermissible state aid in select cases where the Commission second-guesses and, in fact, overrules Member State fiscal autonomy;
- the Commission was about to seek retroactive recovery of tax revenue related to tax years prior to the announcement of its novel approach which, because it departs from prior practice, ought not be applied retroactively as it also undermines G20 efforts to improve tax certainty and creates dangerous precedent for practices by other countries; and
- because the Commissions new theory of “state aid” is inconsistent with OECD’s 2010 Transfer Pricing Guidelines calculated to ensure consistent application of the arm’s length principle, it undermines the international tax system as the Commission claims to apply a different arm’s length principle derived from TFEU that undermines progress made under the OECD and G20 Base Erosion and Profit Shifting (BEPS) project (a project that some argue has failed in the U.S. on domestic political grounds).
It goes without saying that Ireland is by no means likely to land a $13 billion plus interest ($14.5 billion) tax windfall anytime soon as a result of this decision. The intended appeal by the Irish government is likely to take two years, while Apple may take concurrent or separate legal action. Between appeals, claims may be made by other countries, including the U.S. As a result, Ireland may not only never see payment, but also the Commission’s sudden reversal of course on a practice that has been going on for decades in a multitude of Member States could open the floodgates to chaos. Apple, solvent with offshore cash holdings of $230 billion, saw its stock price barely move at all at the Commission’s decision, but that is not the point: ex post facto law, constitutionally prohibited in the U.S. by Article I, Clause 3, Section 9 of the U.S. Constitution, by Art. 7 ECHR, and by Art. 15 of the International Covenant on Civil and Political Rights, is incompatible with “tax certainty.” And while retroactive tax laws are seldom found unconstitutional, reaching back ten years most certainly presents an irreconcilable challenge to the rule of law.
The Apple case is also not, at its heart, about tax law, as is demonstrated by the fact that the company has not been subject to enforcement proceedings anywhere else, including in the U.S. This case is about tax politics and the frustration on the part of high-tax governments with low-tax jurisdictions that are simply using generally accepted accounting principles to deny others revenue. Having previously lost the debate over tax rates with individual Member States including Ireland, the EU is now trying to leverage antitrust law to tell low-tax jurisdictions how to apply their domestic tax codes. But the Commission’s case seems far from an indication of its future course. Not only did the underlying information about Apple’s tax rulings surface by happenstance and indiscretion likely to be avoided in the future, but also Richard Lyal, the Commission’s principal tax advisor, wrote in a Fordham International Law Journal article in 2015 that “it is likely to be only in extreme cases that one can with confidence say that a particular decision reflects a misapplication of the chosen method” (at 1041). Without such evidence of extreme deviance from accepted norms, the Commission does not even dispute that it will remain highly reluctant to initiate similar tax cases in years to come. And that aside, the Apple case may foil important other tax efforts.
The argument that neoliberal tax policies at local and global levels expose democracy to the risk of consolidating inequality may contain some element of truth. However, the argument that inequality is furthered by capital accumulation per se, regardless of its use, is flat-out wrong: it is well-established that municipalities with the most billionaire residents are almost without exception located in high-tax jurisdictions. Corporations have duties to a multitude of stakeholders, including to their employees and shareholders who very often invest through institutional intermediaries such as mutual funds and pension plans. Taxes may be a duty of citizenship, but their maximization – even their non-minimization – is not. Anti-accumulation initiatives (e.g., Thomas Piketty’s proposal in Capital in the Twenty-First Century of a global tax on capital) do not, to the extent they are politically viable, promise significant impact on inequality. Warren Buffett filed and paid whatever taxes he was charged since age 13, which neither reduced nor slowed accumulation of capital and thus inequality. Distortion of competition is a matter far more worthy of analysis, but interference with minimum taxation or tax competition as attempted by the Commission is unlikely to contribute efficiencies.
2016 happens to be an important election year in many places, with general elections in Ireland, the U.S., Russia, and several German states. But leaving that entirely aside, the role of transfer pricing, profit shifting and forum shopping, both domestically and in international taxation, is, just like treaty shopping, a global topic that becomes prioritized periodically every two to three decades, especially in the offshore context. And while initiatives against tax competition never entirely go away and provide an excellent hot-button issue to build a political career or scholarly research agenda, they also never lead to a significant reduction of the practice. This is so because uniform taxation at a higher level, euphemistically referred to as tax harmonization, is, despite continuing initiatives, roughly as far off as world government or the United States of Europe. It is also as likely as the abandonment of state and local competition by other means when it comes to attracting allocation of investments and new jobs. Even the more modest goal of achieving tax transparency appears ambitious in the short term. However, since investors and entrepreneurs have choices, arguments involving fairness are not suitable for dissuading them from making these choices rationally, and that means minimizing their tax burden as part of the cost of doing business. While Commissioner Vestager’s ruling is certain to play well with anti-American and anti-corporate Europeans happy with targeting more U.S. corporations, it will not end the principle or dimension of advance tax rulings or “comfort letters.”
In explaining the current climate in transatlantic international taxation issues, geopolitical factors appear to play a role. For one, this kind of sandbagging non-EU multinationals, especially U.S. companies, will compound and advance the current anti-trade agenda that has already led to a stalemate if not to the shipwreck of the TTIP project (yes, even there, a political tax angle exists). It will also go a long way for some in vindicating the British decision to leave the EU, as the UK stands to benefit from a likely flood of multinationals seeking fiscal domicile outside the U.S., if Ireland were to lose its minimum-tax cachet. In fact, U.S. and EU have recently traded barbs in the billions at the expense of corporations domiciled in the other party: the U.S. was seen penalizing Volkswagen, Deutsche Bank and BNP Paribas while the EU’s “discovery” of Apple’s (and other U.S. companies’) excessively favorable tax treatment and assorted other “competition violations” (Google, Amazon and others) conveniently happens to amount in sum to virtually the same amount: a classic tit-for-tat. While both sides view themselves as victims of aggression and of dangerous levels of protectionism, both also recognize that foreign entities are facing harsher treatment, and, although both contest it, they may well both be right. The underlying conflicts and tensions were not created yesterday and have very little to do with tax or antitrust or data protection but all the more with two fundamentally different geopolitical visions and procedural approaches.
So, despite articles predicting some irresistible trend toward effective tax treatment at a higher rate for multinational corporations (other than by ending deferrals in the U.S.), the opposite trend is true according to OECD as far as the traceable facts are concerned, and it would well behoove the European Commission in this situation to pursue an enduring multilateral tax conversation.
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