What's the future for Irish and EU tax affairs after the Apple case?

The European Commission (EC) won, and Ireland lost. That was the outcome of the recent ruling by the European Court of Justice (ECJ) on the Apple case. The court ordered Apple to pay Ireland €13 billion in illegally granted state aid.

But a closer inspection of the case - and what happened after Apple’s stateless structure closed - paints a different picture of the state of global tax competition. On the one hand, we have the EC situated within a European Union (EU) that is internally struggling with corporate tax reform. On the other, we have Ireland, winning the global tax games hands down, assisted by this political uncertainty.

Parsing the ruling

The EC has long been an advocate for ending aggressive corporate tax avoidance in the EU. Indeed, given Ireland's historic delays or opposition to reforms, there must be serious satisfaction in parts of the EC in its defeat of Ireland.

However, the outcome of this case ranges from problematic to ludicrous. Firstly, it punishes Apple by requiring it to pay €13 billion in illegal state aid to Ireland. Few will shed tears for Apple’s wealthy shareholders, who invested in such a tax aggressive company.

But accounting for the tax payments of global firms in all jurisdictions matters when investigating potential outstanding tax payments. Apple was required to pay a repatriation tax on the same historic profits at the centre of the ECJ case since the introduction of tax reforms in the US in 2017. The ECJ ruling does not account for these payments.

Secondly, the decision financially rewards Ireland despite its clearly questionable approach to tax rulings at the time (helpfully highlighted by the EC investigation) and despite Ireland having tax laws which supported Apple’s stateless structure.

How could this have happened?

The ECJ supported the EC in its view that if the basically empty, stateless head offices of Apple could not have generated €13 billion in profit, then the profit should be allocated to the associated Irish branches. We don’t need to do a legal analysis to understand that this is preposterous. The Irish branches of Apple simply did not have the capacity to generate this massive level of profit.

The ECJ’s legal reasoning is based on support for the EC’s application of OECD guidance on profit allocation. Legal scholars have decried this as a huge mistake as it resulted in excluding the entity most responsible for generating the profits, Apple Inc. in the US.

The ruling in the EU context

The use of state aid law to solve tax avoidance has produced an illogical outcome. However, this is not the first time that tax decisions in the EU have bolstered Ireland. From the late 1990s, the EU saw increased challenges to legal decisions on corporate tax issues. The decisions of the ECJ in this area carefully focused on the protection of the freedom of movement of capital in the EU. This occurred most famously in Cadbury's Schweppes v Inland Revenue, where the ECJ did not support UK anti-avoidance efforts relating to the company's low level activities in Ireland.

Other actions within the EU have also, by default, supported Ireland’s low tax model. For example, in 2003 the EU introduced the Interest and Royalty Directive, which allowed the waiving of withholding tax payments between affiliated companies in EU member states. This Directive helped construct the 'Double Irish Dutch Sandwich' structure.

Ireland still winning the tax games

In 2015, once statelessness was outlawed in Ireland, Apple moved its intellectual property (IP) from the stateless head offices to tax resident companies in Ireland. Why would Apple continue to invest in Ireland which had just outlawed a structure that was crucial to its global tax planning?

From a tax point of view, the key attraction in Irish law was a generous capital allowance on intangible assets. The scheme allows a company to claim against its income allowances for capital expenditure incurred on specified intangible assets.

In a context of changing global and US tax rules, and Ireland’s closure of the Double Irish structure, Apple kickstarted a new tax game, making Ireland a hub for IP driven tax structures of US firms. Alongside the surge in IP into Ireland is the surge in corporate tax receipts as US firms are booking increased levels of profits in Ireland alongside their IP. Irish corporate tax receipts have increased from €4.6 billion in 2014 to a staggering €23.8 billion in 2023.

The future of corporate tax? Unilateralism vs multilateralism

The Department of Finance has indicated that claims have been and, it appears, could still be made on the €13 billion. We know that at least one state has made a small claim. The question is why not more? Legal scholars argue that there is precedence for unilateral action to adjust profit allocation rules, despite stalling global reform on the issue. Potential claims can also be bolstered by the new, albeit low, 15% global minimum tax.

Ireland’s tax games continue for the time being and are undisturbed by global tax reform or by EU institutions. The benefit to Ireland today in terms of tax receipts is similarly disproportionate in scale to the ECJ award. Except in this phase of the games, Ireland is collecting these large-scale revenues itself, rather than via a ruling by the ECJ.

This piece originally appeared on RTÉ Brainstorm