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State Aid

State Aid

 

On August 30 of the present year the European Commission delivered a press release in which it convicted Apple Inc. to pay around 13 Billion € in “owed taxes” to Ireland, plus interest (European Commission Press Release[1]). Apple argues they paid every euro worth of tax that they were due and Ireland does not want the money back.

Briefly, all of Apple’s profits in Europe were channelled to two entities established in Ireland, which then proceeded to allocate them in a “stateless headquarter”, registered nowhere, which does not exist except on paper and with no meaningful activities. All this with the consent and knowledge of the Republic of Ireland under what we can think of as a bilateral agreement (see Double Irish Agreement[2].) This means Apple payed tax to Ireland on a very small part of its profits, and payed no tax on the rest. (Business Insider explains well the particular case in detail – What Just Happened to Apple?[3] ). In fact, this is not the first time the issue comes up within the EU. Identic issues had come up in the past with Starbucks activity in the Netherlands and Fiat Chrysler in Luxembourg.

The conditions in which these companies operate is not illegal per se. These countries have (in case of Ireland up until January 2015) predicted in their law the existence of said bilateral agreements. It is crucial to understand that the issue is not the low corporate income tax rate that a country may charge on the companies operating in the country (12, 5% for publicly traded firms in Ireland). It is indeed perfectly legal and legitimate for a country to sustain a low corporate tax rate as a strategy to attract investment, foster companies to establish their businesses within its borders and generate employment opportunities for its citizens. In this sense, it looks fairly easy to understand these countries’ position. The authorities may perceive the firms’ establishment and operations in the country to be more than compensatory over the “tax revenue loss”, especially when firms are big. For companies, it is obvious that to establish their businesses in countries where their tax burden is significantly reduced is beneficial.

What the European authorities condemn is the fact that these companies benefit from special treatment from these governments. The EU has no saying in a member state’s fiscal policy but it does play an important role in protecting and ensuring competition fairness within the single market. The specific benefits that these companies receive allows them to operate in advantageous conditions (almost as a subsidy) in relation to their competitors in Europe, in which is called State Aid[4]. State Aid is illegal both in European and country level law, and fair competition benefits consumers (people). Tax competition is legitimate and firms are increasingly allocating resources to develop better tax strategies, but the regulatory authorities, governments and European authorities must continue their work in preventing, detecting these situations and enforcing respective sanctions. The size and status of a business and the implied benefits it may generate for a country’s economy should not interfere with the just and fair business environment we desire to have within the EU.

 

Filipe Bento Caires

[1] http://europa.eu/rapid/press-release_IP-16-2923_en.htm

[2] https://www.ft.com/content/f7a2b958-4fc8-11e4-908e-00144feab7de

[3] http://www.businessinsider.com/what-just-happened-to-apple-explained-2016-8

[4] http://ec.europa.eu/competition/state_aid/overview/index_en.html

 

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Author: studentnovasbe

Master student in Nova Sbe

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