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Apple set for showdown with the EU over state aid

The EU’s General Court is due to hear the state aid case over Apple’s multibillion-euro tax bill in Ireland following several years of intense court battles, but this couldn’t come at a worse time.

Next month the iPhone maker is heading to court in the last stretch of its battle over a tax bill of €13 billion ($14.4 billion). Apple and the Irish government hope to overturn the EU’s controversial 2016 decision to recoup billions of euros in taxes.

The European General Court (ECG) will hear the Apple case on September 17-18 and the court’s decision will send a clear message to US tech businesses about the challenges they could face in the EU. The case is going back to court just as the US is pushing hard against France and other countries looking to raise taxes on the high-tech sector.

As Alan Lee, head of global tax policy, told the US Trade Representative: “Facebook appreciates and strongly supports the [Trump] administration’s decision to investigate the French DST under Section 301.”

“We expect additional tax compliance, audit, engineering and maintenance costs,” he continued. “Unilateral measures such as the DST are harmful to Facebook and the digital economy.”

The Trump administration has launched an investigation into the tax plan, with the threat of retaliatory action. The Treasury could invoke Section 891 of the tax code to double taxes on companies from countries with measures that discriminate against US corporate groups.

“We haven’t been collecting a lot of this information, so we have to build tools to do it,” said Peter Hiltz, director of international tax and policy planning at Amazon. “This will cost us millions of dollars to write the systems to collect the data in the first place.”

Despite intense US opposition, France has gone ahead with its digital services tax (DST) and there may be more trouble ahead, now that tech companies find themselves in an unlikely alliance with the Trump administration.

“Countries are watching France’s experience and considering whether a unilateral approach might be easier or more advantageous than pursuing a multilateral agreement,” said Nicholas Bramble, trade policy counsel at Google.

“This is a concern for international trade and the wider economy, if countries follow the DST model,” he stressed.

The US is not going to back down and the EU will continue to enforce its competition standards. The EU has been piling up state aid cases since 2015 when the European Commission (EC) issued its first orders. It would be a shock for the commission to change course now.

High stakes in a world of disputes

The 2016 decision in the Apple case upset almost everyone, sparking a debate worldwide about whether Ireland had granted the company illegal tax benefits. Both the Irish authorities and Apple vehemently deny any wrongdoing.

Much like the DST, the US authorities tend to see the EU state aid case against Apple as a challenge to American enterprise. The European Commission would dispute this and stress that its state aid investigations have targeted the Italian company Fiat and Swedish multinational IKEA.

“If you look at the Apple case, you will find no anti-US bias in the work that we did. Equal treatment and neutrality is of crucial importance to us,” said Margrethe Vestager, then the EU’s competition commissioner, in a 2018 interview with ITR.

“It’s not just about American companies,” she stressed. “Many European companies have come under investigation as well.”

Many tech companies will be bracing for the impact if Apple loses the fight. The US government lost its own bid to tilt the odds in favour of Apple last year. The Irish government may “profoundly” disagree with the EU, but it may not get the result it wants from the ECG.

The dispute comes down to whether or not the Irish authorities gave Apple “sweetheart tax deals” in 1991 and 2007. These tax rulings allowed the US tech company to route profits from European sales through its Irish subsidiary to a head office officially located “nowhere”.

This is the core of the case. The iPhone maker has had a presence in Ireland since 1980 and today has more than 6,000 employees in the country, but the Irish operation ran parallel to its head office. Apple recorded profits of €22 billion in 2011 and paid just €50 million in tax in Ireland, according to US Senate public hearings.

The European Commission argued that €16 billion of profits went untaxed and Apple paid less than €10 million to Irish Revenue in 2011. This would have been an effective rate of 0.05%. The EC alleged that the company’s effective rate continued to fall – reaching 0.005% in 2014.

Apple maintains that the 0.005% rate is misleading because it’s based on the company’s global revenue. But the company’s global effective tax rate was 24.6% at that time. This rate amounted to more than $35 billion in corporate taxes over three years.

The important difference being that the iPhone maker pays tax on its international profits in the US and not in Ireland. Yet the state aid challenge is about whether or not the company should be paying more in Ireland. This shows just how contested taxing rights have become in a world of high-stakes disputes.

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