Practitioners: EU Apple Case Will Cause Chaos, Hurt BEPS

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Alex M. Parker

Aug. 31 — The European Commission's decision to require Apple Inc. to retroactively pay 13 billion euros ($14.5 billion) in unpaid taxes increases uncertainty and chaos in the international tax system, throws tax rulings and advance pricing agreements into question and undermines other global efforts to deal with international tax avoidance, practitioners say.

“I don't know how countries will react in terms of, will they be willing to really give APAs in the future, not knowing whether those APAs might stick?” said Imke Gerdes, a partner at Baker & McKenzie LLP in New York, who specializes in international tax law.

Gerdes spoke during a panel discussion on tax planning at a conference co-sponsored by Baker McKenzie and Bloomberg BNA.

She and other panelists echoed concerns throughout the international tax world about the commission's logic and method—claiming that it creates uncertainty for taxpayers and undermines recent efforts by the Organization for Economic Cooperation and Development to deal with tax avoidance through tweaks in international tax norms.

In a long-anticipated—but still landmark—decision, the EU's competition division Aug. 30 declared that Apple's tax structures granted in 1991 and 2007 Irish APAs disadvantaged other European nations in violation of EU rules on ensuring a fair market (25 Transfer Pricing Report, 9/15/16).

Conflicting Priorities

The meshing of principles—ensuring a market without distortions and enforcing laws against tax avoidance—may create confusion and undermine the OECD's project to combat tax base erosion and profit shifting, Gerdes said.

“Some of the directives pick up the BEPS concepts, but are very much carried into the market, securing the internal market, not necessarily keeping in line with BEPS,” she said. “You have the member states that go a little bit their own way, but always pretty much supported by the European Union, and not necessarily completely in line with what BEPS says.”

She also said the investigations contradicted how the commission had previously conducted investigations into illegal state aid, which had focused on individual country laws and didn't typically require recovery retroactively.

She also noted previous state aid reports which indicated that the commission viewed the application of the arm's-length principle, the global benchmark for profit allocation between related parties, as different in the state aid context than as the OECD standard (25 Transfer Pricing Report 319, 7/14/16).

“They're saying, ‘we just told you what OECD transfer pricing is, but this is not what we're applying. We're applying a completely different standard here, which is the European arm's-length standard. We're not telling you what it is, but it's there,' ” Gerdes said.

The actions cast uncertainty for those taxpayers who obtained rulings they believed were in compliance with OECD standards, she added.

“We have a ruling that is really in line with the OECD, supported by comparables and everything, and there is nothing fishy about it, it's a straightforward ruling,” she said. “Even if you have that in your hands, you might not really be protected with this.”

Broader Focus?

Gerdes speculated that as the EC began to collect information about tax rulings through new initiatives for mandatory exchange by the European Union, if it would begin to review all advance pricing agreements and tax rulings.

“I don't know if this is where the commission is heading, but looking back at the state aid decision, it's something you wonder,” she said.

Patrick Marley, a partner at Osler, Hoskin & Harcourt LLP in Toronto, said the decision indicated a shift in who the power brokers of international tax are.

“The drafting of tax laws, tax policy, it was once the gambit of tax professionals within governments. With transfer pricing, some of that has shifted towards economists,” he said. “it seems with the EU state aid cases, we've seen another pivot, to an extent, that it's not competition lawyers saying, ‘Well this is the way tax ought to be.'”

Other Nations Invited to Collect ‘Astonishing.'

The panelists also noted the EC's indication, in the press release announcing the Apple decision, that other countries may be entitled to tax the amount it identified as state aid, lowering Ireland's take.

“That's probably the most astonishing part of the press release,” said Gary Sprague, a partner with Baker & McKenzie LLP in Palo Alto, Calif. “Because that means the EC is not deciding to overrule or override Irish law, they're also suggesting that everybody else's law ought to be different, and be able to tax on a first basis.”

Sprague wondered if Apple had achieved the same result without a ruling—if it had simply stated its position and defended itself in audits—whether that too would be considered state aid.

“In those circumstances, since you didn't get a ruling, are you completely free from any state aid challenge?” Sprague asked.

Gerdes asked whether the mere acceptance of a tax return with what the commission deemed to be inappropriate transfer pricing could be considered the granting of state aid.

She also noted that the EU is requiring countries to break tax treaty obligations by revising transfer pricing, in apparent violation of OECD rules.

“It's a very weird situation that the European Commission puts those countries and those companies in,” she said.

U.S. Pushback

Sprague noted the U.S. Treasury Department's preemptive rebuttal of the EU decision, with a “white paper” indicating what it believed were flaws in the commission's logic, was unprecedented.

“I personally can't recall such high-level criticism being exchanged between the United States government and other governments. The United States prefers to communicate its policy positions through private channels,” he said. “So you can consider the fact that this was done so publicly as a demonstration of the seriousness with which U.S. Treasury sees the actions now being taken in Europe.”

To contact the reporter on this story: Alex M. Parker in Toronto at

To contact the editor responsible for this story: Molly Moses at

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