The EU’s dangerous quest for tax harmonisation ignores that corporation tax itself is obsolete
Most governments would love to get their hands on an extra €13bn (£11.1bn) from a multinational company.
But the Irish government will likely be wrangling in court for many years at what will surely be considerable expense in a somewhat unusual bid to avoid collecting tax.
The European Commission has ordered what is by far the largest recovery order in EU history by deciding that Ireland gave Apple tax benefits illegal under EU state aid rules. Essentially, it has concluded that two rulings by the Irish tax authorities, in 1991 and 2007, endorsed an allocation of profits within two of Apple’s Irish subsidiaries that had “no factual or economic justification”. The Commission believes these advantages were not available to all companies in Ireland.
The Irish finance minister says an appeal is necessary to defend the integrity of the country’s tax system and provide certainty for businesses. Whatever the intricacies of EU tax law and whether the Commission’s conclusion is consistent with it, he certainly has a point.
The Commission has been sticking its nose into the tax rulings of member states for three years in another of its characteristic, back-door power grabs. Tax harmonisation and the tax increases that inevitably follow have long been a goal of European federalists like Commission president Jean-Claude Juncker. The ruling against Ireland yesterday and other recent ones against the Netherlands, Belgium and Luxembourg have to be viewed through this prism.
European federalists have long looked at Ireland's competitive tax system with envy (Source: Getty)
But it’s not just the Irish government and Apple who are unhappy.
Rather than enforcing competition and state aid law under the Treaty on the Functioning of the European Union, the Commission has morphed into a supranational tax authority, deciding whether member states’ rulings on transfer pricing are consistent with its view of the arm’s length principle. This view is derived from EU law, not the OECD’s Transfer Pricing Guidelines, something that is not consistent with the international consensus and raises questions as to the viability of bilateral tax treaties.
Read more: Unleash Britain's competitive dynamo with even bigger corporation tax cuts
Given that the profits the Commission has ordered to be taxed would have eventually been taxed in the US if and when they were repatriated by Apple, the move will also cost the IRS a substantial amount.
When the UK eventually extricates itself from the EU, it will be better placed to avoid dangerous developments in the direction of EU tax harmonisation. Proposals for a Common Consolidated Corporate Tax Base have been on the agenda since 2011 and only last year German Chancellor Angela Merkel and French President Francois Hollande were pushing plans to introduce a minimum rate of corporation tax across the EU. It’s safe to say that any such rate would be closer to France’s 33 per cent or Germany’s 30-33 per cent rate than the UK’s 20 per cent.
Remaining in the EU, Ireland will face increasing pressure from larger, more powerful member states to make itself a less attractive place to do business.
In any case, Corporation Tax is obsolete, rendered so by the modern, globalised economy. There is no theoretical basis on which profits can be allocated across multiple jurisdictions when modern companies have such a wide variety of functions, customers and shareholders distributed around the world.
Read more: Scrap corporation tax – but replace it with something better
The OECD’s BEPS project and EU proposals for a Common Consolidated Corporate Tax Base will not change the fact that the underlying framework is redundant and, despite the pomp and ceremony surrounding them, will just lead to more complexity, bureaucracy and bigger fees for lawyers and accountants.
The sooner politicians realise this and start taxing distributions from capital rather than profits, the sooner some integrity can be restored to the tax system.