Readers may be aware of media coverage, which suggests that the European Competition Commission may move next week to take action against Ireland in relation to Ireland’s tax ruling practice.
In recent months, Ireland’s tax ruling regime has been under review by the European Competition Commission in tandem with its review of the tax ruling systems in Luxembourg and the Netherlands. These three countries are part of the first phase of a review, which has extended to the ruling practices of other Member States and may well extend to other countries in due course. In Ireland’s case it is understood that this review has encompassed hundreds of rulings given to taxpayers across a range of sectors over a number of years.
We believe that Ireland’s ruling practice does not form a significant part of Ireland’s tax regime, which has been rated highly for its transparency and reputation in reviews of ‘harmful tax practices’ conducted by the OECD. We expect that Ireland will vigorously defend its position in response to any such action. In response to these media reports, Ireland’s Taoiseach Enda Kenny stated on 5 June 2014 Ireland’s intention to strongly defend any action taken.
Ireland’s practice is based on non binding rulings given by the Irish taxing authorities in which they provide written confirmation of the detailed application of taxing statutes to taxpayer transactions. Unlike the ruling practice in other countries, Irish rulings are not binding on an individual Inspector of Taxes who may reach a different view when administering the affairs of a taxpayer. A ruling can provide a taxpayer with greater certainty on Irish Revenue’s view of the treatment of a transaction. However, a ruling is not expected to do more than confirm the application of Irish taxing statutes to the facts presented.
EU State Aid rules on taxation seek to prevent EU Member States from acting in a manner, which distorts competition by ‘favouring certain undertakings’. The practice of a tax authority in providing a ruling to a taxpayer can be considered to be a matter of State Aid where the ruling conveys a benefit on a taxpayer over its competitors in an equivalent position. Where a tax ruling merely confirms the application of taxing provisions to the facts of that taxpayer and where the same tax analysis would apply to another taxpayer in equivalent circumstances, it would be very difficult to sustain a challenge under State Aid rules. If an action on State Aid is successfully upheld, the benefit gained by the taxpayer is recoverable from that taxpayer with retroactive effect for up to a 10 year period.
The current focus on tax ruling practices in various jurisdictions forms part of a wider review of the tax regime affecting multinational corporations, which is underway in the EU and through the OECD’s project which is focused on Base Erosion and Profit Shifting (BEPS).
The question in relation to Ireland’s ruling practice may have been sparked by debate in May 2013 arising from hearings conducted by the US Senate Permanent Subcommittee on Investigations on offshore profit shifting and the US tax code. In these hearings, the Subcommittee explored the application of US tax provisions to the offshore profits of US multinationals. Apple was amongst the US taxpayers called to testify.
The Subcommittee’s report released before the public hearings included in its findings a statement that:
“Apple told the Subcommittee that it had obtained this special rate through negotiations with the Irish government.” The Subcommittee cited an interview dated 15 May 2013 of Phillip Bullock, Apple Inc. Tax Operations Head. This statement was later clarified on 29 May 2013 by Apple CEO Tim Cook when he stated at a conference “We have no special deal with the Irish Government that gives us a 2% flat tax rate”. On that date, Ireland’s Ambassador to the US Michael Collins stated in a letter to the Senate Subcommittee “Ireland’s tax system is set out in statute – so there is no possibility of individual special tax rates being negotiated for companies.”
Ireland’s actions on its tax strategy have evidenced its stated commitment to its tax ‘rate, regime and reputation’ – we fully expect that the Irish government’s response to these developments will reflect this commitment.