Apple, Ireland, and the European Union: Time to Move beyond Failed Approaches

Our international tax system is broken. Indirect remedies will not work, nor will demonizing companies or countries. Major tax reform is needed. 

Recently the EU General Court handed the European Commission a major defeat, quashing the EC’s 2016 order that Ireland collect €13.1 billion in back taxes (plus accrued interest) from Apple. The now-overturned order was notable in several respects, including the size of its tax assessment, its origin from the EC’s competition office rather than from tax authorities, and its opposition by both the taxpayer (Apple) and the taxing government (Ireland). Indeed, Ireland was the successful plaintiff in the case, winning the right not to collect an extremely large tax bill, worth more than 5% of its GNP. This is not the EC’s first major attempt to force an unwilling member government to collect taxes, nor its first failure before the court in such an action, but the size and profile of this case compels consideration of what the decision means for the future. 

The EC had claimed that Ireland’s low tax take from Apple amounted to “state aid” – a selective benefit provided to one company but not others, in violation of EU rules aimed at preventing governments from favoring certain companies over their competitors. The court did not agree. Ireland has a favorable tax climate, but not just for Apple. 

The EC action in this case hinged on the question of state aid. However, the EC was motivated by more fundamental objectives on which the court was silent: to restrict EU member countries like Ireland from competing aggressively with other EU countries for the income and activities of multinationals like Apple, and to force these companies to pay more taxes, to other EU member countries as well as to Ireland. Pursuing these objectives should be a matter of tax policy, not competition policy; and a reform of our system of taxing multinational companies is long overdue.  

To accomplish robust and sustainable tax reform, it is necessary to move beyond a morality play focusing on bad actors – multinational companies engaging in nefarious schemes to avoid paying their fair share of taxes, aided by opportunistic governments – to undertake robust and sustainable tax reform. Such a reform should remove the opportunities and incentives for such behavior. 

The international tax system, conceived in the 1920s, is no longer functional, dependent on concepts that have become increasingly meaningless, such as where a company resides and where its profits are earned. In the case of Apple and Ireland, Apple was able to record substantial profits for its Irish subsidiary, but that subsidiary’s profits did not fall under Ireland’s definition of profits earned there; nor were they taxable in the US, where the parent company resides.1 With multinationals like Apple operating around the globe and generating profits using intangible assets that have no observable location, trying to enforce the existing tax system is a fool’s errand, as (we now know) is trying to use competition policy as a substitute. 

A tax system that relies on attempting to identify where profits are earned invites companies to adjust their activities to make those profits appear in countries with low tax rates or, better yet (for them), no country at all. The same approach encourages countries to lower their tax rates, to encourage companies to locate profits there, rather than in other countries. 

We can largely eliminate the incentives for countries to compete over lowering their corporate tax rates, and the ability of companies to decide where (and where not) to report their income, by levying tax on profit where customers are located. This is how the value added tax (VAT) works, and the VAT has proved to be a resilient source of government revenue around the world, not subject to the pressure of tax competition. This “destination-based” approach works just as well for corporate income taxes, which served to motivate its inclusion in the 2016 “Blueprint” proposal of the US Ways and Means Committee under Paul Ryan and Kevin Brady. Unfortunately, the 2017 Tax Cuts and Jobs Act took just baby steps in this direction. 

Even less ambitious reforms that allocate only part of a multinational’s profits to the customer location – as also laid out in our forthcoming Oxford University Press book with several other collaborators – would represent a major advance. The guiding principle is not that profits are “earned” in the location of customers – for where they are earned is a meaningless concept – but rather that a fair and robust tax system should depend on something that is more easily observed by tax authorities, and more difficult to manipulate by companies. To tax companies in a fair and sustainable manner, we must move in this direction, rather than trying to patch up the existing system, or – like the EC - trying to come up with creative new methods of preventing the system’s natural outcome.  


Alan J. Auerbach is the Robert D. Burch Professor of Economics and Law and Director of the Burch Center for Tax Policy and Public Finance at the University of California, Berkeley.  

Michael Devereux is Director of the Oxford University Centre for Business Taxation and Professor of Business Taxation and Associate Dean for Faculty at the Saïd Business School, University of Oxford.  


Recent relevant research from the Centre for Business Taxation: 

Devereux, Michael P., Alan J. Auerbach, Michael Keen, Paul Oosterhuis, Wolfgang Schon and John Vella “Taxing Profit in a Global Economy”, forthcoming. 

Auerbach, Alan J., Michael P. Devereux, Michael J. Keen, and John Vella, “Destination-based Cash Flow Taxation”, Centre for Business Taxation Working Paper 17/01, 2017. 

Devereux, Michael P., Alan J. Auerbach, Michael Keen, Paul Oosterhuis, Wolfgang Schön and John Vella, “Residual Profit Allocation by Income”, Centre for Business Taxation Working Paper 19/01, 2019.