One of my takeaways from working on the G20/OECD BEPS Project was that it often took two players for base erosion and profit shifting (BEPS) to occur: a tax-planning multinational enterprise and a facilitating country or countries. BEPS was facilitated by some national governments to increase jobs, investment and revenues in their country. Thus, competition is not just between companies, but also between countries.
EU “Competition policy is about applying rules to make sure companies compete fairly with each other.” The EU State Aid rules do not address the issue of competition between countries.
There are many affected parties in the EU State Aid case against Ireland and Apple. Reduced effective tax rates (ETRs) can affect the relative competitiveness of companies. Interestingly, the EU ruling (currently only a 4 page press release) gave no examples of competitive harm to other companies. The OECD BEPS Action 11 report notes that the incidence of corporate tax avoidance from BEPS may be more likely to increase rents to shareholders than lower prices to consumers or higher wages to workers. Without lower consumer prices, the potential harm to other companies is quite limited.
Reduced average ETRs have been shown to affect the location decisions of companies. A lower average tax rate in Ireland encourages more investment, jobs and tax revenue in Ireland. The shifting of investment and jobs due to a reduced ETR comes at the expense of jobs and investment in other countries. BEPS affects the revenue collected by other countries, so other taxpayers, both individuals and companies, have to pay more taxes for a given level of government services. Thus, it is more likely that any State Aid harmed citizens in other countries, rather than other companies’ shareholders.
The current EU State Aid rules require recovery of the reduced taxes by Ireland. Ireland could use the additional money to reduce its current 12.5% corporate tax rate, further reduce its Knowledge Development Box 6.25% tax rate, and/or increase its spending on education or infrastructure, further enhancing its competitive position vis-à-vis other countries. It could be a winner twice with jobs and investment from the initial State Aid, and then with future jobs and investment from spending of the State Aid recovery. The recommended recovery is equivalent to three years worth of Irish corporate tax collections.
The EU ruling notes “If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.” This statement likely reflects the EU’s real concern in the Apple case, which is competition between countries and their harmful tax practices. Distribution of recovered amounts to adversely affected stakeholders would require many assumptions about the incidence of the favorable tax treatment, but clearly the facilitating government is not a negatively impacted stakeholder. With the current lack of understanding of the effects of corporate tax incidence, such an attempt would be a fool’s errand, and new audits by multiple governments based on then existing transfer pricing guidance for tax years 2003-2013 are neither realistic nor desirable.
In my experience with tax policy issues, it is more important to get the future rules improved rather than attempting to recover past tax benefits. Fortunately, the G20/OECD BEPS Project and the EU’s Anti-Avoidance Directive are important steps in reducing corporate tax avoidance in the future with improved transfer pricing guidance and improved governmental transparency with spontaneous exchange of information on governmental tax rulings. Future coordinated multilateral standards to reduce BEPS and reduce personal tax evasion through Automatic Exchange of Information will reduce governments’ use of tax systems to benefit select taxpayers will reduce countries’ harmful tax practices.