In Plato’s Republic, Socrates is presented with the cynical argument that the appearance of justice is more important than the reality of it, an idea taken up two millennia later by Machiavelli in The Prince.
The General Court of the European Union’s rejection yesterday of the EU Commission’s claim that Ireland had given illegal state aid to Apple to the tune of 13 billion euro, was greeted by a disingenuous self-righteous statement of the Emerald Isle’s three week old government, that Ireland has “always been clear that, based on Irish law, the correct amount of Irish tax was charged and that Ireland provided no State aid to Apple”. Apple quickly chomped in with: “This case was not about how much tax we pay, but where we are required to pay it” followed up by: “We’re proud to be the largest taxpayer in the world as we know the important role tax payments play in society”. Everyone west of the Irish Sea was taking the moral high ground, and justice appeared to be done.
Really? To quote an old Yiddish saying: ‘Don’t urinate down my back and tell me it’s raining’.
In truth nobody comes out of this week’s court decision, rejecting the European Commission’s claim, smelling of shamrock. The European Commission appears to have completely mishandled its case, leaving the court no choice but to throw it out. But, in so doing, the court made some very important points. The Commission’s primary argument (and the basis for a 13 billion euro assessment) was that the non-resident Irish companies owned intellectual property and, as there were no real HQ activities offshore, all the income of the companies should be taxable in Ireland. The court remembered that Apple was a US group, not an Irish one. Although not stated specifically, that HQ activity belonged somewhere else. The critically important takeaway here is that, as BEPS-era transfer pricing seeks to reflect reality and ensure the tax pie of the digital economy is cut fairly across the globe, the big money belongs in the US, where, since the US tax reform, it is more likely to be taxed. Apple’s reaction about ‘not how much they paid but where’, would be entirely acceptable, had they paid tax in the US on that income in the years under discussion, which it appears they didn’t. That might also result in a question mark over their pride at being the largest taxpayer in the world.
The secondary argument of the European Commission was that, even if income attributable to HQ IP was not taxable in Ireland, the transfer pricing methodology was wrong. The decision accepted that examination of the methodology by the authorities for the purpose of the ruling had been, at best, sketchy, but – in order to prove illegal state aid – it was necessary to show that the transfer pricing used produced less profit in Ireland than the correct method. Although the peanuts paid to the Irish Treasury imply this was a no-brainer, the court had not been presented with the required analysis, and therefore could only rule that the case was not proven. A far cry from the government’s claim that the right amount of tax had been paid to Ireland.
The decision is expected to be appealed. In the meantime, the threat of past Illegal State Aid will still hang over other cases, while EU members will have to be careful about chipping away at the US’s rightful share of digital economy income.