€13 Billion Tax Bill for Apple
The decision of the European Commissioner, Margrethe Vestager, to impose a €13 billion retrospective tax bill on Apple in Ireland seems, on the face of it, to be a great outcome. €13 billion euro can be pumped into roads, hospitals, broadband and multiple other projects which, after 10 years of purse tightening, badly need significant investment. This is a win-win situation and the Irish Government should embrace it, right? Well not quite, as it happens.
This is a far-reaching, arguably over-reaching, decision of the European Commission which undoubtedly threatens the industrial policy that has seen the Irish economy transformed since the 1980s. There are several reasons to be concerned about this Apple tax bill.
Impact on Foreign Direct Investment
The Government, the IDA (Industrial Development Authority) and every multinational foreign company in Ireland denies that our low corporate tax rate of 12.5% and our friendly tax mechanisms (the “Double Irish” etc) that allow corporates significantly reduce their tax bills are the key reason that those companies choose to locate their European headquarters in Ireland. They cite our excellent education system, highly skilled workforce and English language as our spoken language, as significant factors. They may be factors, but let us not delude ourselves. The biggest and most important reason for all of these companies locating in Ireland is tax. The lower the tax rate, and the greater the number of tax reduction schemes that can be availed of, the more attractive Ireland is as a destination for investment.
This may very well be considered immoral, and not too many people would argue that paying 0.005% tax on profits is either fair or moral, but the reality is that so long as the international tax system is disjointed, corporate entities will seek out the most conducive locations to base themselves.
In Ireland 350,000 people are employed directly and indirectly by such multinationals, who have come here specifically to avail of the tax advantages that Ireland offers. They contribute €4 billion to the Exchequer in taxes each year.
Before we demand that the Government lie down and accept the Commission ruling, without any appeal, we should perhaps spare a thought for those 350,000 people and their families. We should consider how the €4 billion in tax generated by those multinationals annually will be replaced if they pull out, and we should consider what economic and industrial policies can be switched on, overnight, to replace the one Ireland has successfully pursued since the 1980s.
There is no doubt that retaining multinationals in Ireland, not to mention attracting new ones, will be a very tall order if they believe that tax arrangements can simply be overturned on a whim by a crusading European Commissioner.
Competition Commissioner Becomes Tax Hawk
The European Commission has a long and strong record of competition law (antitrust) enforcement in the European Union. It has worked hard to ensure, often controversially, that companies can enjoy a fair and level playing pitch when operating in the Single Market. This is essential to make the single market function properly. It ensures that Member States cannot impose artificial barriers to protect certain vested interests and prevents companies from abusing dominant positions. This has been healthy and positive for business and for consumers.
However, this ruling moves into an entirely unjustified and arguably unauthorised territory, because it will have such a clear impact on domestic taxation policy – a matter for Member States. The notion that rules against ‘state aid’, envisaged as unfair subsidies or a leg-up to companies thus distorting competition across the union, can give a licence to the Commission to decide on tax rules in individual member states, is quite bizarre. It arguably goes far beyond the competence awarded to the Commission by the EU Treaties which form the basis of EU law.
Misunderstanding of Intellectual Property
This is made all the more worrying by the fact that the European Commission apparently believes that more than 60% of Apple’s global profits ought to be taxed in Europe, or specifically Ireland. It is quite apparent that Apple generates all of its creative capacity and its highly valuable intellectual property in the United States. Most of its products are then physically manufactured in China. Its Cork headquarters in Ireland, and its various subsidiaries across Europe, are primarily retail, customer care and marketing operations.
The bulk of the value of Apple goods is generated on two other continents. The European Commission ignores this reality entirely, and in doing so either misunderstands the value of intellectual property or wilfully ignores it. There is no doubt that the global tax system which sees Apple pay rather insignificant corporate tax on its profits in both China and the United States must change (and in fact is already changing through G8 and OECD measures) but this fact does not legitimise a tax grab from the Commission on products which are created and generated elsewhere.
Invalidation of National Tax Authorities
While Ireland is at the receiving end of this extraordinary decision, every EU Member States that values the principle of tax competition (particularly the Nordic countries, the Baltics, Netherlands, Luxembourg and the United Kingdom) should resist this move vehemently.
All of these countries say they are opposed to tax harmonisation in the EU. They either have a vibrant FDI community or they are generating their own models in their own country. There is no doubt that the Competition Commissioner straying into the realm of tax policy, and overturning several binding decisions of a national tax authority, is a very serious development.
Attracting investment to countries which heavily rely on Foreign Direct Investment will be extremely difficult in future if those companies cannot have faith in the rulings and decisions of tax authorities in individual Member States. The inability of national tax authorities to give authoritative decisions to companies considering major investments or relocations, will have a major effect on inward investment, and thus on economic buoyancy, growth and ultimately on jobs. This is something that Member States must fight against.
The other impact of this ruling will be on the debate in the United Kingdom. While the referendum is over, there is still a significant prospect of the UK remaining within the European Union, or at least within the Single Market.
The spectacle of the European Commission dictating tax fines to member states and overturning decisions of national tax authorities is likely to play into the narrative in the UK which favours a quick and full exit from the Union. This is clearly not good for Ireland, which has traditionally relied on the UK to be the voice of reason within the EU Council when it comes to matters concerning tax competition.
In short the apparent tax windfall for Ireland comes with significant risks and enormous cost. It reflects the old adage of “There’s no such thing as a free lunch”. The implications of this ruling are complex and significant. The idea that the Irish State would not be party to an appeal to the European Court of Justice is simply bizarre. Ireland must get deeply involved in this appeal to ensure that our national interest is protected. This will not be an easy task.