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Tax Breaks for Apple and Starbucks Investigated by E.U. Tax Breaks for Apple and Starbucks Investigated by E.U.
(about 9 hours later)
BRUSSELS — The European Union’s top antitrust official opened an investigation on Wednesday into the way countries including Ireland provide tax arrangements that enable big multinational corporations like Apple to reduce their tax bills worldwide. BRUSSELS — European Union officials have been pushing some countries to plug corporate tax loopholes for years to help bolster government coffers in an era of shrinking public budgets and weak economic growth.
The inquiry by Joaquín Almunia, the European Union’s competition commissioner, could — if it leads to changes — undermine tax strategies pursued by many American technology companies that have their international headquarters in Ireland and in other countries in the bloc. Now they are adopting a more forceful approach, announcing on Wednesday an investigation into how low-tax nations like Ireland have helped large multinationals like Apple and Starbucks reduce their tax bills by billions of dollars.
The inquiry also covers Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg. The inquiry represents one of the most aggressive steps taken by Europe to counter the increasingly sophisticated tax avoidance strategies deployed by multinational companies, a move that follows similar crackdowns by the United States and others. Authorities are concerned that countries may be offering improper tax breaks to big global companies.
Ireland has become a preferred place for giant tech companies to place their international headquarters, largely because of concessions from the government allowing businesses to obtain even further breaks on corporate tax rates that, at 12.5 percent, are already low. The European investigation, by Joaquín Almunia, the European Union competition commissioner, highlights a critical weakness of region’s great project of unification: the tendency for countries to march to their own beat by setting different tax policies.
“In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes,” Mr. Almunia said in a statement. “Under the E.U.'s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way,” he said. One result has been a hodgepodge of tax regimens, ranging from Ireland’s cut-rate 12.5 percent at the low end to France’s more punitive 34 percent. But tax policy is a politically perilous issue that risks heightening the already strong nationalist tendencies laid bare during European elections this month.
European Union officials said the inquiry would examine “transfer pricing arrangements validated” in the three countries involved. Transfer pricing refers to the shunting of profits and losses between subsidiaries by accounting for them as internal corporate payments for goods or, as is increasingly common, for copyright or patent royalties. “Even ordinary citizens in Ireland and Luxembourg aren’t going to like this because every time you have a certain degree of tax coordination they may end up losing revenues to other parts of the union,” said Mario Mariniello, a European Union competition expert at Bruegel, a research organization in Brussels. “But there are other major benefits from being in a single market and so the commission should be acting to stop member states operating selective and discriminatory beggar-thy-neighbor tax policies.”
The investigation represents a particular threat to a business model finessed by Ireland, which has used its tax strategies and light-touch regulation to attract major multinationals, providing prestige and jobs that might otherwise end up elsewhere in the European Union. Ireland’s tax policy has been a source of continuing tension. The issue flared in 2010 when Ireland received $90 billion from the European Union and the International Monetary Fund, a bailout the country exited late last year.
“The company in question did not receive selective treatment and there was no ‘special tax rate deal,'” the Irish government said in a statement on Wednesday, apparently referring to Apple. High-tax countries like France were particularly vocal in demanding that Ireland raise its corporate tax rate as part of its package of reform commitments. Technocrats in Brussels and Washington also saw a rate increase as an easy way to raise desperately needed revenue. But Ireland pushed back hard, arguing that the low rate was crucial to the country’s success, and the country’s creditors eventually acquiesced.
“Our technical experts do not believe that there is any state aid,” the Irish statement said. “We will now turn to providing our detailed, technical legal rebuttal of the Commission’s position and if necessary will defend our position in the European Courts.” Now, the Irish economy is recovering, with a flood of new money pouring into the country. And with other European Union nations like Britain aggressively pushing their own corporate rates lower in a bid to attract multinational investments, European officials are becoming concerned about lost revenue streams.
Apple said in a statement that the company had “received no selective treatment from Irish officials” and that it “is subject to the same tax laws as scores of other international companies doing business in Ireland.” The inquiry will also examine Starbucks’s tax treatment by the Netherlands and the tax arrangements in Luxembourg for Fiat Finance and Trade, a unit of the Italian automaker. Mr. Almunia said corporate tax practices in Britain and Belgium would come under the spotlight, though he mentioned no companies by name on Wednesday.
Tax inducements offered by the Netherlands and Luxembourg are also expected to be examined by European Union officials, who have previously said that tax avoidance and evasion in the European Union costs governments huge sums each year. In March, Mr. Almunia’s officials threatened to take Luxembourg to court to force it to provide information to let them assess whether certain tax practices were in breach of the bloc’s so-called state aid rules. Ireland said it would contest the premise of the investigation, while Apple said that it had “received no selective treatment from Irish officials” and that it “is subject to the same tax laws as scores of other international companies doing business in Ireland.” Apple also noted that it was the second-largest employer in Cork, an Irish city, and that it had added 5,000 jobs in the European Union in the last three years. “Success and growth come from the hard work of our Irish employees not from any special tax deal with the Irish government,” it said.
There are no fines in such state aid cases, which are mainly aimed at stopping unfair competition between states within the European Union. But if the commission finds that illegal aid was given, governments found to have doled out the unfair subsidies can be ordered to recover the money from recipient companies. In a statement, Starbucks said it complied with all relevant tax rules, laws and guidelines, and was studying the announcement. The Dutch government said it would cooperate with the commission but had “confidence” that no illegal aid would be found in “one specific case” concerning Starbucks. The tax practices questioned by the commission were “robust and based on a thorough assessment” as well as “positive for our business climate,” it said.
The effort by the Brussels authorities is part of a global crackdown on loopholes that have allowed giant companies like Apple and Starbucks to use complex tax structures to pay small amounts of tax on operations outside the United States. The maneuvers, say critics, allow corporations to operate as virtually stateless entities. In Luxembourg, a spokesman for the Finance Ministry said the government would respond on Thursday. Fiat declined to comment.
Apple, despite being among the most profitable American companies, has avoided billions in taxes in the United States and around the world through a web of complex subsidiaries, according to lawmakers in the United States. In another widely cited example, Starbucks has paid low corporate taxes in Britain despite operating several hundred stores in that country. The effort by the authorities in Brussels is part of a global assault on loopholes that have allowed giant corporations to use complex tax structures to pay small amounts of taxes.
The Irish government’s handling of corporate taxation has become a delicate matter between Dublin and Washington. Apple, despite being among the most profitable American companies, has avoided billions in taxes through a web of complex subsidiaries, according to lawmakers in the United States.
In a report last year, the United States Senate Permanent Subcommittee on Investigations identified Apple subsidiaries that have no “tax residency” in Ireland, where they are incorporated, or in the United States, where the executives who manage those units are based. The subcommittee said that Apple had “exploited a difference between Irish and American tax residency rules” but had not broken any laws. In a report last year, the United States Senate’s Permanent Subcommittee on Investigations identified Apple subsidiaries that have no “tax residency” in Ireland, where they are incorporated, or in the United States, where the executives who manage those units are based. The subcommittee said that Apple had “exploited a difference between Irish and American tax residency rules” but had not broken any laws.
Apple’s chief executive, Tim Cook, later defended the company’s tax strategy in testimony before Congress, saying that profits made in the United States were taxed in the United States and that the company had a significant employee base in Ireland. Apple’s chief executive, Timothy D. Cook, later defended the company’s tax strategy in testimony before Congress, saying that profits made in the United States were taxed in the United States and that the company had a significant employee base in Ireland.
In its statement on Wednesday, Apple noted that it was the second-largest employer in Cork, an Irish city, and that it had added 5,000 jobs in the European Union during the last three years. “Success and growth come from the hard work of our Irish employees, not from any special tax deal with the Irish government,” it said. In another widely cited example, Starbucks has paid low corporate taxes in Britain despite operating several hundred stores in that country. In April, Starbucks said that it would move its regional headquarters to London from Amsterdam.
Irish tax practices are a sore point with many other European Union countries. Mr. Almunia said that the investigations were vital after a bruising six-year economic crisis that has forced many countries to sharply reduce spending on public services.
The French authorities have expressed outrage at how corporate tax avoidance puts an unfair burden on citizens and ordinary workers, while the authorities in Italy have reportedly looked into whether Apple had avoided Italian taxes by filing returns through a subsidiary in Ireland. “In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes,” Mr. Almunia said at a news conference.
Last Friday, according to The Irish Times newspaper, the Irish prime minister, Enda Kenny, said that Ireland’s tax structure would be defended “very strongly,” should any European Union inquiry be initiated. “This is not the first time and will not be the last one,” he added, referring to the prospect of further investigations. Asked about the possibility that Google, which bases much of its European operation in Ireland, could be swept up in the inquiry, Mr. Almunia said, “I don’t exclude anything.”
Although Ireland has undertaken steps to modify its tax codes, it has also responded to recent criticism by citing loopholes in other countries’ tax policies and by drawing attention to the lack of uniformity in international taxation principles. Such cases can take years to resolve, and Mr. Almunia’s term formally ends at the end of October. But he pledged that officials looking into such cases “will not stop working because their bosses will change.”
American businesses have long complained about the corporate tax rate they pay at home, arguing that in today’s global marketplace, they are left at a competitive disadvantage. Many companies aggressively seek loopholes that lower their actual tax rates well below the 35 percent statutory rate. European Union officials said their inquiry would examine “transfer pricing arrangements.” Such activities commonly involve the shunting of profits and losses between subsidiaries by disguising them as internal corporate payments for goods or, as is increasingly common, for copyright or patent royalties.
The move by Brussels is part of increased scrutiny on tax codes around the world, partly as governments seek new sources of revenue to pay for expanding social services and aging populations. The investigation represents a particular threat to a business model finessed by Ireland, which has used its tax strategies and light-touch regulations to attract major multinational companies, providing prestige and jobs that would otherwise end up elsewhere in the union.
Many governments are pressing for policies to prevent corporations from seeking countries with the lowest taxes and then finding ways to book their profits there, even when much of the money is made elsewhere. “We will now turn to providing our detailed, technical legal rebuttal of the commission’s position and if necessary will defend our position in the European courts,” the Irish government said in a statement.
Among the ideas under consideration are strict rules for defining where a company has a permanent presence and measures to limit the practice of transfer pricing. The investigation involving Apple “could prove to be very damaging to the Irish economy and ultimately cost jobs,” warned Michael McGrath, the spokesman on finance for the main Irish opposition party, Fianna Fáil. “Our competitors will hope that today’s announcement is the start of the unraveling of our ability to secure multinational investment.”
Mr. Almunia reserved his most negative assessment for Luxembourg, which he said had offered “only partial” cooperation in preliminary fact finding. “This job cannot be done with public information only,” said Mr. Almunia, who at the news conference said that he had confronted Luxembourg’s minister of finance, Pierre Gramegna, on the matter.
No fines can be assessed in investigations of the sort that Mr. Almunia is conducting, which are mainly aimed at stopping unfair competition among states within the European Union. But if the commission finds that illegal aid was given, governments can be ordered to recover the money from the recipient companies.
That has happened in at least one other set of tax cases concerning Spain. In 2011, the commission ordered the government to recover undisclosed sums from Spanish companies like Telefónica and Iberdrola that were given tax advantages for acquiring foreign companies. The process of recovery is still underway, officials said.
Member states also could be required to change their laws, “but this is still too soon to talk about,” Mr. Almunia said.