By John Quinn, Assistant Professor of Corporate Law, Dublin City University.
On the 4th October 2017, the European Commission referred Ireland to the European Court of Justice (ECJ) for failing to collect tax debts from Apple, following a Commission decision deeming the tax reliefs provided amounted to a breach of EU Competition Law. Ireland allowed Apple to pay between 0.05% and 2% in tax from 2003 to 2014, which, according to the Commission, amounted to up to €13 billion in illegal state aid. Luxembourg was also referred to the ECJ, after giving Amazon €250 million in tax breaks was also deemed to be illegal state aid. Neither country collected the debt, resulting in the recent referrals, and Ireland has appealed the decision to the ECJ.
The aim of EU competition rules is to ensure a competitive market and an even playing field for undertakings in that market. As provided by Article 87(1) of the EC Treaty, illegal state aid is aid which “in any way whatsoever distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods [which] shall, insofar as it affects trade between Member States, be incompatible with the common market.”
There are exceptions to this definition of illegal state aid. Article 87(3) provides that aid falling within 87(1) will be compatible with the common market if it promotes economic development in areas with “serious unemployment” or promotes “culture and heritage” or promotes an “important project of common European interest”. There are other exceptions in 87(3) but none seem applicable in these cases, a point which was noted in the Commission’s decision.
It seems obvious, on a plain reading of Article 87, that the significant tax advantages offered to Apple do threaten to distort competition and provide it with advantages over competitors. However, it is not self-evident that offering low tax rates automatically affects trade between Member States. The only reference to this in the Commission decision relating to Apple is the claim that because of the company’s global nature, any aid in its favour affects intra-EU trade. This seems a superficial explanation and may feature in Ireland’s legal challenge to the ECJ.
Going beyond the legal issues directly involved, the Apple and Amazon cases represent broader issues than the interpretation of EU Competition Law. These cases are part of a broader EU strategy to reduce corporate tax avoidance. In October 2016 Pierre Moscovici, the EU’s Economics Commissioner, relaunched plans to harmonise corporate tax collection across the EU. The Common Consolidated Corporate Tax Base (CCCTB) would require large companies (over €750 million turnover) to aggregate their profits across the EU and divide them among Member States based on the location of company assets, employment and sales. Each country will then tax their share of the profits at their own national rate. The result will be that multinationals will no longer be able to transfer profits made in other EU states to low tax jurisdictions such as Ireland and Luxembourg.
The CCCTB was first proposed in 2011 but could not be agreed upon, primarily because of resistance from Britain. When it comes to harmonisation of EU corporate law and corporate tax, Ireland has been happy to have Britain as an ally. For example, the Fifth Directive on Company Law, which aimed to harmonise company management structures, and would have required major reform in Ireland, collapsed primarily because of British opposition. It is no coincidence that the reintroduction of the CCCTB took place only a few months after the Brexit vote and a consequence of Brexit will be that Ireland has lost its main ally in arguing against it.
The Commission, the Parliament and country leaders such as President Macron and Chancellor Merkel, have made it clear in recent months that reducing corporate tax avoidance is a priority. The OECD, with co-operation from 100 countries, are also targeting corporate tax avoidance through a framework called BEPS that aims to prevent companies from moving profits to low tax jurisdictions.
Between the EU Competition Law cases, the CCCTB and BEPS, it seems one way or another, the days of Ireland facilitating multinationals paying extremely low levels of tax are numbered. However, Ireland can still prevent the CCCTB’s introduction as it requires unanimous agreement among Member States. From the EU perspective, they are clearly concerned about Ireland’s potential veto. Moscovici has stressed that the CCCTB “is not an attack on Ireland’s sovereignty and it will not be introduced without the country’s backing…. Ireland can be reassured that there won’t be a CCCTB if Ireland doesn’t want it.” The question is why would Ireland want it when the corporate tax system has been such a red line issue among successive Irish Governments and seems to have widespread public support.
The Irish political response, from both current Taoiseach Leo Varadkar and former Taoiseach Enda Kenny, has been to claim that setting corporate tax rates falls within national competency and cannot be changed at the EU level. They are, of course, correct but such an argument misses the point. If the ECJ approves the Commission’s decision on Apple, Ireland would keep its 12.5% tax rate but all Irish registered companies must pay close to that rate. If the CCCTB or BEPS are introduced, companies will no longer be able to move their profits through Ireland for tax purposes. If these changes were to be introduced, the statutory corporate tax rate would remain constant but the tax system would be substantially altered.
Ireland’s corporate tax rate is 12.5%, the lowest in the EU, with Revenue recently reporting that the actual tax paid by companies averages about 9.8%. The latest Comptroller and Auditor General report shows that 13 of Ireland’s top 100 corporate tax payers pay less than 1% tax due to various credits and reliefs. However, even with low taxes, the wealthiest companies still contribute significantly to the public finances. According to Revenue, Ireland collected €6.8 billion in corporate tax in 2015 and €7.3 billion in 2016, with approximately 80% of that coming from foreign owned multinationals. The top 10 corporate tax payers paid 2.7 billion in both years.
Further, multinationals provide other benefits such as employment, creating a competitive domestic market, and offering goods and services that can be exported or that attract further business – although some multinationals simply use accounting strategies and subsidiary companies to transfer profits to Ireland and offer little to the local economy. Nonetheless, attracting foreign direct investment has been central to Ireland’s economic successes in the past and the low corporate tax rates is regarded as Ireland’s primary selling point.
However, the corporate tax rate is not the sole basis for attracting multinationals and Ireland does not face a simple choice of offering rock bottom tax rates or seeing all multinationals leave. Aidan Regan and Simon Brazys, Professors at UCD, have shown that while low corporation tax is important for Ireland’s economy, it is not as important as the single market and the free movement of workers which provide a skilled, multilingual workforce. The structure of corporate law itself is also a factor as the Companies Act 2014 has made it comparatively easy to register and operate companies. The only other EU jurisdiction with a similar corporate law framework is Britain.
In a series of judgments around the turn of the millennium – Centros, Uberseering, and Inspire Art – The ECJ developed an elaborate freedom of establishment doctrine for companies. These cases endorsed what is known as incorporation theory, which means that the law applied to a company will be from the jurisdiction where the company is incorporated and not the jurisdiction of its main business operations. Empirical evidence shows that Britain became the primary destination of incorporation after the Centros line of judgments. Many thousands of European companies registered in Britain to take advantage of a combination of lower incorporation costs, low capitalisation requirements, and less reporting demands that come with a common law based corporate law system.
Post Brexit, British incorporated companies are likely to lose their freedom of establishment within the EU as the ECJ rulings are no longer likely to apply. In addition, British incorporated companies which have their main place of business on the continent may lose their corporate status. For example, the German Supreme Court has ruled that companies from non-EU countries, such as Switzerland, operating in Germany will be treated as partnerships under German law without the benefits of corporate status.
From the Irish perspective, an upside of Brexit is that Ireland will become the main English speaking country with access to the single market, with a skilled workforce and a modern corporate law framework based on common law principles. These factors make Ireland a very attractive location for multinationals, regardless of low effective tax rates.
Having floated the idea that perhaps a change to Ireland’s corporate tax system would not see all multinational companies leave, there is a broader question as to whether allowing some of the wealthiest companies in the world to pay almost no tax is something which Ireland should be facilitating. Professor Brigid Laffan, Professor at the European University Institute, has previously called for Ireland to sacrifice the “sacred cow” of operating as destination for tax avoidance for large multinational companies. Perhaps these new measures should be framed as an attack on wealthy corporations seeking to avoid paying tax and not against Ireland’s economy.
Brexit, over time, is likely to create a significant divergence in corporate law and corporate tax rules between Britain and the EU. It is clear that the EU wants greater harmonisation on these issues in order to continue the development of the single market. This is where Ireland faces an important decision: does Ireland accept greater harmonisation on corporate issues or does it resist, continuing to fight the Commission in the ECJ and use its veto against the CCCTB? The corporate tax system has helped the Irish economy enormously in the past but the rock bottom corporate tax rates are under attack from many sources and the overall objective of having large multinationals pay more tax is an admirable goal. Perhaps Ireland should sacrifice the sacred cow and become more aware of the other factors which attract multinationals.