Call for expressions of interest: Moot court on international taxation of digital services

I will be presiding over a moot at the annual conference of the International Fiscal Association this fall in Madrid. The topic as described below is vague, but suffice to say that recent news stories are driving (ahem) the topic forward. The moot is now open to expressions of interest by prospective participants who meet the eligibility requirements described below. Here is the info:

Young IFA Network Moot Court – Madrid, September 28, 2016 Expressions of Interest due June 15, 2016

All members of the Young IFA Network are invited to submit an expression of interest as a moot court speaker at the YIN Moot Court during the 70th Congress of the International Fiscal Association in Madrid, Spain.

YIN at IFA

During recent Congresses in Amsterdam, Kyoto, Brussels, Vancouver, Rome, Paris, Boston, Copenhagen, Mumbai and Basel, the Young IFA Network (YIN) organised a Moot Court.

YIN Moot Court Format

The YIN Moot Court will be held at the Conference Venue on Wednesday, September 28, 2016 from 3:15 pm to 4:45 pm. An acting Tax Judge (Allison Christians, Canada) will preside over a hypothetical tax case relating to digital services to be argued by young tax academics or professionals, one side representing the Tax Authorities and the other side representing the Taxpayer. At the end of the arguments, the acting Tax Judge will render her judgment on the tax case. The fact pattern for the case, the legal issues involved, and a summary of the case will be made available to the delegates before the start of the Moot Court.

Expression of Interest for Speakers at the Moot Court

YIN members that are interested in being one of the speakers at the Moot Court are asked to express their interest to Sanjay Iyer (sanjay@iyerpractice.com) on or before June 15, 2016 along with a brief profile/CV that shall assist the Committee in the selection of the speaker. Eligibility requirements: 1.     YIN Member of an IFA branch 2.     40 years of age or below 3.     Registered for the 2016 Congress in Madrid, Spain.

This Friday in London: Conference on The Changing Shape of Tax Avoidance

This Friday, I'll be in London participating in a conference on tax avoidance and evasion, hosted by the Journal of Tax Administration. Here is the program:

11.00 – 11.15 Welcome and Introduction

11.15 – 11.50 Matthew Rablen: Optimal Income Tax Enforcement in the Presence of Tax Avoidance

11.50 – 12.25 Maya Forstater: Can Stopping ‘Tax Dodging’ by Multinational Enterprises Close the Gap in Development Finance?

12.25 – 13.00 Allison Christians: Tax Avoidance in a World of Aggressive Tax States

13.00 – 13.45 Lunch

13.45 – 14.15 Federica Bardini: The “Ius Commune Europeum” on Tax Avoidance

14.15 - 14.45 Shu-Chien Chen: The Common Pattern of the “Tax Avoidance Concept” in the EU and USA

14.45 – 15.00 Discussion

15.00 – 15.20 Break

15.20 – 15.55 David Duff: Tax Avoidance – Causes, Consequences and Responses

15.55 – 16.30 David Quentin: Tax Risk Mining and Corporate Responsibility for Human Rights

The venue for this conference is Friends House, 173 – 177 Euston Road, London.

Here is the abstract for my presentation:

Tax Avoidance in a World of Aggressive Tax States 

Media coverage of tax “dodging” by high profile elites and multinational companies leads the public to believe that tax avoidance happens when individuals act to thwart the efforts of the state. Confined to the domestic arena this may be an apt description, and a problem anti-avoidance regimes are designed to solve. But on an international scale, tax avoidance is not a one-person show. Instead, it involves interactions among four types of actors: individuals, home states, host states, and intermediary states. International tax avoidance persists largely because home, host, and intermediary states intentionally use their tax systems to lure investment away from other jurisdictions that impose higher tax burdens, and individuals do their best to exploit available opportunities to the fullest. In deciding whether and how law should be used to prevent international tax avoidance, the goals and interests of each of the four actors must be examined.

EU Report: give fiscal state aid recoveries to tax competition victims; sanction the culprits

In an annual report to the European Parliament on EU Competition Policy, MEP Werner Langen has proposed that the fiscal state aid rules be changed so that other EU states receive any recoveries. Thus, if Ireland loses in its investigation by the EC, it will have to recover some billions from Apple as punishment, and Langen proposes that Ireland--the "culprit"--not be allowed to keep the money. The Report:

Calls on the Commission to modify the existing rules without delay, in order to allow the amounts recovered following an infringement of EU tax-related State aid rules to be returned to the Member States which have suffered from an erosion of their tax bases, or to the EU budget, and not to the Member State which granted the illegal tax-related State aid, as is currently the case, as this rule provides an additional incentive for tax dodging;

Even if the proposal goes nowhere, one can understand why the sentiment would arise. When I first started looking at the fiscal state aid investigations, this element struck me as counter-intuitive: where a state has foregone revenue in order to lure business in contravention of the antitrust rules in the TFEU, the punishment is then to collect the revenues foregone. The narrative thus is that the state successfully cheated its EU neighbours of an opportunity to attract foreign investment and the punishment is a cash windfall.

This looks more like a punishment if you think the collection of revenues by the state will cause the investment to flee to other jurisdictions because the targeted state is not competitive but for the state aid. That might not seem likely for Ireland, both because Ireland's general corporate tax rate is still lower than much of Europe even without the extra padding of the state aid, and because the successful luring of Apple arguably had its intended effect, creating spillover effects that gave Ireland a first-mover advantage which now extends its attractiveness beyond the favourable tax climate. In that case the MEP's position on the cash windfall is sympathetic.

Even if it is sympathetic, it is hard to imagine redistributing Apple's foregone tax revenue to other EU members, when it is at least debatable whether any of the recipients hold out clean hands. Tax competition is so ubiquitous, so multifaceted, every victim is a culprit, too.

In a potentially even more problematic move, the report "[c]alls on the Commission to consider the introduction of sanctions, either against the state or the company involved, for serious cases of illegal State aid". The array of issues involved in sorting out that kind of power structure is vast.

On a side note, the report contains a long list of tax harmonization goals, and it includes an interesting call for the EC to get in on the multilateral exchange of tax rulings, which, via the OECD BEPS initiative, are to be automatically shared among countries under conditions of confidentiality, including restrictions as to their use for non-tax purposes. The report "Emphasises that the Commission must, as a matter of course, have access to data exchanged between tax authorities which are relevant in the context of competition law." I am not sure whether sharing tax rulings with the EC would be compatible with the OECD confidentiality framework.

A very provocative report that signals a growing amount of frustration with ongoing tax competition, and an increasing desire of some to use the fiscal state aid rules to stop it. Will be interesting to see where this takes the field.

Apple's private meeting to lobby the European commissioner in state aid investigation

The FT reports that Tim Cook took it upon himself to go and visit the European commissioner Margrethe Vestager, "to lobby the EU’s antitrust chief weeks before she is set to rule on a landmark case that could force the California-based technology company to pay billions in underpaid taxes to Ireland." Really? Let's see, this is a private meeting with a person who is in charge of deciding whether your company benefited from a scheme to violate an agreement among EU members on trade practices within the internal market.

Pretty clearly the Commissioner should have flatly refused such access. I don't know what the rules are for private parties to attempt to influence a sitting Commissioner in the midst of a procedure laid out in an international treaty that directly impacts one's pecuniary interests. Apple is not a party to a case; rather it is a beneficiary of something Ireland did, and that it the action being investigated. But Apple has had a chance to make its statements and explanations according to a process. According to the EC, the formal investigation procedure accords an opportunity for input from all those that may be affected by its investigation:

The Commission is obliged to open a formal investigation under Article 108(2) TFEU where it has serious doubts about the aid's compatibility with EU State aid rules, or where it faces procedural difficulties in obtaining the necessary information. 

The decision to initiate this procedure is sent to the relevant Member State. It summarises the factual and legal bases for the investigation and includes the Commission's preliminary assessment, outlining any doubts as to the measure's compatibility with EU state aid rules. The decision is published in the EU's Official Journal, and Member States and interested third parties have one month from the date of publication to submit comments. The Member State concerned is in turn invited to comment on observations submitted by interested parties.

I have not seen comments submitted by Apple according to this procedure. It seems to me that the private meeting has an appearance of impropriety. First, it was private so it does not form part of a record of information reviewed in the course of the investigation. Neither party has given any public comment regarding what was discussed. Having a private meeting deprived Ireland of its role in responding to observations submitted by interested parties, as described above. The conversation took place for the specific purpose of influencing a decision. The conversation raises the question of whether others have also private meetings, also trying to influence the commissioner beyond the procedures laid out for investigations.

I note that "All decisions and procedural conduct of the Commission are subject to review by the General Court and ultimately by the ECJ." The Commissioner will not likely seek review of its own decision. I do not know whether other member states could seek such a review. It seems most likely that Ireland could seek a review, which it would only do if the decision was unfavorable. If that were to happen, would Tim Cook also have private meetings with the judges of the ECJ?

I should hope not.

Apple may owe $8bn in back taxes after European commission ruling

I have been following the EU state aid cases with particular attention to Apple and its SEC disclosure involving its sweetheart deal in Ireland. A recent story in the Guardian suggests the amounts at stake could be significant, even if not by Apple's standards:

The European commission’s recent ruling against tax breaks for multinational corporations in Belgium strongly suggests that the tech behemoth could be subject to a hefty bill when the open investigation against its activities in Ireland concludes. 

...The commission found that Starbucks owed Dutch authorities upwards of $22m, and a ruling from Belgium this week determined that 35 companies across the EU owe the equivalent of $760m in back taxes. 

Apple has already said it would appeal against a ruling against the company; CEO Tim Cook called the investigation “political crap” in a recent 60 Minutes interview. “There is no truth behind it,” he said. “Apple pays every tax dollar we owe.” 

This is not the first time Apple has been investigated for its accounting practices in Ireland. Executives including Cook appeared before the US Senate in 2013 to testify about whether it had renegotiated Ireland’s 12.5% corporate tax rate down to 2%. The company denied any wrongdoing. Matt Larson, litigation analyst for Bloomberg Intelligence, calculates that the company would owe $8.02bn at that rate....

$8 billion sounds like a lot of money until considered in the reflection of its $200 Billion cash stash, which is being held offshore pending US international tax reform as openly advocated by Tim Cook.

Still, the figure is not nothing and it is pretty far off what Apple intimated to investors back in April of 2015:

As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact. 

That language was new in the April 2015 filing, but the latest Apple filing reverts to the more general message found in prior filings:

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. 

The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material. 

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be adversely affected.

I continue to wonder whether there will be shareholder litigation (more than nuisance suits) in the event of a major clawback by the EU.

Friends with Tax Benefits: Apple's Cautionary Tale

Over the summer, I wrote a column on the ongoing EU state aid investigation into Ireland's tax practices involving Apple. The recent news that Ireland plans to cut its corporate tax rate again, dropping to just 6.5% for IP-driven companies, reminded me that I neglected to post this article, so here it is. Abstract:

Apple recently disclosed to shareholders a potentially material impairment to its earnings: an ongoing investigation by the European Commission into Ireland’s tax ruling practices. Ireland may be forced to retroactively impose additional taxes on Apple, going back as much as a decade (and possibly beyond), if the Commission decides that the Irish Tax Authority granted Apple a prohibited subsidy, referred to as “fiscal state aid,” in contravention of EU law. But the impact of this investigation may be felt well beyond Europe. Against the backdrop of the OECD’s project on base erosion and profit shifting, the Commission’s investigation about whether Ireland gave Apple unfair benefits is fundamentally an interrogation into what, if anything, governments can or should do to stop the strategic use of national tax systems to lure international trade and investment. The Commission’s inquiry into Apple is thus a cautionary tale for both tax planners and tax authorities, whose confidence in past practices must give way as traditional compromises and well-worn assumptions suddenly become subjects of intense renegotiation on the global stage.

Tax competition and cooperation continue to duke it out: BEPS is one battleground, state aid is another. If in policing internal practices, the EC finds that tax favours like Ireland's are anti-competitive as to other EU countries, then surely they are also anti-competitive as to the rest of the world. Even though the relevant treaty (TFEU) is unique and distinct, the principle that tax favours constitute state aid might open the door for disputes beyond the EU, for example in the context of other bilateral or multilateral trade agreements.

Side note: in writing this column, I compared the successive Apple disclosure statements to watch the language change in response to the EC inquiry, which unfolded as follows:

1st EC letter to Ireland: June 2013
Additional info request: October 2013
Additional info request: January 2014
EC letter informing Ireland of investigation: March 2014.

In the column I suggest we can trace this correspondence in Apple's tax disclosure. Because it was a brief discussion I didn't lay out the disclosure changes in full but here they are (through the time of the column; not updated since), interesting in terms of revealing management's decisions about what shareholders need to know in order to make informed investment choices. Perhaps unsurprisingly, Apple's share price appears immune to the news to date. It is hard to imagine the size a clawback would need to be in order to have a material impact.

10K Oct 2012, 10Q Jan 2013, 10Q Apr 2013 [identical provisions]

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions. Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. The Company is also subject to the examination of its tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations.

10Q Jul 2013

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Current economic and political conditions make tax rates in any jurisdiction, including the U.S., subject to significant change.  The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.

10K Oct 2013, 10Q Jan 2014, 10Q Apr 2014: same as prior

10Q Jul 28 2014

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the Company’s taxes in the future. The European Commission could also require Ireland to recover from the Company past taxes reflective of the disallowed state aid.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows, and financial condition could be adversely affected.

10K Oct 2014: same as prior

10Q Jan 2015

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to take a final decision against Ireland, it could require changes to existing tax rulings that, in turn, could increase the Company’s taxes in the future. The European Commission could also Ireland to recover from the Company past taxes reflective of the disallowed state aid. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows and financial condition could be adversely affected.

10-Q Apr 28 2015

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities. The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Ireland with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid.

As of March 28, 2015, the Company recorded gross unrecognized tax benefits of $4.6 billion, of which $1.6 billion, if recognized, would affect the Company’s effective tax rate. As of September 27, 2014, the total amount of gross unrecognized tax benefits was $4.0 billion, of which $1.4 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $844 million and $630 million of gross interest and penalties accrued as of March 28, 2015 and September 27, 2014, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months. On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s operating results, cash flows and financial condition could be adversely affected.