The Case

 The EU Commission brought a suit against Apple for unfair tax avoidance and illegal state aid for its European subsidiary in Ireland. The suit maintained that Ireland failed to collect tax of 13 billion euros ($15 Billion) between 1991 and 2015 and that Ireland was giving Apple special treatment. The court ruled against the EU commission and agreed with Apple’s lawyers that Ireland was not giving Apple special treatment or state aid but rather was applying Irish tax rules consistently. According to the BBC, Dutch MEP Paul Tang called the ruling “deeply unfair”.

The Tax Details

The reason why this ruling is important is that it preserves a tax structure called the Double Irish or the Double Irish with a Dutch Sandwich. John Oliver talked about this arrangement and mentioned that such a title should belong to something far more exciting than international tax rules.

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The first step is to set up a corporate subsidary in Ireland but headquartered elsewhere like Bermuda or in the case of Apple, the island of Jersey and license intellectual property created in the United States to that entity. The subsidiary will pay almost nothing for this property meaning that all the profits from its activities can be assigned to that entity. In apple’s case all of its revenue from the EU, Middle East, and Africa. The parent company will only pay tax on the fees for the licensing and not the full tax bill. The next step is to setup another Irish corporation which will own be owned by the first entity and will do all the selling of services and recoding or actual revenue for those sales. However, that money isn’t going to be drinking Guinness in Shannon, that money will be on its way to Holland. Ireland has tax free transfers within the EU so when the money reaches Holland it does so without tax. The money won’t be staying in Holland long either, that money will then move back to Ireland to the first entity which is headquartered elsewhere. Thanks to Irish law, this money is able to make all these movements tax free. The final step is then to move the money out of Ireland and back to the tax haven country that the original company is in. Clear? 

Simply, two Irish companies license everything they need to sell iPhones and other Apple products in Europe and then move the profits between in Ireland, Holland, and then back to Apple’s subsidiary in Jersey. This helps Apple avoid a tremendous amount of taxes. Apple only pays .005% tax on its profits in Ireland using this arrangement the rest of the money goes to Jersey. 

The Back Drop 

Multinational companies have been watching this case closely. A strike against Apple would end the Double Irish arrangement and increase tax bills for any companies doing business in the EU. Apple’s CEO Tim Cook commented that, “We’re proud to be the largest taxpayer in the world, as we know the important role tax payments play in society.” For now, companies can continue to use these unique tax laws to reduce their tax bills and continue to stash cash overseas. Multinational companies have an estimated $21 Trillion in overseas profits that do not come back to the United States. Countries like Ireland and others compete to be the favorite tax haven for multinationals. This represents an important source of income and jobs in countries where there is little industry and job creation. Familiar names like Panama, The Cayman Island, the Virgin Islands, the Isle of Jersey, the Isle of Man and Ireland are all countries that rewrite tax law to favor these companies. The issue the EU (and the US) have with these arrangements it that local countries where the business occurs lose out on billions in taxes from this economic activity. 

The Taxable Future

EU Competition Commissioner Margrethe Vestager says that she will review the ruling. The EU Commission has 2 months and 10 days to appeal the ruling to the European Court of Justice. The decision there will be final. Apple has set aside the money in an escrow account in the event the case doesn’t go their way. The EU is likely to appeal the decision so that money will be staying put (for once) for the time being.