Europe

A special deal for Scotland? No chance.

, 0 Comments

Nicola Sturgeon has accused the UK Government of “ignoring Scotland’s voice” on Brexit. I’m not sure what else the First Minister can expect given that she spent the past six months making demands she knows can never be met. The Scottish Government intervened in Miller on flimsy grounds in the futile hope of securing a veto for Scotland over the UK’s exit from the European Union – knowing full well (as, I think, likely every lawyer in the country did too) that they stood absolutely no chance of success.

Similarly, the First Minister has peddled the myth that it would be possible for some kind of special deal to be struck that would allow Scotland to remain in the EU/EEA/EFTA/single market (these have been used interchangeably). But such a deal is not possible, as I have articulated before. This is for three reasons.

The first, is international law. Scotland is not a sovereign state – it has no legal personality. As Scotland is not an actor in international law, it cannot enter into treaties with other countries. There is no non-independent region in the world (save, possibly, for the Emirates) with the powers that would be necessary to participate in participate in an international organisation like the EEA.

The second hurdle is domestic, and significant. Since early cases such as Costa v ENEL, it has been clear that single market rules are supreme, and rank above all other forms of domestic law. While this wouldn’t pose any problem where Scotland’s devolved competences are concerned, it’s not clear what would happen should single market rules come into conflict with the powers reserved to Westminster. Of course, the UK could devolve those powers necessary for Scotland’s participation in the single market – the trouble is that’s basically all the powers: full fiscal autonomy; regulation of all markets (financial services, energy, telecoms, etc); immigration, naturalisation, and citizenship; competition law; employment law; product standards; consumer protection – to name but a few. Were this to happen, there would be little left of the United Kingdom, save for a currency union and a defence pact. Scotland would be, de facto, independent.

The third problem is EU/EEA law based, and is possibly even more challenging. The EU/EEA’s institutions are designed for independent sovereign states. There is no provision in the treaties for the participation of a non-sovereign territory. Two years ago the worst case scenario was that an independent Scotland would have to follow the EU’s accession procedures set out in Article 49 of the Treaty on European Union. However, when compared to what would be required for a non-independent Scotland to join the EEA the accession process looks like a breeze. Nothing short of substantial changes to the EU and EEA treaties would be necessary to accommodate a non-sovereign Scotland. Even if Scotland could persuade the EU institutions to go along with this, Scotland still comes up against the same brick wall as it would have done post-independence, which is states with their own secessionist movements such as Spain and Belgium. If Scotland gets to participate in the EEA/EU without independence, you can guarantee that Catalonia, the Basque Country, Flanders, and Wallonia (just for starters) will want the same. You can also guarantee that Spain and probably Belgium would veto it – as is their right.

The opposition needs to call out this daft idea for what it is: a complete fabrication designed to stoke the flames of grievance.

It’s clear that the SNP has no interest in securing the “best deal for Scotland” when the only proposals they have thus far made are manifestly impossible. A far more constructive approach would be to lay dibs on the powers being repatriated from Brussels that they believe would be best exercised in Scotland. Agriculture and Fisheries would obviously be top of the wish list. The devolution of labour law and company law would allow Scotland to take a different path from the race to the bottom that the Government in London seems keen to pursue. While absent concerns about compliance with EU law, VAT is one of the best candidates for further fiscal devolution.

If Nicola Sturgeon truly wants the best deal for Scotland she should stop the shadow boxing and start drawing up a wish list that’s actually deliverable.

#AppleTax: The Commission’s bluster shrouds a shaky legal foundation

, , , , , 5 Comments

apple-taxToday’s sensational, though not entirely unexpected Commission decision, that Apple has been a beneficiary of state aid from Ireland, in breach of Article 107 of the Treaty on the Functioning of the European Union (TFEU) has resulted the bizarre situation where a massive company has been told to pay the state billions in tax, only for the state to say “we don’t want it!” The decision is hailed as a victory by tax justice campaigners, but the reality is that this decision is a travesty for anyone who believes that rulings about tax liabilities should be based upon what the law is, and not what the arbiters wish the law is.

Article 107(1) TFEU provides that:

Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

The classic state aid scenario is one in which a government funnels money or resources towards an undertaking (usually a company) it favours in preference to others. However, in recent decades, it has been commonly accepted that such treatment also includes allowing an undertaking not to pay for something that it otherwise would.

It therefore follows that the Commission has to establish that the state in question granted favourable treatment to Apple specifically. However, rather than doing so, the Commission’s statement today provides little more than a tirade of obfuscation and bluster, containing what could only be deliberate misrepresentations of the nature of international tax law, presumably to distract from the fact that their decision appears to built on an extremely shaky legal foundation.

The Commission repeatedly references the allocation of profits to a “head office” (their quotation marks), claiming that no such “head office” actually exists. Such nomenclature is misleading, as no such terminology exists in either Irish or international tax law. Under both international and Irish tax law, profits are not “allocated” to head offices and subsidiaries. The “first bite of the apple” (as we call it) goes to the source of the income – a jurisdiction in which the enterprise has a fixed place of business through which the business of the enterprise is wholly or partly carried on. Only those profits which arise through the activities of that establishment are attributable there, notwithstanding whether or not profits from other activities are also sourced within that state. In other words, the threshold for attributing profits to a permanent establishment is very high, and that is the sole jurisdiction Ireland has to tax the profits of a non-resident enterprise.

The residuary rule in international taxation is that profits that cannot be explicitly attributed to a permanent establishment are taxable only in the jurisdiction in which the enterprise is resident. Ireland, in common with most common law jurisdictions, uses the De Beers test of corporate residence – which is a company’s “place of effective management”. In other words, as a matter of Irish law, those “head office” profits are being allocated to America – the fact that America employs a different test of corporate residence is America’s problem, and not Ireland’s. Contrary to the Commission’s inferences, it is not Ireland’s concern what happens to the profits that fall beyond its jurisdiction.

A further concern is the following paragraph:

The amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by Apple Sales International and Apple Operations Europe for this period. This could be the case if they consider, in view of the information revealed through the Commission’s investigation, that Apple’s commercial risks, sales and other activities should have been recorded in their jurisdictions. This is because the taxable profits of Apple Sales International in Ireland would be reduced if profits were recorded and taxed in other countries instead of being recorded in Ireland.

This is, quite simply, not the case. First, does the Commission seriously think that other EU Member States have simply rolled over and allowed Ireland to tax profits that those Member States think are rightly theirs? Of course not. They have taxed as much of those profits as can be attributed to permanent establishments situated therein – which will primarily be sales from physical Apple Stores. Shifting jurisdiction to tax online sales requires more than simply a unilateral decision to do so by the Comission, the allocation of jurisdiction is enshrined in thousands of tax treaties, which would have to be amended. The European Commission cannot simply decide that the well-established jurisdictional boundaries that are enshrined in international tax law are suddenly not where they’ve always been. In his letter today, Tim Cook claimed that “using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.” Tim Cook is right.

All of this is a smokescreen. The Commission has chosen to focus attention on this irrelevant facts and even more irrelevant opinion to disguise the fairly shaky basis upon which they have reached this ruling. There is no question that a tax advantage offered only to a specific undertaking (in this case Apple) is a breach of EU state aid rules. This therefore raises the question of the specificity of Apple’s tax treatment.

There are two possible approaches that can be taken to deciding whether or not an undertaking has been the recipient of special treatment. The first, is reference to whether or not the state intended to confer special treatment on the undertaking. This approach has been roundly rejected by the ECJ and legal scholars. The second approach, which is normally employed by the Court, is an objective one, which compares the treatment of the undertaking with that which would be considered “normal” treatment. Therefore, the only ground on which Ireland could be considered to have provided state aid to Apple is by offering them treatment that materially differed from other large multinationals.

Did the Irish Revenue Commissioners do a deal with Apple? Yes – and in the minds of irate campaigners that would appear to make this an open-and-shut case. Except that almost every multi-national enterprise trading in almost every developed country will strike a deal with the revenue on how to allocate group expenditure to subsidiaries, such as research and development, intellectual property, and management costs. These deals are called Advance Pricing Agreements, and provide enterprises with a degree of certainty as to what their costs will be (i.e. the state in which they’re investing isn’t going to retrospectively tell them that little of their group expenditure can be deducted from their gross profits). The difficulty in determining the value of these costs (pricing) is that they are dependent upon comparable market values, where no such transactions ever actually take place on an open market. Apple would never license the iPhone brand to anyone, so how the heck are we supposed to work out the actual value of the brand?! For technology companies, intangible assets such as these constitute the overwhelming majority of such companies’ cost base. These Advance Pricing Agreements are normally therefore the product of educated guesswork and tough negotiation. Therefore, the “normal” treatment of advance pricing such companies is not a specific set treatment, but a range. Like with all ranges, there will be companies at either end of this range. As the largest company in the world, you would certainly expect Apple to be at the most favourable end of the range.

The Commission’s statement today contains absolutely no references to comparable Advance Pricing Agreements in Ireland in order to determine what is “normal”, nor does their more detailed preliminary decision of 2014. The 2014 preliminary decision focuses almost entirely upon determining whether or not the Revenue Commissioners intended to confer special treatment upon Apple (by focusing on statements about how many people were employed by Apple in Cork, etc.), which has been conclusively established as irrelevant in determining whether or not Article 107 has been breached.

Having failed to demonstrate in any way why the treatment afforded to Apple differed from “normal” practice, the Commission has sought to justify its decision on a tirade of bluster about “factual or economic justification”, as opposed to, y’know, the law.

De-bundling Free Movement: an acceptable solution for all sides?

, , , 0 Comments

BL61540The question of free movement was undoubtedly the central issue of the European Union referendum debate, and it will, surely, be the central question surrounding Britain’s future relationship with the EU. While Leave campaigners repeatedly assured us that access to the EU’s single market (presumably through the EEA) is quite possible without accepting free movement, the early rumblings from the EU institutions and Member States do not sound too promising.

There are, of course, numerous free movement rights within the EU: free movement of goods, of services, of capital, to name but a few. However, the contentious free movement is that of persons. However, the broad term “free movement of persons” is a relative neologism, bundling the long-standing right of free movement of workers with the more recent right granted to all citizens of the EU to move reside freely within the territory of the Union.

Contrary to the rhetoric that we have heard, it is in fact entirely possible to participate in some aspects of the single market without accepting the free movement of persons. This is the case, for example, in the Channel Islands, and the Isle of Man, which participate in the free movement of goods, but not people, services, or capital. However, while the idea of the “Channel Islands Model” sounds attractive to many, it is probably even less likely than Scotland doing a “reverse Greenland”. The Crown Dependencies are considered by Article 355 of the Treaty on the Functioning of the European Union (TFEU) as special cases, along with various other overseas territories and dependencies of the Member States. While they might demonstrate that it is at least possible to selectively participate in the internal market, they also demonstrate that you have to be a territory or dependency to do it – not a state.

The right of free movement for workers is intrinsically tied up with the internal market, being one of the “four freedoms” that has existed since the inception of the European Economic Community (EEC, or “the Common Market”).

Free movement of workers is provided for by what is now Article 45 TFEU. It provides that:

  1. Freedom of movement for workers shall be secured within the Union.
  2. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment.
  3. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:
    • to accept offers of employment actually made;
    • to move freely within the territory of Member States for this purpose;
    • to stay in a Member State for the purpose of employment in accordance with the provisions governing the employment of nationals of that State laid down by law, regulation or administrative action;
    • to remain in the territory of a Member State after having been employed in that State, subject to conditions which shall be embodied in regulations to be drawn up by the Commission.

Paragraph 4 provides the sole exception, which applies to employment in the public service (though not, according to the ECJ, all employment in the public service, see Commission v. Belgium). The right was held to cover not only workers, but also those seeking work, by the ECJ in Antonissen, although in an inventive piece of jurisprudence the court held that the rights of jobseekers were subject to limitations.

The right of citizens to move and reside freely provided for by Article 21 TFEU is of more recent genesis. A product of the Treaty of Maastricht, free movement for citizens is a right that is applicable far more broadly than simply the economically active migrants to whom Article 45 TFEU applies. Article 21(1) TFEU provides that

Every citizen of the Union shall have the right to move and reside freely within the territory of the Member States, subject to the limitations and conditions laid down in the Treaties and by the measures adopted to give them effect.

It should be immediately apparent to even the casual reader that this right of free movement, though broader in scope, is much more circumspect than the free movement of workers.

The rights attaching to free movement of workers were expanded upon by Council Regulation (EEC) No 1612/68, and subsequently entangled with the rights of free movement of citizens by Directive 2004/38/EC.

The 1968 Regulation is comprehensive. Article 7 provides that

  1. A worker who is a national of a Member State, may not, in the territory of another Member State, be treated differently form national workers by reason of his nationality in respect of any conditions of employment and work, in particular as regards remuneration, dismissal, and should he become unemployed, reinstatement or re-employment.
  2. He shall enjoy the same social and tax advantages as national workers.

The Directive further provides for equal treatment with respect to trade union membership and housing. It also extends this treatment to spouses and dependents.

The 2004 Directive provides for far more limited rights for citizens than the 1968 Regulation. For example, Article 6 of the Directive provides that the right to move and reside in another Member State is only without restriction for the first three months. Thereafter, Article 7 provides that such migrants must

have sufficient resources for themselves and their family members not to become a burden on the social assistance system of the host Member State during their period of residence and have comprehensive sickness insurance cover in the host Member State.

However, despite the clear intention of the legislating institutions to severely curtail the burden that such migrants may place on the social assistance system of the host Member State, this has not stopped the ECJ from granting entitlements to non-economically active EU citizens which any plain-text reading of both the treaties and the Directive would surely proscribe. The only recent example of the ECJ declining to extend a state benefit payment to a non-economic migrant is the 2014 Dano decision.

Could it be, therefore, that de-bundling the free movement of workers from the free movement rights of Union citizens is the compromise that would be most acceptable to all parties? It certainly has a number of advantages.

First of all, it would allow the EU to maintain that it has preserved the free movement of workers that is so intrinsic to the internal market. Meanwhile, the UK could claim a victory in having ended the absolute right of union citizens to move and reside freely, restricting the right solely to economic migrants.

It might also be a politically acceptable compromise, as it wouldn’t involve reviewing any of the treaty provisions regarding the internal market. Rather, it would merely involve reviewing the 2007 Decision of the EEA Joint Committee to adopt the 2004 Directive in full. No treaty change means there is no need for ratification, which would keep the debate surrounding it largely out of the domestic spheres of other EU Member States.

What this amounts to in reality is largely symbolic. As the definition of “workers” includes jobseekers, those looking for work will still be able to travel to and reside freely in the UK, at least until the UK Government can demonstrate that their job search is hopeless. In reality, the majority of non-economic migrants are retirees, and there are a far greater number of British pensioners in Europe than there are European pensioners in the UK. It may well be that when the Tory-voting Daily Mail readers of the Costa Del Sol discover that, in fact, they’re the only migrants who are about to be kicked-out of anywhere, our new government decides that the full free movement of persons principle is a price worth paying for market access after all.

1 2 3 4 5