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Taking More than They Give: MNE Tax Privateering and Apple's “Ocean” Income

Published online by Cambridge University Press:  06 March 2019

Robin F. Hansen

Abstract

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Following a three-year investigation, on August 30, 2016, the European Commission (EC) released its decision in the Ireland-Apple State aid case. The EC found that Ireland had breached the Treaty on the Functioning of the European Union because the manner in which Ireland had determined the tax payable by two Apple subsidiaries was not consistent with the arm's length principle and/or it was not based on objective criteria. This meant that Ireland had selectively favored Apple and provided the firm with State aid. The EC decision provides an example of how aggressive multinational enterprise (MNE) tax minimization is anti-competitive. The Ireland-Apple case also provides an illustration of how a lack of transparency and incoherency in MNE definition contribute to aggressive MNE tax minimization. States' reactions to the EC decision are further telling because they show how MNE tax minimization engages the self-interest of States. This suggests that efforts to combat aggressive MNE tax minimization, such as the OECD's Base Erosion and Profit-Shifting Action Plan, face complex State motivations in effecting change on the international level. Profit haven States have the most to lose if MNE tax minimization is effectively addressed. In addition, MNE home States may be at times loath to support changes to the system which favors “their” MNEs at the expense of other States' tax revenues. It is as if some home States view MNEs as their privateers, with such MNEs operating internationally under the tacit approval of their home States to aggressively avoid paying taxes to other countries. Home State leadership may be mistaken in thinking that MNE tax minimization is in their favor because MNEs are largely free agents and aggressive MNE tax minimization is dearly costing nearly all states.

Type
Law & the new Economy
Information
German Law Journal , Volume 19 , Issue 4 , 01 July 2018 , pp. 693 - 726
Copyright
Copyright © 2018 by German Law Journal, Inc. 

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168 See Cobham & Jansky, supra note 138 at 7, 22–3 (reporting missing MNE tax payments to the United States for 2012 at US$ 84.8 billion).Google Scholar

169 Indep. Comm'n for the Reform of Int'l Corp. Tax'n, Declaration 4 (2015), http://www.un.org/esa/ffd/wp-content/uploads/sites/2/2015/03/ICRICT_FINAL.pdf.Google Scholar

170 Id. at 10–11.Google Scholar

171 See UNCTAD WIR 2016, supra note 110, at xiii.Google Scholar

172 Paul Sweeney, If Apple Won't Pay Tax What Hope is There for Civilization?, The Irish Times (Feb. 2, 2017), http://www.irishtimes.com/opinion/if-apple-wont-pay-tax-what-hope-is-there-for-civilisation-1.2959603; see Compania Gen. De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting).Google Scholar

173 See EC Decision, supra note 7, at paras. 411–12.Google Scholar

174 Id. at para. 381.Google Scholar

175 Vanessa Barford & Gerry Holt, Google, Amazon, Starbucks: The Rise of “Tax Shaming”, BBC News Mag. (May 21, 2013), http://www.bbc.com/news/magazine-20560359; Simon Neville & Jill Treanor, Starbucks to Pay £20m in Tax Over Next Two Years After Customer Revolt, The Guardian (Dec. 6, 2012), https://www.theguardian.com/business/2012/dec/06/starbucks-to-pay-10m-corporation-tax (“Starbucks is volunteering to pay £10m in taxes in each of the next two years as it attempts to win back customers following revelations that it has paid no corporation tax in the UK in the past three years.”); Elle Hunt, Apple Paid No Tax in New Zealand for at Least a Decade, Reports Say, The Guardian (Mar. 22, 2017) https://www.theguardian.com/world/2017/mar/23/apple-paid-no-tax-in-new-zealand-for-at-least-a-decade-reports-say.Google Scholar

176 See Cobham & Jansky, supra note 138, at 24.Google Scholar

177 Google, for its part, employs the so-called “Double Irish” or “Dutch Sandwich” in its tax strategy. See Jeremy Kahn & Martijn Van Der Starre, Google Lowered 2015 Taxes by $3.6 Billion Using “Dutch Sandwich”, Bloomberg (Dec. 21, 2016), https://www.bloomberg.com/news/articles/2016-12-21/google-lowered-2015-taxes-by-3-6-billion-using-dutch-sandwich (“By moving most of its international profits to Bermuda, the company was able to reduce its effective tax rate outside the U.S. to 6.4 percent in 2015, according to Alphabet's filings with the U.S. Securities and Exchange Commission.”). Google arrived at a tax settlement of 130 million pounds with the UK government in 2016, and French police are investigating Google for tax fraud in relation to the MNE's Irish structuring. See Womack, Brian, Google Agrees to Pay $185 Million in U.K. Tax Settlement, Bloomberg (Jan. 22, 2016), https://www.bloomberg.com/news/articles/2016-01-22/google-agrees-to-pay-185-million-in-uk-tax-settlement; Gaspard Sebag & Stephanie Bodoni, French Tax Investigators Swoop on Google's Paris Offices, Bloomberg (May 24, 2016), https://www.bloomberg.com/news/articles/2016-05-24/french-tax-investigators-swoop-on-google-s-paris-offices. Furthermore, Google—Alphabet Inc.—briefly displaced Apple as the world's largest MNE by market capitalization in February 2016. See PwC Global top 100 Companies, supra note 15, at 7.Google Scholar

178 Naren Prasad, Policies for redistribution: The use of taxes and social transfers 27 (2008), http://www.oit.org/wcmsp5/groups/public/—dgreports/—inst/documents/publication/wcms_193159.pdf. Prasad concludes:Google Scholar

This paper examined the extent to which taxes and social transfers have managed to redistribute the gains and losses from economic growth over the past 15 years or so. A key finding is that, despite increasing income inequality, the redistributive impact of taxes and social transfers has generally not been able to reverse this raising trend. One reason for this failure is that taxation has become less progressive and therefore less likely to address growing income inequality found in many countries. Generally speaking, indirect taxes—which are typically regressive—have become a more important source of government revenue. By contrast, tax rates both on corporate income and on top personal incomes have, on average, declined over the past 15 years or so.

Id. Google Scholar