Ireland: EC state aid investigation, “illegal tax benefits” to multinational company of €13 billion

Ireland: EC state aid investigation

The European Commission today announced that it has concluded that Ireland granted undue tax benefits of up to €13 billion to a U.S.-based multinational corporation and that this action was “illegal” under EU state aid rules because it allowed the taxpayer company to pay substantially less tax than other businesses. The EC concluded that Ireland must now recover the illegal aid.

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Today’s EC release reports that, following an in-depth state aid investigation that began in June 2014, the EC concluded that two tax rulings issued by Ireland “substantially and artificially” lowered the tax paid by the company in Ireland since 1991. The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the multinational group that “did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a ‘head office’.” The EC found:

  • The "head offices" existed only on paper and could not have generated such profits. 
  • These profits allocated to the "head offices" were not subject to tax in any country under specific provisions of the Irish tax law.
  • Given the allocation method under the tax rulings, the company paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of one of the Irish group members.  
  • Ireland must now recover the unpaid taxes in Ireland from the multinational entity for the years 2003 to 2014 of up to €13 billion, plus interest.

KPMG observation

The U.S. Treasury Department earlier this month released a “white paper” outlining Treasury’s concerns with the approach of the European Commission and its state aid investigations. A concern expressed by Treasury officials is that the EC’s state aid investigations threaten to undermine progress in efforts to curtail corporate tax evasion and could “create an unfortunate international tax policy precedent.” Previously, the Treasury Secretary wrote urging the EC to reconsider these actions while reaffirming the U.S. commitment to continued collaboration through the base erosion and profit shifting (BEPS) project. 

Treasury has stated that these EC state aid investigations have major implications for the United States. In particular, recoveries imposed by the EC “…would have an outsized impact on U.S. companies” and "settlement payments ultimately could be determined to give rise to creditable foreign taxes.” U.S. taxpayers could eventually be “footing the bill” for these state aid recoveries in the form of foreign tax credits that would offset the U.S. tax bills of these companies. The investigations have global implications as well for the international tax system and the G20’s agenda to address BEPS while improving tax certainty to fuel growth and investment. Read TaxNewsFlash-Transfer Pricing

Reaction from the Irish government

In a press release issued by the Irish government, Minister of Finance Michael Noonan said “I disagree profoundly with the Commission’s decision. Our tax system is founded on the strict application of the law, as enacted by the [Irish Parliament], without exception. The decision leaves me with no choice but to seek Cabinet approval to appeal the decision before the European Courts."

Next steps

This decision forms part of the standard EC state aid investigation procedure. The non-confidential version of the decision is expected to be published in the next few months. Both Ireland’s Finance Minister and the taxpayer group are understood to have indicated that they will appeal the decision before the General Court (and possibly later the Court of Justice of the European Union). Any appeal would not suspend the recovery payment. According to the EC’s release, the amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require the taxpayer to pay more taxes on the profits recorded by the two Irish entities for this period.

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