EU's "Fair Taxation" Ruling and Its Impact on Global Big Tech

On September 10th, the European Union's highest court imposed a fine of 13 billion euros (approximately 19 trillion won) on Apple regarding Ireland's corporate tax benefits. 

On September 10th, the European Union's highest court imposed a fine of 13 billion euros (approximately 19 trillion won) on Apple regarding Ireland's corporate tax benefits. This ruling highlights the issue of "tax avoidance" by big tech companies distorting fair competition. This blog explores the implications of the ruling and how it might affect big tech firms, including those operating in South Korea.

On September 10th, the European Union's highest court ruled that Apple must pay a fine of 13 billion euros (around 19 trillion won) due to Ireland's corporate tax benefits. This decision was based on the argument that big tech companies' tax avoidance practices distort fair competition. Apple had used a method of funneling profits through subsidiaries and grand-subsidiaries in Ireland, where the tax rates were significantly lower.

This tax avoidance method, known as the "Double Irish," is a common strategy among global companies to reduce their tax liabilities by leveraging low-tax jurisdictions like Ireland. Apple's profits were concentrated in Ireland through a multi-tiered subsidiary structure, leading to significantly lower tax rates than those applied to local Irish companies.

The European Court of Justice (ECJ) ruled that while the tax benefits might not be strictly classified as subsidies, they function similarly and have the same effect, making them a form of unlawful aid. The ECJ emphasized that any form of aid that distorts competition within the EU is illegal.

The significance of this ruling lies in its approach of addressing "tax avoidance" as an issue of "unfair practice" rather than just a tax problem. Since tax systems vary across countries and have unique aspects, uniform regulation can be challenging. However, assessing unfair practices provides a global market perspective on fair competition. Recently, there has been a trend towards stricter enforcement against unfair practices such as monopolies. The Financial Times (FT) described this ruling as a "strategic victory" for EU competition authorities using competition law instead of country-specific tax laws.

The ECJ detailed Apple's tax avoidance methods in the ruling. Apple utilized a structure involving a subsidiary and a grand-subsidiary in Ireland, a common tactic among big tech companies to minimize taxes. Profits were routed through the grand-subsidiary to the subsidiary, which enjoyed special tax benefits as a "non-resident corporation" under Irish law. This setup allowed Apple to pay minimal taxes compared to the standard 12.5% corporate tax rate in Ireland.

Initially, the EU's General Court had ruled that Apple's tax practices did not violate Irish tax laws. However, the final ruling by the ECJ applied a standard of "unfair practice" and imposed the fine on Apple.

The ruling may prompt further investigations into how EU member states apply corporate tax rates to global big tech firms. There is speculation that multinational companies that have established European hubs in Ireland might face additional scrutiny.

Margrethe Vestager, EU Commissioner for Competition, remarked after the ruling, "The judgment is a victory for European citizens and tax justice," highlighting the broader implications of the decision for global tax practices.

The EU's highest court ruling represents a significant step in addressing global big tech companies' tax avoidance strategies. By approaching tax avoidance as an issue of unfair competition, the ruling sets a precedent that could influence regulatory practices worldwide, including in South Korea. It is crucial for South Korea to develop national strategies to address challenges posed by foreign platforms, following Europe's example. The hope is that this ruling will contribute to achieving fair competition and tax justice globally.