The European Commission announced that Apple owes Ireland $14.5 billion in back EU taxes, after a two-year investigation. The commission, which enforces business competition, said that Apple's illegal deal with the Irish government allowed the tech giant to pay almost nothing in taxes. Miami Law's Stanley I. Langbein explains what is at stake and why it matters.
Langbein is a Professor of Law at University of Miami School of Law, teaching courses in banking law and regulations, secured transactions, negotiable instruments, Federal income taxation, and international taxation. He was an attorney/adviser in the Office of International Tax Counsel of the Treasury Department. He is the author of "Federal Income Taxation of Bank and Financial Institutions" and is currently working on a new treatise, "Federal Regulation of Banking Organizations," to be published by Civic Research Institute/Delta Hedge in 2017.
Why wasn't the tax being collected in the first place?
From 1971 through 2004, the United States had in force statutory "export incentives," which reduced tax on the export income of U.S. corporations. The original 1971 law was declared to be a violation of the General Agreement on Tariffs and Trade in 1981. The U.S. revised the rules in 1984, supposedly to comply with the GATT, but the revisions again were found to violate the World Trade Organization rules. In 2004 the changes were repealed. But in the period leading up to the revisions, the U. S. executed "advanced pricing" agreements with many U.S. corporations, which blessed intercompany allocations of income among the U.S. parent and its foreign affiliates under so-called "cost-sharing" agreements among the companies. These arrangements may have affected in substantial part what the repealed provisions, which violated international rules, achieved. Because these "advanced pricing agreements" are secret, there is no way to be sure of this.
Why did this lead to Apple's paying only 50 euros for every million euros earned, one-half of one one-hundredth of a percent?
Apple and other companies exploited provisions of the laws of Luxembourg or the Netherlands and Ireland, both EU members, to set up a complicated "double Irish Dutch sandwich." The rules resulted in the preponderance of the income – already shifted out of the U. S. by the "advance pricing agreements"— to be shifted to Bermuda, or to other, comparable low- or zero-tax jurisdictions, and out of jurisdictions in the Middle East and Europe where the income was being earned.
Why has it taken two years for the EU to level the penalty?
The EU action was aimed at Ireland, Luxembourg, the Netherlands, and other jurisdictions, and is predicated on the notion that the tax incentives and corporate laws of those jurisdictions resulted in proffering "state aid" to the enterprises involved, in violation of the competition laws and policies of the EU. At the same time, the Group of 20 and the Organization for Economic Co-operation and Development have been pursuing a project on "base erosion and profit shifting" and the European officials waited for the completion of that project before wrapping up the state aid cases.
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