Friends with Tax Benefits: Apple's Cautionary Tale

Abstract

Apple recently disclosed to shareholders a potentially material impairment to its earnings: an ongoing investigation by the European Commission into Ireland’s tax ruling practices. Ireland may be forced to retroactively impose additional taxes on Apple, going back as much as a decade (and possibly beyond), if the Commission decides that the Irish Tax Authority granted Apple a prohibited subsidy, referred to as “fiscal state aid,” in contravention of EU law. But the impact of this investigation may be felt well beyond Europe. Against the backdrop of the OECD’s project on base erosion and profit shifting, the Commission’s investigation about whether Ireland gave Apple unfair benefits is fundamentally an interrogation into what, if anything, governments can or should do to stop the strategic use of national tax systems to lure international trade and investment. The Commission’s inquiry into Apple is thus a cautionary tale for both tax planners and tax authorities, whose confidence in past practices must give way as traditional compromises and well-worn assumptions suddenly become subjects of intense renegotiation on the global stage.

Keywords: Apple, state aid, EU, subsidies, tax policy, fiscal policy, industrial policy, international factor movements, business taxes, private tax ruling, tax competition

JEL Classification: D21, E62, F02, F23, H25, H50, H77, H87, K33, K34, L21, M14, O34, O38