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Case Study
EU Court of Justice to Decide on Back Taxes
Owed by Apple to Ireland after Commissioner
Vestager Launched Appeal
https://commons.wikimedia.org/wiki/File:Margrethe_Vestager_EU_Commission_Apple_I
reland_State_Aid.jpg
09/2022-6664
This case study was written by Morten Bennedsen, the André and Rosalie Hoffmann Chaired Professor
of Family Enterprise and Academic Director of the Wendel International Centre for Family Enterprise;
Brian Henry, Research Fellow; Alexandra Roulet, Assistant Professor of Economics; and Mark Stabile,
Academic Director of the James M. and Cathleen D. Stone Centre for the Study of Wealth Inequality,
and the Deputy Academic Director of the Hoffmann Global Institute for Business & Society, all at
INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective
or ineffective handling of an administrative situation.
The case was generously financed by the James M. and Cathleen D. Stone Centre for the Study of
Wealth Inequality.
To access INSEAD teaching materials, go to https://publishing.insead.edu/
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COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, TRANSLATED,
REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.
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European General Court Judgment
In mid-July 2020, the European General Court, the second highest court in the European Union,
rendered its judgment on one of the most controversial decisions ever taken by Margrethe
Vestager, the EU Commissioner for Competition. The General Court (GC) found that in 2016 the
Commissioner had failed to present evidence “to the requisite legal standard” that Ireland had
conferred a “selective advantage” on Apple and that Apple had received illegal state aid. 1
In so doing, the GC annulled the Commissioner’s ruling to require Ireland to recover €13.1 billion
in back taxes from Apple plus interest of €1.2 billion. The Commissioner was given two months
and 10 days to appeal the lower court’s ruling. If she had decided not to appeal, the €14.3 billion
held in an escrow account in Ireland would have been returned to Apple.
But on 25 September 2020, Commission Vestager announced that she would appeal the ruling,
citing “errors of law” committed by the lower court. 2 The appeal has now gone before the highest
court in the EU, the Court of Justice of the European Union (CJEU), which could take as long as
two-to-three years to return its ruling.
Steve Jobs: An American in Cork
In 1980, Steve Jobs opened Apple’s first manufacturing facility in Cork, employing 60 people. Cork
became the foundation on which Apple grew from a struggling computer maker in the US into a
diversified powerhouse throughout Europe. 3
In the early 1990s, Apple created two Irish subsidiaries: Apple Sales International (ASI) and Apple
Operations Europe (AOP). These would be responsible for the procurement, manufacturing, sales
and distribution of all Apple products outside North and South America. 4 Customers who bought
Apple products from shops in Europe were buying them contractually from ASI in Ireland. Profits
on sales in Europe were recorded in Ireland, not in countries where the shops were located (see
graphic below). 5 6
At the height of the global economic crisis in 2009, President Barack Obama tried to put an end
to a loophole in US tax law that enabled American multinationals like Apple to funnel profits to
their foreign subsidiaries to avoid paying billions in American taxes. But powerful business groups
were opposed to fiscal reform and Obama left the so-called “check the box” loophole in place,
letting American firms decide how to classify their subsidiaries for tax reasons. 7
With the world economy moving towards a new normality based on greater global trade, in 2013,
two senior American statesmen launched a campaign in the Senate to shine a spotlight on
1
2
3
4
5
6
7
https://www.ft.com/content/6cc18c26-04e0-410d-9c0a-3f1baf1a1685
https://www.ft.com/content/058d380a-a0fa-40b7-95f9-1867378daf99
Apple collectively refers to Europe as the following: Europe, Africa, the Middle East and India.
Apple Faces $14.5 Billion Irish Tax Bill, by Natalia Drozdiak and Sam Schechner, The Wall Street Journal, 31 August 2016
http://ec.europa.eu/competition/publications/infographics/2016_07_en.pdf, accessed 16 November 2016
The EC has launched a project called Common Consolidated Corporate Tax Base (CCCTB) to prevent companies from
transferring profits to tax havens like Ireland.
http://ec.europa.eu/taxation_customs/consultations-get-involved/tax-consultations/relaunch-common-consolidatedcorporate-tax-base-ccctb_en, accessed 7 November 2016
Irish take the flack for US tax loophole, Business and Finance Daily News Service, 31 May 2013
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corporate tax sheltering schemes like the “check the box” loophole. Senators John McCain (19362018) and Carl Levin, organized a Senate hearing highlighting the need for corporate tax reform
(this would eventually play a role in Commissioner Vestager’s ruling). They accused Apple of using
the loophole to avoid paying $9 billion in US taxes the previous year.
Apple profits recorded in Ireland were not taxed since they were shifted to ASI, a company that was considered stateless by
Irish tax authorities. Source: https://ec.europa.eu/competition/publications/infographics/2016_07_en.pdf
The Senators discovered that the IP licenses to Apple products had been transferred out of the
North and South America to ASI and AOE in Ireland. With detailed reports to back them up
following a two-year investigation, Senators McCain and Levin alleged that Apple had funnelled
its profits through ASI and AOE to pay an effective tax rate of just 2% in Ireland on the total income
generated by IP licenses since 2003. 8
The Senate allegations were vehemently denied by Irish Prime Minister Enda Kenny and Apple
CEO Tim Cook, both of whom affirmed that Apple paid the standard 12.5% rate on profitgenerating activities arising in Ireland. However, Kenny acknowledged that variations in the
corporate tax rates of different countries and in their legal systems could lead to international tax
planners taking advantage of these differences. 9 Indeed, the hearings would simply bring Ireland
8
9
https://www.theguardian.com/technology/2013/may/29/apple-tax-profits-ireland-cork
Ireland: No Favors Offered To Firms, by Eamon Quinn and Paul Hannon, The Wall Street Journal, 22 May 2013
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free publicity as a destination for foreign direct investment – no changes were made to the US
corporate tax code. However, the revelations prompted Brussels to take a closer look at Ireland
and its alleged “sweetheart deal” with Apple.
Illegal State Aid Moves Centre Stage
On 1 November 2014, Jean-Claude Juncker, President of the European Commission, appointed
Margrethe Vestager, Denmark’s former Minister for Economic and Interior Affairs, as European
Commissioner for Competition. In his letter of nomination, he called on her “to be bigger and more
ambitious on big things, and smaller and more modest on small things”. While his wording was
ambiguous, the message was clear: go after the biggest tax evaders.
Commissioner Vestager did just that. She launched an investigation into what she believed to be
‘illegal state aid’ granted by Ireland to Apple. 10 On 30 August 2016, less than two years after her
appointment, she handed down her controversial ruling:
Ireland granted undue tax benefits of up to €13 billion to Apple. This is illegal under
EU state aid rules, because it allowed Apple to pay substantially less tax than other
businesses. Ireland must now recover the illegal aid.
Both Tim Cook and Enda Kenny may have felt a sense of déjà vu. Having refuted many of the
same allegations following the Senate hearings three years earlier, they were quick to refute the
Commission’s arguments. On the day that the Commission announced its ruling, Cook presented
his version of events to the Apple community in Europe (see Appendix 2).
Over the years, we received guidance from Irish tax authorities on how to comply
correctly with Irish tax law — the same kind of guidance available to any company
doing business there. In Ireland and in every country where we operate, Apple follows
the law and we pay all the taxes we owe. The European Commission has launched
an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the
international tax system in the process. The opinion issued on August 30th alleges that
Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in
law. We never asked for, nor did we receive, any special deals. We now find ourselves
in the unusual position of being ordered to retroactively pay additional taxes to a
government that says we don’t owe them any more than we’ve already paid.
Enda Kenny immediately recalled the Irish parliament to ask for its backing to appeal the
Commission’s decision, arguing that the ruling threatened the integrity of Ireland’s corporate tax
regime and could jeopardise the inflow of foreign direct investment (FDI). 11 Irish lawmakers voted
93-36 to appeal against the ruling following 10 hours of heated debate. 12 Ireland filed an appeal
10 http://www.telegraph.co.uk/business/2016/07/20/revealed-the-biggest-companies-in-the-world-in-2016/,
accessed 28 October 2016
11 Irish PM hits at Brussels after cabinet backs Apple tax appeal; Avoidance allegations, by Vincent Boland, Financial Times,
3 September 2016
12 Irish parliament backs gov’t’s decision to appeal Apple tax ruling, by Xiong Sihao, Xinhua News Agency, 8 September 2016
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to the General Court in Luxembourg in November 2016. Apple filed an appeal a month later,
claiming that it was a “convenient target”. 13
Ireland Woos Big Business
Ireland’s corporate tax rate of 12.5% on net income was one of the lowest tax rates in the EU. The
average among its 28 members in 2016 was 19.97%. 14 Yet Commissioner Vestager said her
decision was rooted in Ireland conferring a selective advantage on Apple rather than the tax rate:
We do not do tax, we do state aid…We look at state aid through all the tools you can
use to give state aid, be it, in this issue, as a tax ruling … from any possible angle to
see if tools are being used that shouldn’t be used to give a selective advantage. 15
Irish lawmakers were concerned that the Commission’s ruling could undermine the country’s
longstanding relationships with foreign firms who had invested heavily in Ireland. The Prime
Minister tried to reassure foreign companies that their significant investments would not be
affected by the Commission’s ruling.
There were conflicting views of the effects of low corporation tax. According to tax expert James
R. Hines, “Countries with lower tax rates receive much more foreign direct investment than
countries with higher tax rates. … The evidence indicates that higher tax rates in host countries
are indeed associated with lower direct investment by US multinational firms.” 16 This was at odds
with the view taken by Pierre Moscovici, former EU Commissioner for Economic and Financial
Affairs, Taxation and Customs, who argued that EU Member States should not use low corporate
taxes to compete for FDI: “For too long, some companies have been able to take advantage of
the mismatches between different Member States’ tax systems to avoid billions of euros in tax.” 17
18
In October 2016, a ‘dormant’ EC tax rulebook from 2011, known as the common consolidated
corporate tax base (CCCTB), was ‘given teeth’ as part of the plan to “tackle loopholes currently
associated with profit-shifting for tax purposes.” 19 20 However, many Irish lawmakers voted against
the recommendations. Brian Hayes, former Member of the European Parliament (MEP) for Dublin
from 2014 to 2019, said the CCCTB recommendations would “destroy Irish corporate tax
revenues”. 21
13 https://www.irishtimes.com/business/apple-s-13bn-irish-tax-case-timeline-1.4305041
14 https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online.html,
accessed 7 September 2020
15 Star commissioner not afraid to take on Europe’s big taxing issues; Margrethe Vestager has taken up the anti-trust mantle
and gone further than many had expected, by Suzanne Lynch, The Irish Times, 21 October 2016
16 Taxation and Multinational Activity: New Evidence, New Interpretations, by Mihir A. Desai, C. Fritz Foley, and James R.
Hines Jr., Survey of Current Business, February 2006, p. 18
17 https://ec.europa.eu/taxation_customs/sites/taxation/files/com_2016_685_en.pdf,
accessed 16 November 2016
18 Fair Taxation: Commission welcomes agreement reached by Member States on new rules to tackle tax avoidance, EU
Press Release, 21 June 2016
19 http://europa.eu/rapid/press-release_IP-16-3471_en.htm, accessed 16 November 2016
20 The European Union in Crisis: Resilient or rotten?, by Douglas Webber, INSEAD Business Case, Ref. 03/2016-6202
21 https://www.irishexaminer.com/business/arid-30829216.html
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Understanding the “Double Irish” Tax Structure
In 1991, tax accountants representing ASI and AOE had met with the Irish tax authorities to work
out a tax agreement. At the heart of the negotiations was the legality of allocating Apple’s net
income on the sale of its products in Europe to its Irish incorporated subsidiaries. It was on the
basis of this tax agreement, and a similar agreement in 2007, that the Commission ruled that
Ireland had granted Apple illegal state aid going back decades.
ASI had two parts in Ireland, a head office and a branch. 22 Under the tax arrangements of 1991
and 2007, Apple allocated the majority of its profits to the head office and the remainder to the
Irish branch, until the structure was terminated in 2014. It was this internal allocation of profits,
named the “double Irish” tax structure, that gave rise to the illegal state aid, according to
Commissioner Vestager. 23
ASI head office had no “permanent establishment” in any of the European countries where it sold
its goods; 24 it merely existed on paper. Therefore, the €100 billion in income that Apple’s activities
generated over the 10-year period in question was not taxable by the Irish authorities, since these
activities were not located in Ireland. 25 Conversely, the ASI Irish branch did in fact pay the regular
corporate tax rate of 12.5% on its income, but the profits that the Irish branch recorded was
insignificant compared to the profits of the ASI head office.
It is a so-called head office because it exists only on paper: it has no employees, no
premises and no real activities. The Irish branch was subject to the normal Irish
corporation tax. However, the head office was neither subject to tax in Ireland nor
anywhere else. This was possible under the Irish tax law, which until 2013 allowed for
so-called stateless companies. 26
Commissioner Vestager
As a result of the allocation of the vast majority of Apple’s profits to ASI head office, which she
said had “no factual or economic justification”, the Commissioner calculated that its annual tax
rate on profits in Europe had been between 0.005% and 1% for over a decade to 2014. 27
To put that in perspective, it means that for every million euros in profit, it paid just 500
euros in tax. This effective tax rate dropped further to as little as 0.005% in 2014, which
means less than 50 euros in tax for every million euro in profit.
Commissioner Vestager
To come up with €13 billion plus interest in unpaid tax, the Commission estimated the taxable
profit or liability applicable had the profits been allocated to the Irish branch of ASI rather than the
22 http://ec.europa.eu/competition/publications/infographics/2016_07_en.pdf, accessed 16 November 2016
23 Eurozone Finance Chief Lashes Out at Apple’s Response to Tax Ruling; U.S. tech giant has failed to grasp public outcry
over tax practices, says Jeroen Dijsselbloem, by James Mackintosh, The Wall Street Journal, 4 September 2016
24 Apple’s 13bn bill swamps its EU tax filing, by Vanessa Houlder, Financial Times, 31 August 2016
25 The Commission focused on the period between 2003 and 2014, because under its own rules it could only order illegal
state aid to be recovered from Apple for a 10-year period preceding its first request for information, which for Ireland
occurred in 2013.
26 Statement by Commissioner Vestager on state aid decision that Ireland’s tax benefits for Apple were illegal, 30 August
2016, http://europa.eu/rapid/press-release_STATEMENT-16-2926_en.htm, accessed 3 November 2016
27 Apple Faces $14.5 Billion Irish Tax Bill, by Natalia Drozdiak and Sam Schechner, The Wall Street Journal, 31 August 2016
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head office, and then multiplied this number by the corporate tax rate (12.5%) retroactively from
2003 to 2014. While Commissioner Vestager refused to divulge the breakdown of her calculations
until the full details of the two tax agreements were disclosed, she affirmed that she had “structured
the case in a way that it’ll be upheld if it goes to court.” 28
In fact, the case was not upheld by the lower court. Both Apple and Ireland appealed to the GC
and the Commission lost the appeal. In its 72-page judgment, the GC agreed with some of the
Commission’s findings but disagreed with the accusation that Ireland had granted Apple illegal
state aid. According to the GC, the Commission did not show that the activities generating income
from Apple’s IP licenses were conducted in Ireland. It ruled that the Commission’s legal
arguments, while in part correct, failed to fully address the fundamental tax laws applicable to
profit shifting.
In a letter to Apple’s European stakeholders, Tim Cook touched on the critical importance of where
taxes should be levied:
Taxes for multinational companies are complex, yet a fundamental principle is
recognized around the world: A company’s profits should be taxed in the country
where the value is created. Apple, Ireland and the United States all agree on this
principle. In Apple’s case, nearly all of our research and development takes place in
California, so the vast majority of our profits are taxed in the United States. European
companies doing business in the U.S. are taxed according to the same principle. But
the Commission is now calling to retroactively change those rules.
However, on a revenue basis, ASI’s transfers to Apple’s head office in Cupertino, California, may
have seemed greater than its fair share, since sales of Apple products and services in Europe
accounted for about 25% of its total revenues in the same period. 29
The day after Tim Cook’s remarks were published worldwide, Neelie Kroes, who had served as
European Commissioner for Competition from 2004 to 2010 and as European Commissioner for
Digital Agenda from 2010 to 2014, wrote a letter to The Guardian, in which she alleged that the
Commission had set itself up as a supra-national tax authority. 30
But the Commission stuck to its guns, insisting that the IP licences held by the two Apple entities,
ASI and AOE, should have been allocated in their entirety to their Irish branches, not to Apple Inc.
in Cupertino. It argued that ASI and AOE had a physical presence in Ireland and had employees
capable of managing Apple’s IP licenses, hence did have the operational capacity to generate
income from the distribution of Apple products. Following this logic, the Commission believed that
all profits generated by IP licenses sold in Europe should have been recorded with the ASI Irish
branch and taxed at Ireland’s 12.5% corporate tax rate. Had the internal allocation of profits taken
place in this manner in conjunction with the “arm’s length” principle, all the profits from IP licences
would have been taxable in Ireland, according to the Commission.
28 European Commission Decision Isn’t Endgame for Apple, Ireland; Apple, Ireland have a chance to turn the tables on the
commission in appeal process, by Natalia Drozdiak, The Wall Street Journal, 8 September 2016
29 https://www.statista.com/statistics/382288/geographical-region-share-of-revenue-of-apple/,
accessed 3 November 2016
30 Why EU state aid is not the right tool to fight tax avoidance, by Neelie Kroes, The Guardian, 1 September 2016
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The GC disagreed with the Commission’s analysis, arguing that ASI and AOE were managed by
Apple’s head office in Cupertino, and as such the IP licences that they sold were managed and
controlled by Cupertino. In short, the Irish branches had only a minor role in the business. Income
generated from Apple’s IP licenses should not have been taxed in Ireland, since this was not
required under Irish tax law. The GC said the Commission had failed to show that the tax rulings
between Ireland and Apple in 1991 and 2007 had conferred a selective advantage on Apple in the
form of illegal State aid. Likewise, the GC said the Commission had failed to show that the
commercial outcome would have been different without the tax rulings under normal market
conditions. However, the GC found that the Commission was competent to review the above tax
rulings to ensure they were compliant with State aid rules. Indeed, following the Commission’s
investigation and original ruling in 2016, the Irish tax authorities significantly tightened many
aspects of the system around tax law and company residency. The changes included preventing
Irish incorporated entities from being stateless for tax purposes. 31
Cook must have felt vindicated by the GC’s judgment. In 2016, he had described the
Commission’s ruling as “total political crap”, saying “they just picked a number from I don’t know
where.” 32 In its third quarter 2020 briefing, Apple disclosed cash reserves of $193.817 billion, up
slightly from the second quarter. 33 Hence, the €14.3 billion currently in the Irish escrow account
represented about 7% of Apple’s total cash reserves.
What Next?
During the four-year period between the Commission’s ruling in 2016 and the GC decision in 2020,
the various parties had time to reflect on their future roles in as far as they might apply to the
following issues:
• Ireland’s low corporate tax rate
• Repatriation of Apple’s earnings to the United States
• Illegal state aid in the EU
• The retroactive nature of the Commission’s ruling
• President Trump’s Tax reforms in 2017
• Public policy responses
Ireland’s Low Corporate Tax Rates
Ireland’s corporate tax rate of 12.5%, which has not changed in decades, compares with an EU
average of 19.12% in 2020, 34 down from 23.7% in 2006. Ireland’s corporate tax rate used to be
as high as 40%, but in the late 1990s Ireland decided to reduce the corporate tax rate to 12.5%.
It was part of a programme to attract digital giants like Apple and Microsoft to its shores. Ireland
31 https://www.mccannfitzgerald.com/knowledge/antitrust-competition/eu-general-court-annuls-apple-state-aid-decision
32 I love the EU but we were right to back Apple, The Sunday Independent, by Adrian Weckler, 19 July 2020
33 https://www.cnbc.com/2020/07/30/apple-q3-cash-hoard-heres-how-much-apple-has-on-hand.html#
34 https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html,
interactive tool accessed 22 September 2020
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offered the American tech giants what they were looking for: access to European markets, a
population of digital natives and low tax rates.
After the OECD pushed to bring an end to low tax regimes in the 2000s, the US Senate took issue
with Apple in for taking advantage of its 12.5% corporate tax rate in 2013. Nothing ever came from
the hearings, but Ireland drew more attention for its favourable tax policies. In 2019, it attracted
foreign direct investment of €162 billion, among the largest per capita investment in the world. 35
According to Seamus Coffey, an economist at University College Cork, “US companies in Ireland
every year pay €8 billion in wages, spend another €4 billion on Irish contractors and another €4
billion on capital projects – on top of their corporation tax.” 36 Moreover, Ireland had an estimated
250,000 multinational employers that employed one out of 10 workers in the country.
Its tax regime is likely to continue to face mounting opposition from the EU, which has indicated
that fiscal reform is needed to shore up huge budget deficits among member states because of
government spending on Covid-19 measures.
Repatriation of Apple’s Earnings to the United States
In the wake of the Commission’s ruling in 2016, a spotlight was thrown on a provision in the US
tax code that enabled American corporations to defer paying taxes on profits held overseas. This
was widely seen as an incentive for multinational firms to shift profits offshore rather than repatriate
overseas earnings to the United States. 37
In an editorial in the Wall Street Journal critical of the Commission’s 2016 ruling, the then US
Treasury Secretary Jacob Lew estimated that American firms were holding $2 trillion in earnings
outside the US (see Appendix 4). 38 With $200 billion in cash parked overseas, Apple accounted
for about 10% of this total. 39 Calling America’s tax regime “broken”, Secretary Lew acknowledged
that “the EC state aid investigations have further highlighted the issue and created additional
urgency.” He supported a plan by the Obama administration to impose a minimum tax on foreign
income held abroad by American firms that would make it “impossible” for them to continue parking
income overseas for tax-avoidance reasons.
In September 2016, Apple CEO Tim Cook said he would consider repatriating some of Apple’s
$200 billion in cash and other liquid investments the following year, 40 with the prospect of full
repatriation if the US tax authorities offered a “fair” corporate tax rate. 41 Cook often spoke out
publicly in favour of tax reform. In an interview for 60 Minutes with Charlie Rose, he said:
35 https://www.irishtimes.com/business/economy/will-ireland-s-long-winning-streak-on-tax-soon-come-to-an-end-1.4355799
36 https://www.irishtimes.com/opinion/david-mcwilliams-apple-decision-shows-ireland-is-not-a-tax-haven-1.4306343?
37 Tax Law and Repatriation of U.S. Corporation Funds Overseas, by John M. Exley, Above the Standard Procurement Group,
date unknown
38 Europe’s Bite Out of Apple Shows the Need for U.S. Tax Reform, by Jacob J. Lew, The Wall Street Journal, 12 September
2016
39 http://www.marketwatch.com/story/apple-isnt-really-sitting-on-216-billion-in-cash-2016-01-26,
accessed 3 November 2016
40 Business News: Apple May Send Cash to the U.S., by Paul Hannon and Sam Schechner, The Wall Street Journal, 2
September 2016
41 Ibid.
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This is a tax code that was made for the industrial age, not the digital age. It’s
backwards, it’s awful for America, it should have been fixed years ago, it’s past time
to get it done. 42
In operating a worldwide tax system, the United States taxes both the domestic and foreign income
of its citizens, whether individuals or corporations. 43 Before President Trump’s tax reform in 2017,
the corporate tax rate levied on repatriated earnings above a threshold of $10 million was 35%.
Repatriated earnings were also subject to state and local taxes. 44 However, American companies
could avoid paying income tax on the earnings of their foreign subsidiaries (also called expatriate
earnings or permanently reinvested earnings) by declaring their intent to keep them offshore.
At the end of 2014, 16% of American multinational companies held more than 90% of their cash
offshore. Apple, for example, had a cash pile of $216 billion, of which $200 billion was held
overseas (more than 90%). While taxing the repatriated foreign incomes of American companies,
the United States has granted credits for any foreign taxes paid, thereby effectively taxing these
firms on the difference between the US and foreign tax rates. 45 Firms with operations in countries
like Ireland with much lower tax rates than the United States have deficit credits and are therefore
subject to US taxes when that foreign income is repatriated. 46 This credit-based system acts as a
disincentive for American companies with large credit deficits to repatriate income.
Writing for the New York Times in 2016, editorialist David Leonhardt argued that the American tax
code should be modernized to avoid eroding the country’s tax base:
The key move [for American corporations] is opening offices in a low-tax country like
Ireland and then claiming that much of their business flows through those offices. Put
all these tax breaks together and you end up with our system. AT&T and General
Electric each paid a combined tax rate of only 18% since 2007, according to the S&P
data. Coca-Cola, Apple and IBM paid 17%, and Alphabet (Google’s parent) is at 16%.
Boeing is at 8%, Facebook at 4%. 47
In the previously cited September 2016 editorial in the Wall Street Journal, Secretary Lew argued
that US corporations would not be paying such low tax rates if the American tax system were
reformed. To generate support for his reformist agenda, he claimed that all new tax revenues
derived from the repatriation of cash piles held abroad by US companies should be used to “fund
an urgent and long-neglected national need—the transportation and infrastructure investments …
42 http://www.marketwatch.com/story/will-any-presidential-candidate-give-silicon-valley-what-it-wants-most-2015-12-28,
accessed 3 November 2016
43 How Much Do Expatriate Earnings and Repatriation Taxes Matter to Shareholders? by Robert Comment, Journal of Applied
Corporate Finance, Summer 2015, p. 122
44 Tax Law and Repatriation of U.S. Corporation Funds Overseas, by John M. Exley, Above the Standard Procurement Group,
date unknown
45 Treasure Islands, by James R. Hines Jr., Journal of Economic Perspectives, Volume 24, Number 4, Fall 2010, Pages 103–
126
46 Corporate Inversions: Stanley Works and the Lure of Tax Havens, by Mihir A. Desai, James R. Hines Jr. Mark F. Veblen,
Teaching Note, HBS Case No. 9-203-008, (Boston: Harvard Business School Publishing), 17 October 2002
47 The Big Companies That Avoid Taxes, by David Leonhardt, the New York Times, 18 October 2016
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in our roads, highways, bridges, and transit systems.” Without substantial investment, he said,
America’s productivity and competitiveness would suffer and decline. 48
Illegal State Aid in the EU
In passing their verdict, the judges of the General Court in 2020 defended Commissioner
Vestager’s right to target countries whose tax regimes may give rise to granting illegal state aid to
corporations. Shortly after the GC judgment, a Financial Times editorial entitled, Apple ruling
strengthens case for tax crackdown, opined: “If anything, the Apple case underscores the need to
press on with international collaboration against avoidance techniques by multinationals.” 49
For her part, Commissioner Vestager said, “The General Court judgment raises important legal
issues that are of relevance to the Commission in its application of state aid rules to tax planning
cases.”
Retroactive Nature of the Commission’s 2016 ruling
The Commission focused on the period between 2003 and 2014 because under its own rules it
could only order illegal state aid to be recovered for the 10-year period preceding its first request
for information, which for Ireland occurred in 2013.
Because of its retroactive nature, the penalty was considered one of the most aggressive
institutional reactions. In the previously cited Wall Street Journal editorial, Secretary Lew claimed
that the Commission’s approach “seeks to impose unfair retroactive penalties, [which] is contrary
to well established legal principles, calls into question the tax rules of individual countries, and
threatens to undermine the overall business climate in Europe [and] has been broadly condemned
by members of Congress, business leaders and tax professionals.” 50 In his letter to the Apple
community in 2016, Tim Cook said, “Every company in Ireland and across Europe is suddenly at
risk of being subjected to taxes under laws that never existed. … And as with any new laws, they
should be applied going forward – not retroactively.”
The options available to the Commission in situations where excessive tax avoidance is perceived
were as follows: 51
• Do nothing
• Enact new laws or regulations that disallow future use of the tax avoidance method, but to
‘grandfather’ past use (that may carry into the future)
• Disallow use of the tax avoidance method prospectively, thereby denying ‘grandfather’
benefits to those already enjoying tax savings
48 Europe’s Bite Out of Apple Shows the Need for U.S. Tax Reform, by Jacob J. Lew, The Wall Street Journal, 12 September
2016
49 https://www.ft.com/content/d1fffd14-c68c-11ea-9d81-eb7f2a294e50
50 Europe’s Bite Out of Apple Shows the Need for U.S. Tax Reform, by Jacob Lew, The Wall Street Journal, 12 September
2016
51 On the timeliness of tax reform, by James R. Hines Jr., Journal of Public Economics 88 (2004) 1043– 1059, p. 1046
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• Disallow all future, present, and past use of the tax avoidance method, which is implemented
via legislative or regulatory action or by legal action in which the institution argues to a court
that current (and past) tax avoidance is inconsistent with a proper interpretation of existing
tax rules.
Having assumed the last option – the most severe – the Commission believed that legal action
was indeed required in a decade-long affair that involved so much unpaid back tax.
It was not the first time that Apple had faced retroactive tax penalties in Europe. In December
2015, Apple agreed to pay €318 million to settle an Italian tax claim in relation to profits declared
in Ireland between 2008 and 2013. This was a direct result of an investigation by the Milan public
prosecutor’s office, which concluded that between 2008 and 2013 Apple Italia had transferred
€879 million of profits to ASI in order to avail itself of Ireland’s lower corporation tax rate (12.5%
compared to Italy’s 31.4%). Apple was not charged with illegal activities arising from its transfer
payments but with an “incomplete [tax] declaration”. A meeting between Italian Prime Minister
Matteo Renzi and Apple’s Tim Cook in 2015 may have cleared the way for a settlement.
President Trump’s Tax Reforms in 2017
On 22 December 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), which
reduced taxes on corporate profits earned offshore — from 35% to a one-time rate of 15.5% on
cash and 8% on other assets. This trillion-dollar tax cut was designed to encourage multinational
enterprises to bring their offshore cash piles home, but the response was muted. 52
By some estimates, American companies held between $1 trillion and $2.5 trillion in cash offshore
before the tax cut. Trump had high hopes for the amount of money that that it would bring in: “Over
$4 [trillion], but close to $5 trillion, will be brought back into our country. This is money that will
never, ever be seen again by the workers and the people of our country.” 53
For full year 2018, US companies brought back $664.9 billion in offshore cash, compared to
$155.1 billion in 2017, according to the Commerce Department, far lower than Trump
anticipated. 54
In 2017, Apple said it would bring back nearly all of its $250 billion parked overseas. Much of the
money brought home went to share buybacks, according to a Federal Reserve study. Indeed
buyback activity on the part of publicly traded American multinationals hit a record $1.1 trillion in
2018. The five biggest US tech companies with the most money held abroad – Apple, Alphabet,
Cisco, Microsoft and Oracle – doubled their share buyback programmes to $115 billion in the first
three quarters of 2018, compared with 2017. 55 Without giving details as to when or how much it
would repatriate, Apple unveiled a $100 billion share buyback programme in May 2018. It also
increased its dividend by 16%. 56
52 https://www.wsj.com/articles/companies-arent-all-rushing-to-repatriate-cash-1537106555, accessed 22 November 2018
53 https://www.wsj.com/articles/companies-arent-all-rushing-to-repatriate-cash-1537106555, accessed 10 December 2018
54 https://www.cnbc.com/2019/03/27/us-companies-bring-home-665-billion-in-overseas-cash-last-year.html
55 https://www.ft.com/content/2017ec30-e711-11e8-8a85-04b8afea6ea3, accessed 10 December 2018
56 https://www.ft.com/content/d699ec26-4da9-11e8-8a8e-22951a2d8493, accessed 22 November 2018.
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Public Policy Points Towards Tax Reform
In the past decade, the momentum for corporate tax reform has gained traction. Joseph Stiglitz,
an economist who won the Nobel Memorial Prize in Economics in 2001, accused Ireland of
“robbing” other countries in the EU by granting Apple such a low tax rate of close to zero. 57 He
and other economists joined together to form an Independent Commission for the Reform of
International Corporate Taxation (ICRICT).
One of the driving forces behind the push for corporate tax reform was the Covid-19 pandemic,
which according to the ICRICT “has led to major structural increases in public expenditure to
support health, incomes and employment.” Given the “rapid and radical disarticulation of the world
economy”, Stiglitz and other ICRICT Commissioners seek to strengthen corporate tax structures
by i) applying a higher corporate tax rate to large corporations in oligopolised sectors with excess
rates of return; ii) setting a minimum effective corporate tax rate of 25% worldwide to stop base
erosion and profit shifting. 58
Conclusion
In December 2019, Commissioner Margrethe Vestager was named Executive Vice President of
the European Commission for A Europe Fit for the Digital Age. In her enlarged role within the Von
der Leyen Commission, she was given the tools to confront and punish the tech giants. 59
Her new powers were made manifest a year later, when she submitted two packages of proposed
laws called the Digital Services Act and the Digital Markets Act. Both sets of regulations are
designed to provide a clear legal framework for the tech companies to operate in the European
Union.
With the first proposal, companies like Facebook would have to moderate content like removing
illegal uploads, while sharing their data with the authorities to ensure compliance. 60 Under the
second proposal, tech firms like Amazon whose platforms have large market shares would be
classified as ‘gatekeepers’ and as such would be required to follow strict rules to encourage a
healthier and more competitive marketplace. Failure to abide by the laws could results in hefty
fines. 61
Despite her having lost the battle thus far in the EU lower court, the Von der Leyen Commission
has given Commissioner Vestager the means by which she can perhaps win the larger war. When
these new laws come into place, she can better regulate the digital market that continues to
transform the behaviour of individuals and organizations in Europe.
57 https://www.irishtimes.com/business/economy/ireland-robbing-european-neighbours-with-low-tax-rate-stiglitz-1.4279638
58 https://static1.squarespace.com/static/5a0c602bf43b5594845abb81/t/5ee79779c63e0b7d057437f8/
1592235907012/ICRICT+Global+pandemic+and+international+taxation.pdf
59 https://ec.europa.eu/commission/commissioners/2019-2024/vestager_en
60 https://ec.europa.eu/info/sites/info/files/proposal_for_a_regulation_on_a_single_market_for_digital_
services.pdf
61 https://ec.europa.eu/info/sites/info/files/proposal-regulation-single-market-digital-services-digital-services-act_en.pdf
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Apple Case: Class discussion questions (short answers)
1. How does Ireland tax corporations?
• Definition of residency
• Special agreements
2. Explain the tax structure Apple was using in Ireland
• Who has the right to collect the tax/penalties assessed by
the EU Commission?
• On whose side is the U.S. – Apple or EU?
• Why doesn’t Ireland want to collect the 14 billion Euros and
decided to appeal the EU Ruling?
• Why was the head office of the Irish Companies not taxed by
Ireland?
• How were the Irish branches taxed in Ireland?
• What kind of agreement did Apple sign with the Irish
government? What did it cover? Was it reasonable?
• Why does the head office pay Apple U.S. for R&D? Is the
payment reasonable?
• How do you think the approach by the EU commission with
Apple differ from the approach taken a=with Amazon,
McDonalds, and FIAT, in Luxemburg and The Netherlands?
• How were sales of Apple products in the EU countries
structured – taxable?
• Why no Subpart F income
• How has the TCJA heightened the tension between the U.S.
and the EU community
Case Study No. 1: Did Apple Pay Too Little Tax? Appealing the EU Ruling
on Illegal Sate Aid.
Assignment Questions:
1. Was the European Commission Premature in its decision to launch investigations
into tax arrangements of EU member states with foreign companies such as
Apple and Starbucks when the corporate tax rates imposed by EU member
states remain an area of national sovereignty?
2. Why did Commissioner Vestager seek retroactive penalties instead of taking
preventative measures going forward?
Assignment:
Short (no more than one to two paragraphs) response to each question.