Jennifer Blouin, Raymond Luja and Erik Jones discuss the EC's ruling on Apple and Ireland

The European Commission’s ruling last week that Ireland must collect nearly 13 billion euros ($15 billion) in unpaid taxes from Apple reveals deep fissures within the European Union on leveraging tax policy to attract investments. It also highlights the fragile and unpredictable nature of commitments on tax incentives made by governments in Europe and in Ireland in particular. As a consequence, companies such as Apple that take advantage of friendly tax regimes may have to look elsewhere for future investments, warn experts.

Ireland’s parliament on Wednesday voted 93-36 to uphold the EC ruling on Apple. However, Enda Kenny, the country’s prime minister, opposed the EC ruling and maintained that Ireland “played by the rules” in its tax treatment of Apple, according to an AFP report. Apple, which has had offices in the Irish city of Cork since 1980, has nearly 6,000 employees in that country, the report adds.

Apple’s tax case in Ireland is unique in that it attempts to show that its profits from operations there don’t fall under any specific tax regime, says Wharton accounting professor Jennifer Blouin. The EC’s ruling aims to “level the playing field” and avoid tax policy distortions in Europe, and also to collect revenue, according to Raymond Luja, professor of comparative tax law at Maastricht University in the Netherlands. However, changing tax policies after companies make investments based on those rules introduces unpredictability and will prompt investors to flee to more stable jurisdictions, says Erik Jones, professor of European studies and international political economy and director of European and Eurasian Studies at Johns Hopkins University.

Blouin, Jones and Luja discussed the issues raised by the European Commission’s ruling on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Here are five key takeaways from their discussion:

  1. The case of Apple’s “stateless profits”: What is unique to the Apple case is that it made the argument that the profits generated from its Ireland operations were actually stateless, notes Blouin. Apple’s contention is that “they weren’t generated anywhere but with a board meeting that happened on the phone lines between Cupertino, Calif. and Cork, Ireland,” she says. Based on that, it contends that “[those profits] weren’t reportable in Ireland, weren’t reportable in the U.S., and so they paid a very low country [tax] rate,” she adds. Blouin traced the structure of the deal to the 1990s when Ireland’s economy was struggling and it tried to attract new investment by lowering its tax rate. The country then enabled the creation of “a unique legal entity that allowed Apple to make the argument that although it has people and activity going on in Ireland, the dominant decision-making process and rights to the intellectual property belonged outside of Ireland.”
  1. “Leveling the playing field”: According to Jones, the EC ruling is part of “a general move” by institutions within the EU to take a close look at different tax treatments across countries. “We’re focusing on this because we are American, [and] because it’s Apple that is at stake,” he says. “But within the European context, it is not so much Apple, but it is Ireland and the ability of different countries to distort the tax regime in order to attract investment. They see this less as something about recouping money; [it is] more of a question of leveling the playing field.” Luja adds that although there might be a tendency to look at the Apple case as a tax matter, similar issues have arisen with subsidies offered by European Union member countries as well.
  1. Unpredictability for investors: U.S. Treasury secretary Jacob Lew criticized the EC ruling on Apple, and said it is an attempt “to reach into the U.S. tax base,” the Wall Street Journal reports. Blouin says she is not surprised by the U.S. government’s support for Apple here, and notes that it is consistent with Apple’s testimony before Congress on its tax obligations. “It is like changing the rules of the game after the fact,” says Blouin of the EC’s asking Ireland to collect back taxes from Apple. “[Companies] will look for more predictable tax regimes,” she warns. Jones agrees with Blouin. “It becomes a real source of unpredictability if you suddenly say you are going to change the rules and try to level the playing field.” Luja notes that correcting something that was wrongly done in the past is not new, “but what is happening here is on such a massive scale, and in taxation.” He offers a context to the issue: “There is much opposition to a uniform tax regime across Europe, with worries that it will encroach into the sovereignty of individual countries.”

“It is like changing the rules of the game after the fact. [Companies] will look for more predictable tax regimes.” –Jennifer Blouin

  1. Tipping point in Europe: As Jones sees it, “a tipping point has been reached, and not in financial terms, but in terms of popular perception,” as regards favorable tax treatment for multinational corporations. He says it is unfair to single out Ireland for blame, adding that many European countries have “weird distortions in their tax regimes precisely because of sovereignty.” With the Apple ruling, the EC is also trying to dispel perceptions that it is incompetent in straightening out its tax imperfections, he adds. “They’re actually responding to a highly salient political issue, and Ireland just happens to be in the crosshairs.”
  1. Irish growth model will be affected: The EC ruling will affect Ireland’s growth as companies look for the next tax jurisdiction, says Blouin. “Companies are smart. To the extent you have intangible capital, you are mobile; you could choose to go someplace else,” she notes. “The Irish growth model is predicated on attracting foreign capital and the employment that it brings with it,” says Jones. Luja adds that Ireland’s tax regime has been one of the biggest drivers of its economy in recent years, and revising that could have an adverse impact on industry in the country.