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author: du tao, head image from: visual china

after nearly a decade of promotion by the european union, apple has finally paid additional taxes, which has sounded the clarion call for the "dual-pillar" international tax system reform that is being pushed forward with difficulty.

september 10th, local time,the european court of justice, the eu's highest court, has ruled that apple must pay ireland 13 billion euros in back taxes.the ecj's statement confirmed the european commission's 2016 ruling.

in 2016, the european commission determined that apple had massively evaded taxes by taking advantage of the tax agreement reached with the irish government and demanded that apple pay 13 billion euros in back taxes.

in 2019, apple appealed the european commission's ruling. in 2020, the european court of justice ruled that the tax incentives apple enjoyed in ireland, an eu member state, did not constitute state subsidies, and revoked the european commission's 2016 ruling, and apple did not need to pay back 13 billion euros in taxes.

the european court's ruling is considered final and apple will no longer be able to appeal the case.

ye yongqing, a partner at king & wood mallesons, said that at the time, the irish government also used low taxes to attract more resources based on the consideration of "attracting investment". for a period of time, many eu countries provided certain preferential policies to enterprises in terms of taxation or other aspects. whether these preferential policies violate the eu's fair competition requirements is relatively vague and requires specific judgment.

ye yongqing believes that the european court's ruling is "both unexpected and reasonable". for the eu, the trend is that the eu has higher and higher requirements for internal fiscal balance and personal tax unification. based on the concept of a unified market, the eu's tolerance for individual countries is also getting lower and lower. the eu hopes to strengthen internal unity and external overall competition. the previous tariffs on new energy and the ruling on apple this time both have this implication.

jiang yuesheng, deputy director of the academic committee of the china international taxation research association and president of the jiangsu international taxation research association, said that the fundamental reason why the european commission was able to win this time was the unstoppable momentum of the "global minimum tax system", which will be implemented in more than 40 countries, and also because the united nations' promotion of the establishment of an international tax organization has become a foregone conclusion.

from this perspective, apple’s tax payment is also a representative event in the international tax system reform promoted globally in the past decade.

jiang yuesheng is a famous chinese expert in international tax theory and practice. he has been engaged in international tax research and practice for more than 30 years and has long been in charge of international tax management. recently, jiang yuesheng reviewed the more than 70-page judgment of the european court of justice against apple.

jiang yuesheng believes thatthe historical significance of the european court of justice's tax ruling on apple lies in that it further declared and implemented the fundamental principle of international tax reform that the place of taxation must be consistent with the place of economic behavior and value creation, and further promoted and deepened the basic method of combating tax base erosion and profit shifting, that is, economic substance takes precedence over legal form.

tax avoidance design

zhang wenchun from the school of finance and economics of renmin university of china mentioned in his article "a study on tax planning issues of apple inc. in the united states" that the u.s. senate published a report and held a hearing on may 21, 2013, stating that apple's international tax avoidance strategy enabled it to evade global taxes on $44 billion in revenue from 2009 to 2012. apple ceo tim cook countered that apple is completely law-abiding and has paid all taxes due at home and abroad.

apple's international tax avoidance strategy has caused a stir around the world. the us senate hearing questioned apple's executives, focusing on three aspects: first, transferring profits overseas; second, "self-denial" of resident taxpayer status: apple's two irish subsidiaries took advantage of the differences in the recognition of resident taxpayers in various countries to make them neither irish tax residents nor us taxpayers; third, the abuse of cost-sharing agreements: this is apple's main tool for transferring profits.

the above article analyzes apple's main financial data such as operating income, operating profit, pre-tax profit, and income tax from 2012 to 2016 and finds that: apple's revenue in 2014 increased by about 6.95% compared with 2013, and its net profit increased by about 6.68%; its revenue in 2015 increased by about 27.86% compared with 2014, and its net profit increased by about 35.14%; and both revenue and net profit showed negative growth from 2016 to 2017. however, with the rapid growth of revenue and profit, apple's tax rate in recent years has remained at 25% to 26%, while the corporate income tax rate in the united states is generally 35%. therefore, the article infers that apple must have used various means to evade international tax evasion and evaded the tax obligations it should have borne.

ye yongqing said that at that time, the design of apple's entire structure was very complete, and to some extent, it also made a subtle response to the us anti-tax avoidance rules, so it did not really pay back taxes in the us. from the perspective of the enterprise, if a company achieves overall tax reduction, it is actually the benefit obtained by the enterprise itself, thus forming its own competitive advantage.

the above article mentioned thatapple retained approximately $260 billion in overseas profits in ireland and only paid a tax burden of approximately 1.9%, a huge difference from the u.s. federal government's 35% corporate income tax rate.

the european commission investigated apple's tax avoidance scheme in ireland, which is called the "sandwich" scheme, and resulted in apple's extremely low income tax rate in ireland. the european commission believes that apple's effective tax rate in europe was 1% in 2003 and has dropped to 0.005% in 2014.

the income tax rates of major international economies are different: 25% in the uk, 25% in france, 20% in russia, 25% in china, 25% in the united states (21% for the federal government + different tax rates for each state), 30% in japan, and 25%-30% in india.

ye yongqing told the economic observer that ireland has historically been a country that uses the place of management as the standard for tax residency. apple's tax design in ireland is mainly based on the special nature of ireland's resident identity recognition. it has accumulated a large amount of profits in ireland through cost-sharing agreements, and has also made sophisticated tax avoidance arrangements so that these profits can be treated as non-resident income in ireland without being taxed, and do not need to be taxed back in the united states.

in simple terms,apple's tax avoidance design includes three steps:

the first step is to set up a non-operating business in a low-tax country such as ireland;

second, through transfer pricing of related-party transactions, profits are retained in ireland;

third, design a complete tax avoidance system to deal with the anti-tax avoidance rules of various countries and regions, including advance rulings, in order to obtain a stable tax collection and management environment.

jiang yuesheng told the economic observer that american multinational companies generally adopt two models when investing in the european union:

one is to establish a subsidiary in ireland, acquire the equity of the us parent company through the subsidiary, and move the global headquarters to ireland;

second, the subsidiary is registered in ireland but has no actual management, so it is not an irish tax resident. at the same time, the right to use intangible assets outside the united states is granted to the irish subsidiary. after collecting huge royalties, the irish company does not need to pay taxes in ireland, and takes advantage of the tax-free payment of royalties between eu member states to pay royalties to the dutch affiliates. the dutch affiliates are controlled foreign companies of the us parent company and can apply for deferred taxation of overseas profits that are not repatriated in accordance with us tax law. this is the once famous irish and dutch "sandwich" tax avoidance structure.

jiang yuesheng said that the tax design adopted by apple is not exactly the same as the above two models. it is a special tax arrangement that was jointly approved by the us and irish governments, with ireland as the core of the overseas value chain, taking advantage of the differences in the tax laws of the two countries and loopholes in international tax laws, and is committed to minimizing apple’s tax burden and maximizing us tax sources, thereby promoting apple’s growth and strength.

jiang yuesheng said that apple registered apple international operations in ireland as its overseas headquarters, under which apple european operations is responsible for the assembly and production of desktop computers and laptops sold in ireland, while the european operations is under which apple international sales is responsible for the procurement and sales of apple products in global markets outside the americas.

the above three apple companies are all registered in the same location in cork, ireland, but have no employees or workplaces. according to irish law, only companies with actual management institutions in ireland are considered irish tax residents, so the three apple companies are not tax residents and do not need to pay taxes in ireland. at the same time, the us tax law adopts the registration standard. the three irish companies are not registered in the united states, are not us tax residents, and do not need to pay taxes in the united states.

the non-resident status here is very important for apple's tax avoidance design. ye yongqing said that non-resident and resident status refer to tax residents and non-resident companies. when a company is a tax resident in a country, the country has the right to tax the company's global income. if the company is regarded as a non-resident locally, it will only pay taxes on income from local sources. apple's non-resident status in ireland is based on a company registered in ireland but not managed in ireland. at the same time, because it is registered in ireland, it avoids becoming a tax resident in most countries, and other countries in the world can also not treat it as a tax resident for jurisdiction.

later, apple transferred profits to its base company in ireland through cost-sharing agreements and indirect sales. apple also took advantage of loopholes in the us tax law cfc (domestic controlled foreign corporation) rules (mainly the tax box check rule), which means that apple, as a qualified entity, can choose a branch with the least income as the object of taxation.

eu resolve

the european union has been pushing apple to pay additional taxes for nearly 10 years.

in 2016, the european commission determined that apple had evaded taxes by taking advantage of a tax agreement with the irish government and demanded that the company pay 13 billion euros in back taxes.

the european commission's determination comes from a two-year investigation. after two years of investigation, the european commission accused ireland of allowing apple to evade billions of euros in taxes. the european commission said that apple, which has a branch in ireland, has benefited from two irish tax treaties for more than 20 years. these two tax treaties artificially reduced the tax burden it should pay, so apple needs to pay back taxes to the irish government.

in 2019, apple appealed the european commission's ruling. in 2020, the european court of justice ruled that the tax incentives apple enjoyed in ireland, an eu member state, did not constitute state subsidies, and revoked the european commission's 2016 ruling, and apple did not need to pay back 13 billion euros in taxes.

on september 10, 2024, the european court of justice, headquartered in luxembourg, announced its final ruling on the same day, confirming the overturning of the 2020 eu permanent court's ruling that "apple does not need to pay back taxes" and supporting the 2016 european commission's decision that "apple should pay back taxes". apple should pay back 13 billion euros in taxes to the irish government.

on the same day, apple said: "the eu is trying to change the rules retroactively, ignoring that our revenue has been taxed in the united states in accordance with international tax laws."

on the day of the ruling, vestager, the european commission's executive vice president in charge of digital policy and competition affairs, said that the investigation has promoted a change in thinking and attitudes among member states, which will accelerate eu regulatory and legislative reforms and is of "great significance."

an important background for the eu to push apple to pay additional taxes is the international tax system reform that began in 2013.

in june 2012, the group of twenty (g20) finance ministers and central bank governors meeting agreed to address the beps (base erosion and profit shifting) issue through international cooperation and commissioned the organization for economic cooperation and development (oecd) to conduct research.

in june 2013, the oecd released the beps action plan, which was supported by leaders of various countries at the g20 st. petersburg summit in september of the same year. the beps action plan includes 15 actions aimed at reshaping the international tax rules system, curbing the behavior of multinational corporations evading global tax obligations and eroding the tax bases of various countries, and ensuring that taxation matches substantive economic activities and value creation.

the implementation of this plan "repaired" the international tax framework, but with the development of the digital economy, it is becoming increasingly difficult to patch the original framework. to this end, since 2015, the oecd digital economy working group has continued to study solutions to digital tax challenges, and in 2019 initially formed a "two-pillar" plan: pillar one aims to distribute part of the surplus profits of super-large, high-profit multinational companies to market countries by modifying the existing cross-border income tax distribution system; the core of pillar two is to establish a global minimum tax system so that the effective tax rate of multinational companies in each jurisdiction at least reaches the global minimum tax rate standard.

the oecd believes that pillar 1 will increase global tax revenue by $13 billion to $36 billion, while pillar 2 will generate an additional $220 billion in revenue worldwide. the international monetary fund predicts that the "two-pillar" plan will increase global corporate income tax revenue by about 6%, of which pillar 2 will increase it by 5.7% and pillar 1 will increase it by $12 billion.

after the "dual-pillar" plan was proposed, pillar one and pillar two were promoted separately, actually forming two paths. among them, the promotion of pillar two was relatively smooth, but the promotion of pillar one faced various difficulties.

jiang yuesheng said that the implementation of the "pillar one" international digital tax has come to a standstill and the goal of signing a multilateral convention by the end of june has not been achieved. the eu has flexed its muscles to the united states through the ruling in the apple case, demonstrating its determination to combat cross-border tax evasion and the possibility of the eu resuming the implementation of the digital service tax after the failure of pillar one.

regarding the eu's determination, jiang yuesheng said,first, the eu constitution clearly stipulates that in order to maintain the unity of the eu market, policy fairness, including taxation, must be achieved, and the abuse of tax incentives such as state aid must be curbed. the apple case, as the largest state aid case, has a guiding role and can only succeed, not fail. secondly, a unified tax base is the basis for the eu to achieve common finances. the global minimum tax unifies the eu's tax base, while state aid hinders the implementation of the global minimum tax in the eu and must be resolved with great force.

depression cleaning?

as the other party to the tax backpayment incident and a former eu tax "lowland", ireland also responded. the irish ministry of finance said it would consider the ruling, but said: "ireland's consistent position is that ireland will not give any company or taxpayer preferential tax treatment."

jiang yuesheng said that after the european court of justice issued the ruling, the irish government insisted that it was innocent, but also expressed respect and implementation of the ruling. at present, the irish government's sovereign fund urgently needs to inject funds for infrastructure investment, and the 13 billion euros in taxes can be said to be timely. the irish government's strategy in handling the apple case is to attract foreign investment and to have affordable taxes.

ireland has previously used its tax havens to attract investment, while also continuously improving its business environment. jiang yuesheng said that due to the optimization of ireland's business environment, apple's investment in ireland has not been affected by the increase in tax burden. in recent years, ireland has not only received a large amount of investment from apple, but also received a huge amount of tax paid by apple, which can be said to be a win-win situation.

jiang yuesheng said that once this ruling sets a precedent, eu countries can cite the european court's ruling in the apple case when distributing cross-border profits, denying the role of foreign holding companies without economic substance in value creation, and attributing the vast majority of profits to eu entities. this will be a fatal blow to traditional tax havens, and the model of setting up holding companies in tax havens and then investing in the eu will lose its legitimacy and appeal. for us multinational companies that have relocated their headquarters to low-tax locations within the eu, the us internal revenue service can also cite the european court's ruling and attribute profits to us controlled entities because the headquarters lack economic substance.

ireland is not the only low-tax haven in the eu and even in the world. the netherlands, luxembourg and other countries are also low-tax countries in the eu. in addition to apple, the european commission also launched an investigation into the tax agreements reached between fiat and the luxembourg government, starbucks and the dutch government, ikea and the dutch government, and nike and the dutch government. as a result, starbucks and fiat were required to pay back taxes of 20 million to 30 million euros respectively. the tax evasion cases of ikea and nike are still under investigation.

ye yongqing believes that the european court's ruling will require all multinational companies to consider more carefully their low tax rates within the eu and whether these tax rates will face scrutiny outside their own country, such as the eu's fair competition regulations.

ye yongqing further explained that the eu's tough attitude is to maintain the integrity of the entire system, which is also the most important meaning and value of its existence. under the current circumstances, ireland's tax system does not represent the mainstream countries in the eu. the mainstream countries in the eu still emphasize the unity of high taxes and high welfare. the eu established the rules of sovereignty transfer at the beginning of its establishment. both economic development and economic forms require that competition must be carried out in a unified manner.

ye yongqing said:our country has also established a fair competition review system. in essence, the concept of fair competition review is a necessary institutional design under the unified market. therefore, the eu must also take a more cautious attitude towards some structural designs from the perspective of more countries and higher institutional levels. even if a country's advance ruling is obtained, it is not enough to support the judgment.。”