US intervention on state-aid cases ratchets up

The US Treasury were obviously unimpressed with the response to Asst. Treasury Secretary Robert Stack’s recent visit to Brussels with Competition Commissioner Margrethe Vestager responding that “it is the same argument as we have heard before”.

The US clearly feels it is an argument worth making and now Treasury Secretary Jacob Lew has written a letter to Commission President Jean-Claude Juncker.  It is largely a repetition of the arguments heard before but there are some interesting elements.

On the State Aid case against Ireland in relation to Apple, Lew is pretty clear:

Third, DG COMP’s approach appears to target, in at least several of its investigations, income that Member States have no right to tax under well-established international tax standards. U.S. multinationals generally do not conduct the cutting-edge research and development that creates substantial value in the European Union, and as a result, comparatively little of their income is attributable to their European operations. We recognize that the U.S. system will only tax this income upon repatriation, and many U.S. firms are choosing to defer paying tax liabilities by keeping income overseas in low-tax jurisdictions. This is a serious problem that we seek to address through President Obama’s business tax reform plan and the BEPS project. This problem, however, does not give Member States the legal right to tax this income. Doing so would directly harm U.S. taxpayers. When U.S. companies repatriate revenue- as tax reform proposals from both U.S. political parties would require them to do within a fixed timeframe any assessments paid to Member States could be eligible for foreign tax credits. This loss of revenue would impose a direct cost on American taxpayers.

Whether right or wrong the current system of corporate income taxation allocates a large share of the profit made by Apple to the research and development that generates Apple’s intellectual property (patents, design, brand, reputation etc.).  The most crucial aspect of the strategies used by many US MNCs is the ability to divide the rights to exploit their intellectual property into US and non-US divisions and have the non-US rights held by a subsidiary that is considered “offshore” for US tax purposes. 

These are cost-sharing agreements where the offshore subsidiary contributes a portion of the R&D expense incurred by the parent company and in return gets the right to use the IP that results from that R&D in a particular region.  These agreements were initiated before these companies became hugely profitable and any attempts to put in place such agreements after the IP has been created and profits flows identified would trigger large capital gains tax payments on origination and much higher ongoing royalty payments into the US.  The implementation of a cost-sharing agreements before the profits flow reduces the amount of capital gains tax and limits the required inbound payments to the R&D expense incurred by the company. This is the crucial aspect of these strategies.

If this division under US law was not possible the strategies used by US MNCs would be wholly ineffective.  Google Inc. has an agreement to grant the ex-US rights to its technology to Google Ireland Holdings and Apple Inc. has an agreement with Apple Operations International for the ex-US rights to Apple’s intellectual property.  Both companies have operations in Ireland where the work to exploit the intellectual property is undertaken. Google through a subsidiary of GIH, Google Ireland Limited, and Apple through a branch of the AOI subsidiary, Apple Sales International.

Lew fudges somewhat when he says that “many U.S. firms are choosing to defer paying tax liabilities by keeping income overseas in low-tax jurisdictions.”  That is true but Apple is not keeping the income overseas; in Apple’s scheme the income goes directly to the US but it is deemed “offshore” and the US allows a deferral because Apple keeps it in a company that is Irish-incorporated.

In her response to Stack’s visit Vestager further added that “just as it is an obvious right for U.S. tax authorities to tax revenues when they are repatriated, it is also for European tax authorities to tax money that is made in the member states." But just because something is “offshore” under US tax law does not necessarily mean it is “onshore” somewhere else.  International agreements allocate taxing rights and it is up to each country how they want to utilise the taxing rights that such agreements grant to them.

The Commission are attempting to prove, or are just going to say without proving, that the profits earned by Apple Sales International are taxable in Ireland.  The reality, based on substance, is that these are profits earned by Apple Inc and should be taxable in the US.  That the US allows these to go untaxed should be their business but who wouldn’t be obsessed by a potential pot of untaxed gold?

Our own Oireachtas Finance Committee took a look and when before them, the OECD’s point man on tax Pascal Saint Amans, said the following:

Pascal Saint-Amans: Assuming the best action plan translates into domestic legislation in all countries, including the US, the companies in question would be taxable in the US and would not benefit from what they currently enjoy, which is double non-taxation.

Pascal Saint-Amans: Ireland should also consider it is not the only country in the world and there is an interaction with other countries. For example, part of the tax is due in the US rather than in Ireland for the simple reason that the intangible has been developed in the US, is owned by the US and should be taxable in the US, so there is a reason not to tax profit which is not accruing in Ireland. Therefore, this issue cannot be solved unilaterally and there is need for interaction with another country in order to deal with this.

The US are concerned by such unilateral action – even if such action by Ireland is result of a decision by the European Commission.  In his letter Lew doesn’t even try to veil the threatened response to this:

Fourth, DG COMP’s approach could undermine U.S. tax treaties with EU Member States. As you know, Member States have exclusive authority over income tax under EU law.  Accordingly, the United States does not have an income tax treaty with the European Union.  DG COMP’s new assertion of authority raises serious questions about this relationship and the finality of income taxation-related dealings with Member States. We expect that this new uncertainty could damage the business climate in Europe and deter foreign direct investment.

A ‘toughened stance’ from Ireland is no surprise.  Though it should be remembered that the US-Ireland tax treaty is not applicable in the case of Apple.  The structure is such that the subsidiaries are deemed non-resident in Ireland (because they are not managed and controlled here) and are non-resident in the US (because they are not incorporated there).  One of the consequences of being ‘stateless’ is that Apple cannot avail of the provisions of the US-Ireland tax treaty to relieve a tax liability that might be due in Ireland. Tax risk anyone?

The ratcheting up by the US through this letter from the Treasury Secretary to Juncker shows what the US believes the European Commission is about the do.  The Commission know that the US is not going to do anything to address the problem regardless of any “robust business tax reform plans” that Lew says have been proposed by US President Obama.  And the US has hugely pulled back from its engagement with the BEPS project.  But saying something and doing something are very different things. Will the Commission pull the trigger?

13 replies on “US intervention on state-aid cases ratchets up”

Half of Ireland’s 6.6bn corp tax comes from 10 MNC’s at a time when governments are short of cash, growth is risible and voters are volatile.

@ seafóid

I broke the story on just 10 firms paying about half of corporation tax in 2015 on Monday last.

It was reported in the Irish Independent on Saturday.

Mainstream Irish journalists have traditionally looked down on the online sector but they have no problem sourcing material there.

Typically in the US, the originator of a story is credited by rivals but not in Ireland.

Seamus, you’re back in the battle defending US MNCs and Jack Lew himself had an account in the Cayman Islands when he had worked in Citibank.

The US can huff and puff after Obama had failed to gain any traction for several corporate tax reform proposals in Congress.

However, whatever may happen in future regarding the division of profits between the home base (it’s gets confusing when for example drugs giant Pfizer likely will become “Irish” this year) and big sales markets in for example Europe, China, Japan and India, in Europe there is no longer a willingness to have anti-tax -tax fraud laws applying only to domestic companies while a cosy relationship between tax authorities and foreign MNCs can result in “special” deals cf “Monsieur Ruling” in Luxembourg.

You may quibble on the definition of “special” or “tax haven” and the use of Irish shell companies for tax avoidance/ evasion (when Apple in 2006/2007 declared the shell companies not tax resident anywhere — we don’t know if it consulted the Irish authorities, but we do know that it stopped filing a tax return for its principal overseas company, an Irish shell company — one wonders what is avoidance, evasion or fraud).

In a year the current Treasury officials will be looking for jobs in the private sector!


Thanks again for your great analysis on this. There is a poverty of it else where.

One questions. In the event of a finding against Apple and ‘for’ Ireland, is there a mechanism for Ireland to simply gift the fine back to Apple indirectly or maybe via the US? While proceeding to appeal the decision. Or is it the case that any back taxes wouldn’t have to be paid until the appeal process is over?

It has been known that the top 10 payers were contributing around 50% of the 2015 CT revenues for quite a while now. It is a significant statistic but it is not breaking news.

The details are from a letter from the Revenue Chairman to the Minister for Finance.

One can go all round the houses on the topic of corporate taxation but this tends to obscure the central question (i) who, at the current juncture, is holding a gun to the head of the Irish corporate tax system and (ii) is it loaded?

The answer to the first element is clearly the Commission and the best guide to assessing whether the gun is loaded must be to see what happened in the most recent parallel case.

The only bullet with which the gun can be loaded is that of anti-competitive behaviour i.e. discriminatory treatment of individual firms.

This was fairly clear in the Belgian case.

Is it clear in the case of Apple?

That is the question.

From the Commission’s notification in the Belgian case (paras. 53 and 54)

According to Article 107(1), TFEU “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market”.

State aid rules only apply to aid granted to undertakings involved in economic activities. On top of that, the criteria laid down in Article 107, paragraph 1 TFEU are cumulative. Therefore, the measures under assessment constitute State aid within the meaning of the Treaty if all the above mentioned conditions are fulfilled. Namely, the financial support

• be granted by the State and through State resources,
• favour certain undertakings or the production of certain goods,
• distort or threaten to distort competition, and
• affect trade between Member States.

Whether the Commission is firing live ammunition or blanks, in the event of a negative ruling, may only be decided by reference to the ECJ.

@ MH,

There is no provision to allocate taxable income to a company’s “home base”. Profit is allocated to countries on the basis of the risks, functions and assets that a company has in that country. The seat of a company matters if a country has a worldwide rather than a territorial corporation tax regime but even if a country has a worldwide regime the countries where the profit is earned get first dibs on the tax to be collected.

Unless there are other changes Pfizer won’t earn any more profit in Ireland than it currently does. Pfizer will continue to pay the US 35% rate on the profits it earns there. What the change means is that Pfizer will no longer be liable to top up its tax to the US 35% rate on profits it earns outside the US.

And this is why inversions so irk the US. The US system facilitates the division of US MNC profits into “onshore” and “offshore” but does so in such a fashion that allows the “offshore” revenues to be kept in low- or no- tax jurisdictions. This, in theory at any rate, maintained the amount of tax that would be due to the US.

But an inversion exploits this. The inverted company will keep in place the arrangements that allow a lot of its US profits (from R&D that is carried out there) to be deemed “offshore” but will now change its company seat so that it escapes the US worldwide regime on those profits.

This is having your cake (reducing US-sourced profits) and eating it (escaping the US worldwide regime). The US either curbs the onshore/offshore division of profits or limits the ability to invert to a new seat. At the moment neither seems likely but we’ll know more after November.

Whatever the technical details , Apple is a thin reed against which to lean. The US economy is in crisis. So what if markets don’t see it yet. The share of gdp of the bottom 99% went from 60% pre Reagan to 50% now. Corp profits are at an all time high. 13% of gdp. The Fed is unable to generate growth. Apple is taking the p$ss which is also why US sales are stalling btw. This is senior hurling

@ Seamus Coffey

The NTMA last month after final data was available for 2015, made a comparison for the top 10 payers related to the 24% ratio of total CT payments in 2008-2012, that does not suggest the top 10 preliminary value as per Revenue’s Nov letter remained unchanged and thus accounted for 33% of total 2015 receipts.

For the first ten months of 2015 that percentage is 50%. While November CT receipts may have reduced this share as smaller companies filed returns, it is clear that a high concentration leaves Ireland open to idiosyncratic company/sector risk.

Large firms can also pay in November.

I didn’t use “home base” as a tax rule definition. There is an evolving issue on how the current 1928 rules allocate profits between countries when big firms allocate IP to letter box/ shell companies while the reaction to the Google settlement in the UK suggests that large sales operations in big markets will not be able to get away with paying nominal sums in tax while diverting most of their profits in tax havens.

Absent US reforms, firms will continue to be pressured in Europe and elsewhere to raise tax payments from derisory levels.

” … holding a gun to the head of the Irish corporate tax system and (ii) is it loaded?”

Ah, DOCM. There are a few ‘rules’ about firearms. (1) Never point a firearm unless you intend to fire it. (2) If you do fire – shoot to kill! (3) A firearm is NEVER unloaded, unless the person its being aimed at knows that it is in fact unloaded. Moral: Never point an empty firearm! You may fetch up with a disaggreable suprise.


In the Belgian case, the Commission had a gun, it pointed it and it fired it. As far as I can find out, the ammunition was live as the Belgian government has not raised itself from the floor, dusted it self off and filed a case in the ECJ against the decision by the Commission.

The firms affected, notably the US ones, are also making the necessary provisions which suggests that the taxes due will be collected.

Incidentally, I agree with the author’s conclusion. Corporation tax should be abolished altogether. As US firms are adept at paying as little of it as possible, and are aided in this by the US Congress, one assumes that the economic logic of this is widely accepted in that country. Politics and economic logic do not, however, very often coincide.

Jack Lew’s argument rests on what he calls “well-established international tax standards.” Those standards were designed in 1928 and predate tax havens and Dutch sandwiches. They are not fit for purpose. The EU knows this and is looking to blow a hole in them. Despite Jack Lew’s huffing and puffing the house is not going to blow down. MV is calling his bluff. There is no chance of significant tax reform happening in the US in the next year. Lew and Obama are lame ducks and can do very little to stop the EU’s pursuit of Apple. The morally dubious regime of tax on the basis of intellectual property is coming down.

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