European competition commissioner Margrethe Vestager. Picture: REUTERS/YVES HERMAN
European competition commissioner Margrethe Vestager. Picture: REUTERS/YVES HERMAN

Apple is squaring up with tech’s European bête noire, Margrethe Vestager, over its historical tax arrangements in Ireland at a court hearing this week. If the iPhone maker wins, Vestager may be able to use the defeat to her benefit.

In 2016, EU competition commissioner Vestager imposed a €13bn bill on Apple for unpaid taxes in Ireland, alleging illegal state aid. That case has now reached the EU General Court in Luxembourg. The losing side will be able to appeal one level higher to the European Court of Justice.

Though a ruling will still take months, either outcome could potentially play into Vestager’s hands. If the court decides in her favour, then all well and good: Apple has already placed the funds in escrow, Ireland enjoys a nice boost to its coffers and her efforts to end so-called sweetheart tax deals are rubber-stamped.

If the court concludes that the arrangement was in fact above board, it would prove a blow to the commission’s ability to use state aid rules to punish countries using tax breaks to prop up certain industries. But if Ireland is able to get away with taxing Apple at such a tiny rate — the commission says it was as low as 0.005% — the question becomes: how was this permissible under the global tax system?

It could prove a useful political tool for Vestager, who in her new mandate as executive vice-president in charge of digital policy will also be responsible for European efforts to change the way technology companies are taxed. It may also help pile pressure on the Group of 20 (G20) to finally agree an overhaul of global tax rules.

Profit-shifting

Moves to change the tax framework are reaching a climax. In 2013, the G20 tasked the Organisation for Economic Co-Operation and Development (OECD) with developing a solution to the problem known as base erosion and profit-shifting, in which companies are able to book profits in countries with more favourable tax regimes. The aim was to come up with a common framework that plugged some tax loopholes.

The EU has already made some progress to tackle profit-shifting by multinational corporations. But G20 finance ministers will once again consider a more comprehensive multilateral plan when they meet on the sidelines of the World Bank and IMF gatherings in Washington in October. The hope is that the proposals will be formally adopted by the G20 at its meeting in Riyadh in 2020.

The bone of contention is essentially whether to tax revenue or profit. Traditionally, taxes have been levied on profit. But due to the nature of digital services, companies can more readily shift around where exactly that profit is booked. Take Facebook, for instance. Is the value being generated in the country where a user clicks on an ad? Or is it in Menlo Park, California, where Facebook has its headquarters and where an engineer might have written the code to serve up that ad?

In the absence of a broader agreement to combat profit-shifting, the UK and France are pushing for digital taxes that would target the former, while the US errs in favour of the latter — understandably, because that boosts its own tax revenue. The existing approach has made it easier to claim residency in lower-tax regimes such as Ireland.

Efforts to come up with a comprehensive European solution to take on the tech giants have so far failed, prompting France and the UK to advance with their own taxes on digital companies’ revenue.

The OECD is looking favourably on measures that assess whether a firm has a significant economic presence in a country — a combination of its footprint and sales. It’s also likely to take into account factors such as local user contribution (for example videos uploaded) and where the product was developed.

If the OECD’s proposals aren’t adopted by the G20, Vestager has to find a way of convincing European member states to agree on a solution. Countries such as Sweden and Luxembourg have so far stood in the way of a consensus.

Bloomberg