Handelsblatt Exclusive

Punish Ireland, Not Apple

  • Why it matters

    Why it matters

    Rudolf Mellinghoff says the European Commission’s actions against Apple risk undermining the confidence of businesses operating across Europe.

  • Facts

    Facts

    • The Federal Fiscal Court is one of five high courts in Germany established under the country’s constitution, known here as the “Basic Law.”
    • The Federal Fiscal Court has jurisdiction over fiscal matters like taxes and customs disputes.
    • The European Commission is demanding €13 billion in back taxes from Apple after it ruled that Ireland offered illegal subsidies to the U.S. companies.
  • Audio

    Audio

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RUDOLF MELLINGHOFF 17.10.2011 BFH
Rudolf Mellinghoff, Germany's top tax judge, sides with Ireland over Brussels when it comes to Apple. Source: Frank Beer for Handelsblatt

It’s perhaps one of the most controversial decisions taken by the European Commission this year. The E.U. executive is demanding that U.S. tech giant Apple pay €13 billion ($13.5 billion) in back taxes after ruling that long-time subsidies offered by Ireland amounted to illegal state aid.

Both Ireland and Apple are appealing the surprise decision from August, arguing that Brussels overstepped its authority. Now, Germany’s top tax judge has also come to their defense.

“The Apple decision reveals a dilemma. After all, it was Ireland that violated rules governing state aid, not Apple. And yet Apple is expected to take the fall,” Rudolf Mellinghoff, president of Germany’s Federal Fiscal Court, the highest German court for tax matters, told Handelsblatt in an interview.

“Companies need to be able to trust that national authorities are implementing tax laws correctly. ”

Rudolf Mellinghoff, President, Federal Fiscal Court

In other words, Apple had every reason to believe that Ireland knew what it was doing when it offered special deals that reduced the Silicon Valley giant’s tax burden – the first in 1991 and the second in 2007. If the European Commission wants to go after someone for taxes owed, it should go after Ireland rather than Apple, Mr. Mellinghoff suggested.

“Companies need to be able to trust that national authorities are implementing tax laws correctly. That is a necessary requirement for a functioning state of law,” Mr. Mellinghoff said.

Countries like Ireland and Luxembourg have come under fire in recent years for offering secret tax deals to multinational companies before the financial crisis. The loopholes that allowed these countries to get away with it have largely been closed since, but Brussels has tried to go beyond merely changing the laws. The Commission says Apple has to pay Ireland back – even if Dublin says it doesn’t want the money. The dispute has also risked relations with the United States.

As the president of Germany’s top fiscal court, Mr. Mellinghoff has no jurisdiction over the case. Ireland and Apple earlier this month formally appealed the Commission’s ruling to the European Court of Justice, which will have the final say.

Most experts believe the odds of victory are with the Commission. Yet Mr. Mellinghoff’s comments suggest the E.U.’s top court has a tough case on its hands. And regardless of who wins, no doubt national courts like Mr. Mellinghoff’s will be looking to the decision for guidance in future.

“I am very curious to see how the European Court of Justice decides these matters,” Mr. Mellinghoff said.

Making tax laws an E.U. matter could be a problem, given the way that legislating in Brussels is currently set up.

More broadly, Mr. Mellinghoff also questioned whether Brussels has amassed too much power over the last decade. He suggested countries have given up their authority over tax issues too easily.

“It’s debatable from a democratic perspective whether competency over tax matters, which form such a central pillar of government financing in a democratic law-based state, can be handed over so broadly,” Mr. Mellinghoff said.

His point: Rightly or wrongly, national governments are supposed to still be in charge of their own budgets in the European Union. It’s not something that has been handed over to Brussels, even if there has been talk of creating a single budget or E.U. finance minister among some corners of the European Union.

Mr. Mellinghoff says making tax laws an E.U. matter could be a problem, especially given the way that legislating in Brussels is currently set up. Germany, for example, tinkers with its tax code a few times a year. Any changes at the E.U. level need to be agreed by all 28 member states. “This leads to a hardening of the tax code,” he said.

This is where the Apple case comes in: If the E.U. court rules in favor of the European Commission, then it basically becomes enshrined into E.U. law. Any country that wants to change the law – Ireland, for example – would have to convince all 27 members of the European Union to go along with the changes.

 

Volker Votsmeier is an editor with Handelsblatt based in Frankfurt. Christopher Cermak of Handelsblatt Global contributed to this story. To contact the authors: Votsmeier@handelsblatt.com and cermak@handelsblatt.com

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