Taxing time ahead in EU for US tech giants

WASHINGTON • The days when big US technology companies could easily slice tax bills in Europe are coming to an end.

For decades, businesses like Apple that generate significant revenue abroad flocked to Ireland, the Netherlands and Luxembourg, where they counted on amenable fiscal regimes to reduce their tax, even if they had minimal operations on the ground.

On Tuesday, European Competition Commissioner Margrethe Vestager sent the strongest signal yet that she will not abide by these strategies when she demanded that Apple pay an estimated €13 billion (S$19.8 billion) in back taxes.

"Every global company that is exposed to EU taxes in individual nations now has to look back and ask whether any of their agreements are subject to similar attacks," said Professor Thomas Cooke of Georgetown's McDonough School of Business. "This is the first signal of a long play that's going to take place over many, many months."

Every time an iPhone or iPad is bought in London, Paris or Milan, Apple books the profit at a subsidiary in the Irish city of Cork. The process is part of a decades-long arrangement with the Irish government that has let the company pay lower taxes on these European sales.

The European Commission ruled that Ireland gave Apple illegally favourable tax treatment, letting it pay an effective tax rate on European profits of 1 per cent in 2003 and down to 0.005 per cent in 2014.

Apple's Irish tax arrangement was considered "the most brazen" among multinational US technology firms, said Ms Aisling Donohue, a partner at tax and business advisory firm MGPartners in Ireland.

Ms Vestager's move is part of a broader push to close loopholes that European regulators think give foreign companies an advantage. Google parent, Alphabet, has also been a beneficiary of Ireland's tax regime, using the so-called "Double Irish" mechanism to save billions in tax on its international earnings.

Ireland is phasing this out, although companies have until 2021 to adjust.

About six months ago, Netflix told an investor that the company will likely pay higher international tax rates than other large US technology companies currently pay.

Netflix, which recently began expanding aggressively abroad, said it views other US tech companies' international tax strategies as unsustainable, according to a person familiar with the situation.

"Multinationals with aggressive tax planning strategies can expect to pay more tax," Ms Sarah Jane Mahmud, a Bloomberg Intelligence analyst, wrote in a recent research note. WASHINGTON POST

A version of this article appeared in the print edition of The Straits Times on September 01, 2016, with the headline 'Taxing time ahead in EU for US tech giants'. Print Edition | Subscribe