EU tax ruling opens up Pandora’s Box

You thought that it was India which commits such crimes as imposing retrospective taxes running into ten years or more. Think again. It is the holiest of holies of so-called tax conservatives, the European Union and Organisation for Economic Co-operation and Development (OECD) countries that are now imposing two decades old retrospective tax claims.

Former Finance Minister Pranab Mukherjee had announced provisions for retrospective tax claims in his budget as Finance Minister in the second UPA regime. This had raised a volley of protests from companies, particularly multinational corporations operating in India. They had argued that this was against all principles of taxation and this upset all certainties about tax obligations of corporates in India. The affected corporates, Vodafone, being the most high profile among them, put pressure. The multinational lobbies were so active and their pressures were of such high pitch, that even the US barged in to say that such tax provisions were against natural justice. 

Now, the European Union Competition Commissioner, Margrethe Vestager, announced imposing a retrospective tax claim on the technology company, Apple Inc of United States to pay back taxes amounting to $14.5 billion. While doing so, the EU Commissioner has also described the tax ruling of a sovereign country, Ireland, as illegal. The tax claim is humongous and a sort of record in such claims, worth around Rs 110,000 crore. 

The Competition Commissioner’s ruling not only raises questions about the obligations coming on a company from agreements it had concluded with the tax authorities of a country. Ireland had agreed to allow Apple to pay only 1 percent tax on its income from the sale of an iPhone anywhere in Europe. Still later, the tax dues were brought down to 0.0005 percent in subsequent negotiations as its sales rose. 

Ireland allows such tax rulings to attract technology companies into the country. Additionally, Ireland has a lower tax rate on corporate profits of only 12.5 percent for the same purpose of attracting more and more companies to come and make Ireland the preferred corporate headquarters. Against this, many other countries in the EU have far higher corporate income tax rates running up to 35 percent and sometimes close to 40 percent. No doubt that Ireland had emerged as the destination of choice and it helped Ireland to become a technology hub.

Apple Inc’s chief Tim Cooke had given a statement claiming that the company always followed the specific tax laws of countries where it operates and abides by all the tax rules. Apple thereby is claiming that it did not violate any of the tax rules in the host country. Indeed, it appears to be true. Apple did not violate any tax law of Ireland. If anybody did not follow the rules, it is the tax authority of Ireland. It had negotiated the special agreement with Apple.

Now the question is: Has a sovereign state the right to determine its tax rulings and tax laws? Maybe, Ireland was following certain overall objective in granting such concessional treatment to a company or companies. It was following such a strategy to attract investment into the country which it thought should encourage the economy, create more jobs, earn more tax revenues and initiate a virtuous cycle of growth. Can a country have the right to pursue such policies? 

And then, if Ireland cannot offer tax rulings favouring a company or companies, can it also maintain a low tax rate for corporate income like its existing 12.5 percent. Can that also be called into question by the EU authorities and muzzle the country into submission? What happens to its growth strategy? Following the announcement of the verdict, Ireland and Apple both have declared their intention for going on appeal. On the face of it, it might be argued that Apple does not have any culpability: after all it negotiated the deal with the tax authorities of a country. If someone had done wrong, it might be the tax authority of Ireland which concluded the deal. And then, as a sovereign country, Ireland might have every right to do any deal which it deems to be in the larger interest of the country. In the circumstances, Ireland really does not want the booty. That is, Ireland does not want to get the money from Apple. 

In fact, it should not because if Ireland takes the tax dues, it might just as well open the way for other EU member countries to claim a share of the bonanza. After all, these were tax dues on sales throughout EU and not just in Ireland. The records must then be looked into for twenty years for sale points and the governments of those countries where the sales took place could then claim a part of the retrospective tax dues. The EU Competition Commissioner had in fact given such hints and gave the US also the possibility of such tax windfalls. 

The United States apparently is chuckling with the award. It has been smarting under its own multinational companies attempts to do tax shopping. That is, shifting their tax headquarters to countries and locations which offered lower tax rates.  Called “Base Erosion and Profit Shifting” (BEPS), the issue has become a live wire topic. It has even reached the podium of US Presidential elections with Donald Trump saying that he would lower tax rates in the US to retain US companies and discouraging them from shifting their tax headquarters. 

On its part, EU Competition Commissioner has promised more excitement. It has promised to look into many more such tax rulings favouring someone or other. Already, the names of McDonald, Starbucks, and Amazon are circulating and they may as well be looked into for “unfair” tax benefits. There are supposedly more than 1000 such tax deals which have been concluded by various countries and companies. Luxembourg and Netherlands have also been described as tax havens for offering lower tax rates and concessional treatment of large companies.  

Good Lord! The EU award on the retrospective taxation might give ideas to our tax authorities and embolden those who had pursued companies with retrospective tax claims. With EU browbeating those who are opposing, retrospective taxation could be the rule. But maybe if that happens, the advanced countries might claim that this is acceptable in their tax regimes but it cannot be trusted with the emerging market or developing economies.  IPA

(The views expressed are strictly personal.)

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