Losing the Apple battle might help win the tech tax war

APPLE Inc is squaring up with tech's European bete noire, Margrethe Vestager, over its historical tax arrangements in Ireland at a court hearing this week. If the iPhone maker wins, Ms Vestager may be able to use the defeat to her benefit.

Back in 2016, EU Competition Commissioner Ms Vestager imposed a 13 billion euro (S$19.7 billion) bill on Apple for unpaid taxes in Ireland, alleging illegal state aid. That case has now reached the EU General Court in Luxembourg. The losing side will be able to appeal one level higher to the European Court of Justice.

Though a ruling will still take some months, either outcome could potentially play into Ms Vestager's hands. If the court decides in her favour, then all well and good: Apple has already placed the funds in escrow, Ireland enjoys a nice boost to its coffers and her efforts to end socalled sweetheart tax deals are rubber-stamped.

If the court concludes that the arrangement was in fact above board, of course it would prove a blow to the Commission's ability to use state aid rules to punish countries using tax breaks to prop up certain industries. But if Ireland is able to get away with taxing Apple at such a tiny rate - the Commission says it was as low as 0.005% per cent - then the question becomes: How was this permissible under the global tax system?

Useful political tool

It could prove a useful political tool for Ms Vestager, who in her new mandate as executive vice-president in charge of digital policy will also be responsible for European efforts to change the way technology firms are taxed. It may also help pile pressure on the G-20 to finally agree to an overhaul of global tax rules.

Moves to change the tax framework are reaching a climax. Back in 2013, the G-20 tasked the Organization for Economic Cooperation and Development (OECD) with developing a solution to the problem known as base erosion and profit shifting, where companies are able to book profits in countries with more favourable tax regimes. The aim was to come up with a common framework that plugged some tax loopholes.

The EU has already made some progress to tackle profit shifting by multinational corporations. But G-20 finance ministers will once again consider a more comprehensive multilateral plan when they meet on the sidelines of the World Bank and International Monetary Fund meetings next month in Washington, DC. The hope is that the proposals will then be formally adopted by the G-20 at its meeting in Riyadh next year.

Bone of contention

The bone of contention now is essentially over whether to tax revenue or profit. Traditionally, taxes have been levied on profit, but the nature of digital services means companies can more readily shift around where exactly that profit is booked. Take Facebook Inc, for instance. Is the value being generated in the country where a user clicks on an ad? Or is it in Menlo Park, California, where Facebook has its headquarters and where an engineer might have written the code to serve up that ad?

In the absence of a broader agreement to combat profit shifting, the UK and France are pushing for digital taxes that would target the former, while the US errs in favour of the latter - understandably, since that boosts its own tax revenue. The existing approach has made it easier to claim residency in lower tax regimes such as Ireland. Efforts to come up with a comprehensive European solution to take on the tech giants have so far failed, prompting France and the UK to advance with their own taxes on digital companies' revenue.

The OECD is looking favourably on measures that assess whether a firm has a significant economic presence in a country - a combination of its footprint and sales. It's also likely to take into account factors such as local user contribution (for example, videos uploaded) and where the product was developed.

If the OECD's proposals aren't adopted by the G-20, then Ms Vestager has to find a way of convincing European member states to agree on a solution. Countries like Sweden and Luxembourg have so far stood in the way of a consensus.

Whether at the G-20 or EU level, a victory for Apple would serve as the primary example of why tax reform is needed. BLOOMBERG