It is not every day that we hear of landmark decisions that go in favour of taxpayers. The EU’s general court in Luxembourg decided this week that the Commission did not prove that the Irish government had given Apple, a tax advantage. This follows an appeal from a tax penalty of €13bn plus interest charged by the Commission on Apple Inc. for its trading activities in Ireland.
The case is highly sensitive for Ireland, a global hub for hundreds of multinationals attracted by its low 12.5% corporate tax rate and EU market access. In a similar tax case in 2019, the Luxembourg court annulled a decision by the Commission ordering the Netherlands to recover up to €30m in back taxes relating to tax affairs of Starbucks but, it upheld a decision that Fiat had received tax advantages that broke European state aid laws.
This time, the Commission alleged that Apple was given state-aid when it signed so-called “sweetheart deals” for its two companies headquartered in Cork, Ireland. The Commission charged that a selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003, down to 0.005% in 2014.
The EU’s “state-aid” investigation concluded that almost all Apple profits recorded by the company’s Irish incorporated entities were internally transferred to a so-called head office that existed only on paper. The profit transfer to the “head office” had no “factual or economic justification”. The tax scheme worked out that a small fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland.
The remaining majority of profits generated in various European sales offices were allocated to the “head office” where they were considered non-resident and therefore remained untaxed. The Commission accused Ireland of striking deals with Apple in 1991 and 2007 that amounted to state aid, which is illegal under EU regulations.
The Irish government and Apple decided to appeal the commission’s decision, with the company arguing the order to repay taxes “defies reality and common sense”. The Commission now has two months to decide if they want to appeal the latest ruling and potentially take it to the EU’s highest tribunal.
The Irish government said it has always been clear “that there was no special treatment provided to the two Apple companies” and that “the correct amount of Irish tax was charged in line with normal Irish taxation rules”.
How does this landmark ruling affect us in Malta as we are constantly under the microscope of the Commission over domestic tax concessions that have been in place and approved ever since we joined the EU in 2004. Such tax rules help us to attract FDI over the years which sustain thousands of jobs in bona-fide business activities. The country, located in the periphery of the Med., does not have natural resources such as oil, minerals, etc. to sustain its growing population. It cannot sustain any large manufacturing bases run by multi-national companies due to its size limitation.
Ever since the base erosion and profit shifting rules started to probe various small jurisdictions, Malta started to attract attention even though we have never availed ourselves of aggressive tax schemes to attract multi-national companies.
Our manufacturing base is not expanding due to COVID-19 restrictions and we face heavy competition from non-EU countries which offer lower wage costs and suffer no state-aid rules. Another aspect is the passport scheme. This was criticised at the European level where media sources reported on the adverse comments by the chairman of the PANA Committee who claimed that the IIP should be stopped. Alex Muscat, the parliamentary secretary responsible for MIIP, has announced that the original version is being “scrapped”.
Malta tries in many ways to attract niche markets. It promoted new initiatives to attract business from Europe. For example, two years ago it risked funds in building a comprehensive legislation and hosted international mega conferences to label itself as a “Blockchain island” but alas the vim seems to have died down.
Due to heavy scrutiny by the European Central Bank (in the shadow of the disgraced Iranian Pilatus bank) no local bank dares open an account for such crypto business. This has resulted in entrepreneurs seeking other shelters such as in Estonia, which has a friendly touch to the sector. The post-COVID-19 recession makes it paramount that as an EU member it is given a light touch regulation especially now that, starting from 1 October, all FDI from outside the EU (including Britain) falling under certain protected category will be screened and possibly excluded from investing locally.
More pressure came from Jeep Kofod, a PANA Report rapporteur. He recently called for the introduction of a minimum corporate tax rate, in his words to stop “the sick race to the bottom on taxation and regulation”. In his opinion, countries that exploit tax inequalities for their own profit may be adversely affected by a law which aims to close this loophole.