The finding by the EU Commission that Apple should return €13 billion (plus interest) in unpaid taxes because they constitute illegal state aid has raised a number of interesting and important issues that go beyond the specific case (see here and here for earlier commentary). One of these is that the Irish government is in a pickle. But worry not: there is a simple solution.
Apple is being obliged to pay back taxes. It is logical that it is unhappy about this and will appeal. On the other hand, it is important to realise that the Commission has not said that the Irish government is entitled to claim unpaid taxes from a major corporation, but that it is obliged to do so. On the face of it, even leaving aside interest, the €13 bn would be a very nice fiscal windfall (roughly equal to annual health spending) for a country whose public finances were battered by the financial crisis. Yet Ireland will also appeal the ruling. Not doing so would, clearly, imply an admission of guilt: the tax deals reached by previous governments with Apple – and by implication with other global corporations – would be brandmarked and the country would suffer a serious reputational loss.
What this tells us is that the EU’s state aid procedures underpinning the ruling that Ireland must recover unpaid taxes, are problematic. Let us assume in the following that the Commission’s analysis is correct. A corporation has colluded with a Member State government. The corporation has derived an unjustified and illegal advantage: it has paid less tax than it should have (in Apple’s case almost none). It is therefore right that EU rules force it to repay this with interest. Two issues arise. The first, more technical, is that recovery is limited to a period of ten years. So any tax saved before then is for keeps. The second, more basic, is whether, on top, the company should not also be fined. After all, if I steal €1000 from Apple and I am caught, matters are not laid to rest merely by my restituting the pilfered cash (with interest). For the corporate side the lack of a fine makes such tax deals a no-lose proposition (although there are reputational losses).
But what of the Member State government that colluded with the company? Here the problem seems more fundamental. The country is now to be rewarded, if that is the right word, by a sizable tax windfall. That seems wrong at an intuitive level and I believe it to be so in legal terms. In a traditional state-aid setting a government favours, for some unjustified reason, company A over companies B, C and D. The losers are clearly the domestic taxpayer and the other companies. Recovery by the national government cancels the loss incurred by the taxpayer. And companies B, C and D are now relatively advantaged vis-a-vis company A to the same extent that they had been previously disadvantaged. (Yes, there some simplification here. Time is unidirectional and they may even have gone out of business in the meantime.)
But in the Apple and similar cases, domestic (here: Irish) taxpayers have not lost out. By poaching a tax base (corporate profits) from other EU countries they have directly imposed losses on the taxpayers of other countries. They have benefited directly from the (very low) tax rate they impose on the (very large) profit base. On top of this come indirect fiscal effects (such as income tax from staff in headquarters whose location is determined largely by the illegal state aid). Recovery by the national fiscal authority from an illegal state aid scheme (reputational losses aside) seems like a win-win. Instead, loss compensation needs to primarily benefit the taxpayers of other countries.
Given this, the solution seems obvious. The EU state aid recovery procedures should be amended. The ten-year limit to the recovery period should be lifted. The Commission should be able to impose fines on the delinquent company and the Member State operating the scheme. And, last but not least, the state aid monies recovered should be paid to the EU, not the culpable Member State.
Of course it will take time to change the rules. In the meantime Ireland could always voluntarily put the recovered billions at the disposal of the EU. This might reduce its reputational losses abroad. I’m not holding my breath, though.