Following the recent Apple tax ruling, we ask: are ‘sweetheart’ tax deals for large corporations a thing of the past or will Brexit open the door for more?
Government tax rulings given to large organisations under so-called ‘sweetheart’ tax deals are coming under increased scrutiny by the European Commission, with multinationals potentially facing large tax bills if their deals are found to breach EU state aid rules.
Multinationals facing back taxes
Apple, for example, hit the headlines last month when the European Commission found that two tax rulings between Apple and Ireland amounted to illegal EU state aid. The European Commission has effectively ruled that Apple must repay Ireland up to €13 billion (€19 billion including interest), as two tax rulings were found to amount to a special deal agreed only with Apple.
This is not the only state aid case that the European Commission is pursuing. Fiat (relating to an agreement with the Luxembourg tax authority) and Starbucks (relating to an agreement with the Dutch tax authority) are among other multinationals faced with large tax bills relating to historic tax agreements with tax authorities around Europe.
Apple and the Irish government are both expected to appeal the decision. Even if the decision is upheld, there is a technical question as to how Ireland would enforce the ruling. Ireland may be unable to collect tax over and beyond that which it considers is due under its domestic rules. To do so might require the Irish government to enact some sort of retrospective legislation, which could have wide-reaching implications. There may also be a case for challenge against any such retroactive/retrospective legislation under the European Convention on Human Rights.
Should you prepare for a potential challenge?
In many European countries it has been commonplace to obtain tax rulings from tax authorities to give certainty over a tax position. Groups that have received such tax rulings in the past should be taking steps to consider their position and whether they could be open to challenge under the state aid rules.
For example, they should be checking that they have clear documentation setting out the negotiations which were undertaken and including evidence that the ruling given was not selective (ie would have been available to all companies).
Company auditors are likely to start to ask questions of some groups regarding their rulings and whether they should be providing for a potential European Commission challenge.
Changing international tax landscape
With the drive for cooperation between tax authorities coming both from the OECD and the EU, we expect to see tax rulings being shared more widely, leaving much less room for individual tax authorities to enter into tax rulings that may be viewed as too generous by others.
The European Commission found that the majority of profits were allocated to a head office, which was not based in any country, had no employees, nor premises and so it did not have the economic substance to justify that allocation (and these profits were not taxed in Ireland).
Concerns regarding profits being artificially shifted to low (or no) tax jurisdictions, was the impetus behind the OECD’s BEPS project, which began in 2012 and was finalised in 2015 with the issuance of a 15-point BEPS action plan. If the plan is implemented universally it should lead to a more coherent international tax system, and ensure profits are allocated to countries where there is genuine substance and activity.
In relation to rules concerning transfer pricing arrangements, the UK post-Brexit will remain a member of the OECD and be subject to the 2010 guidance on transfer pricing rulings. The guidance sets forth the so called “arm’s length” principle and acceptable calculation methodologies upon which transactions between international groups ought to be treated for tax purposes in the affected jurisdictions by OECD members.
Post-Brexit, it is expected that the UK will remain a member of the World Trade Organisation (WTO) and, as such, will remain a party to the WTO Agreement on Subsidies and Countervailing Measures (SCM) which was negotiated as part of the setting up of the WTO in 1995. The WTO state aid regime, however, differs significantly from the EU regime because, for example, the WTO does not require pre approval of state aid programmes, the WTO policing mechanism does not compare to that of the EU Commission and it is the case that the body’s dispute resolution mechanisms may not mandate retrospective recovery of aid already given.
It should be noted that HM Revenue and Customs (HMRC) published a consultation document with the aim of introducing proposals. If introduced, the proposals would lead to imposing punitive penalties on tax advisers who assist clients to avoid tax where those arrangements are subsequently counteracted or otherwise defeated. This could potentially include tax avoidance arrangements which artificially shift profits from the UK to another jurisdiction.
Post-Brexit, the UK will no longer be bound by the limits of EU state aid (although depending on what future agreements are negotiated it could face similar restrictions). This means that in the absence of further agreements it could choose to be more flexible with the tax treatment it gives to large multinationals.
In view of strong public opinion and extensive media coverage regarding tax avoidance and ‘sweetheart’ deals, it is unlikely that the UK would adopt an aggressive stance. Unless the post-Brexit economy deteriorates to such an extent that it becomes necessary to significantly lower corporation tax rates for all companies.