Academic journal article Chicago Journal of International Law

A Method Inside the Madness: Understanding the European Union State Aid and Taxation Rulings

Academic journal article Chicago Journal of International Law

A Method Inside the Madness: Understanding the European Union State Aid and Taxation Rulings

Article excerpt

I. Introduction

At the end of August 2016, headlines hit the news that the E.U. would charge Apple $14.6 billion dollars in unpaid taxes, payable to Ireland.1 Apple argued that the Commission's tax ruling "upended the international tax system and would damage jobs and investment in Europe."2 The U.S. chimed in, arguing that the ruling would erode foreign investment, the European business climate, and, ultimately, economic partnership between the U.S. and the E.U.3 In the eyes of the obama Administration, the decision essentially amounted to theft, by the E.U., of revenue from U.S. taxpayers.4 In its official response, the U.S. Treasury published a white paper outlining various objections, including concerns that the E.U. Commission's approach was new (departing from prior E.U. case law), that retroactive recoveries defied legitimate expectations on the part of both State Members and multinational companies, and that this novel approach was inconsistent with international norms.5

The recovery at issue was associated with a negative decision by the Commission concerning a reduction of Apple's tax base within Ireland, meaning the Commission found the reduction to constitute illegal state aid.6 In a set of decisions, the E.U. similarly probed the tax arrangements of both Amazon and Fiat in Luxembourg and Starbucks in the Netherlands over concerns that these E.U. Member States were acting as tax havens to attract multinational companies, including, in many cases, those from the U.S.7 The principal motivation behind these investigations was not only to achieve the common state aid goal of creating a fair marketplace for corporations in the E.U., but also to avoid the creation of international tax havens.8

In the Apple case, the company paid tax at 1 percent or less on profits attributed to subsidiaries in Ireland, a number well below the 35 percent top corporate tax rate in the U.S. and Ireland's own corporate tax rate of 12.5 percent.9 Such a favorable tax rate prompted concern from European lawmakers, 10 which in turn led to retorts due to U.S. outrage against the aforementioned decision. In the Commission's view, investigations into "sweetheart deals" such as those between Apple and Ireland are not aimed at stealing U.S. tax revenue, but rather at ensuring that E.U. law applies fairly to every company with headquarters or subsidiaries in Europe.11 Consequently, these decisions concern both international tax issues and state aid law within the E.U.12

On December 19, 2016, Apple appealed the decision that illegal state aid was given to the company and its subsidiaries.13 "State aid," as defined by the Commission, consists of an advantage granted in any form whatsoever on a selective basis by a Member State to an economic actor.14 It is illegal primarily because it distorts competition between E.U. Member States.15 In its appeal, Apple charged that the E.U. acted unilaterally and changed the rules retroactively, alleging that there was a predetermined outcome since the start of the case.16 Ireland also filed its own appeal, claiming that the E.U. "overstepped its powers by trying to rewrite Irish tax law."17 Additionally, Ireland claimed in its appeal that the E.U. committed a grave error in misinterpreting Irish law, contending that its tax rules were within the reference system of the Irish tax code, following a portion stating that "nonresident companies shouldn't pay income tax on profit that isn't generated in Ireland."18 At the heart of these claims are charges that the Commission meddled in Ireland's sovereignty to set its own tax code and laws.19 The Commission answered that neither a consistent nor objective criteria was applied in determining the profit allocation to Apple's Irish branches.20 What this dispute ultimately made clear is that it is impossible to forecast how E.U. courts "will rule in an area that has not been tested before."21

As further rulings are handed down, tax professionals, attorneys, multinational corporations, and E. …

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