FOR many, there is no question who is the hero and who the villain in this week’s tax confrontation between Brussels and Apple (see article). Gaming of cross-border tax rules has risen inexorably. Apple, with its abundance of intangible assets, which are easier to play around with, has been one of the cleverest at exploiting the gaps. A bill of €13 billion ($14.5 billion) plus interest, the amount that the European Commission says Ireland must recover from the firm for tax avoidance, would pay for all the country’s health-care budget this year and barely dent Apple’s $230 billion cash mountain.
But in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant, at a time when big economies are meant to be co-ordinating their anti-avoidance rules. Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible.
It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other.
Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago. Back then, there was no reason for Apple to think it might one day fall foul of the state-aid rules. The firm shook hands with a sovereign government, which continues to defend the arrangement to this day. Even if the plan had been legally suspect at the time, it makes as much sense for subsequent penalties to fall on the country that offered it as on the company that took it. Either way, firms that invest in Europe will be entitled to wonder what other deals reached with governments can be unwound retroactively. Ireland itself is bridling at interference in affairs that are typically the province of EU member states. It is considering whether to appeal; Apple has said it will.
Better together
By using new arguments to fire broadsides at deals done long ago, the commission is not helping the fight against egregious tax-dodging. Ireland and other obliging European states, such as Luxembourg and the Netherlands, have already succumbed to pressure to close several of the loopholes of the past. Last year the OECD, a group of rich countries, led the way on a set of guidelines designed to crack down on avoidance. By going it alone the commission risks stoking conflict, not co-operation. American politicians quickly branded the judgment a naked tax raid; in a white paper released before the commission’s verdict, America’s Treasury hinted ominously at retaliation.
Some see a bright side. Money paid by Apple and other American firms to European governments will not go into tax coffers back home; the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely. The commission has lobbed a grenade; a tax war may result.