Europe’s use of Apple and Ireland as pawns in tax gambit could backfire

30 Aug 2016

The EU, in using Apple and countries like Ireland, as pawns in a wider strategy to achieve tax harmonisation, is playing a dangerous game

No sooner has the decision to make Ireland recoup €13bn in taxes from Apple been revealed, and both the country and the tech giant are decrying Margrethe Vestager’s ruling for what it really is: a ploy by the European Commission to eventually strong-arm all of Europe into a harmonised tax regime.

As pointed out recently by Liza Lovdahl Gormsen, a senior lecturer on law at the University of Manchester, in an article in The Telegraph, the EU is using state aid rules as a tool to bring about taxation reform.

Ultimately, the top dogs in the EU want to create a harmonised corporate tax regime across Europe.

‘Taxes for multinational companies are complex, yet a fundamental principle is recognised around the world: A company’s profits should be taxed in the country where the value is created’

In its sights are pesky sovereign tax rules like the 12.5pc one used to very good effect by Ireland.

As they titter over tea in Brussels or Strasbourg as they draw up a Utopian view of the perfect Europe we can imagine them saying: “Why shouldn’t Google or Facebook be headquartered in Rome, Paris or Berlin, not grubby little backwaters like Dublin?”

The reality is their perfect view of the world is becoming increasingly at odds with ordinary Europeans and is naively out of touch: no country wants to cede their autonomy over tax policy.

That is a bridge too far.

Autonomy, not automatons

Pesky regimes like the 12.5pc rate in Ireland have been used to disconcertingly good effect to help the country land cutting-edge multinationals as far back as 1980, when a bearded young man in a suit called Steve Jobs came calling to Cork.

Small countries like Ireland, the Netherlands, Luxembourg and Belgium that lack vast industrial heartlands and large populations have had to be creative in their tax policy.

And so, today’s €13bn ruling against Apple and ultimately Ireland’s industrial policy is precisely what Gormsen had summed it up to be: the use of “embarrassment and inconvenience” to strong-arm change.

Ireland and Apple aren’t the first to fall prey to this manoeuvring, the EU’s probing includes the European operations of Google, Fiat, McDonald’s, Starbucks and Ikea, and it is keen to make examples.

As Gormsen pointed out, the EU is using an untested interpretation of EU state aid law to come to its conclusions, including the “arm’s length principle” of calculating taxation on profits, which no member state is obliged to implement. Indeed, the very fact that Ireland has not implemented this could be the Gordian knot that could unravel the whole thing.

Ireland is a country that, despite having faced provocations in recent years, such as unfairly shouldering 42pc of Europe’s banking debt thanks to bullying by bigger countries, is having its loyalty as a good citizen of Europe sorely tested.

Despite this, as the UK took the unpopular decision to vote to leave the EU, we Irish thought the Brits must be mad. We see the common sense of the European experiment and we are proud of our place in the European Union. Despite recent provocations, we see the practicality of it. The value of it.

But using Ireland and Apple as pawns in a gambit to strong-arm Europe into a harmonised corporate tax regime is the highest profile ploy by the EU yet.

And it could backfire.

A calculated, devastating blow to the sovereignty of EU member states


Apple CEO Tim Cook with students at Trinity College Dublin last year

Already, Ireland’s Finance Minister Michael Noonan has pointed to the contradictory nature of Vestager’s argument, which involves encouraging countries to ensure Apple pays back taxes in other jurisdictions too.

For his part, Apple CEO Tim Cook, in a letter to customers today, said that the European Commission is playing a very dangerous game.

“The Commission’s move is unprecedented and it has serious, wide-reaching implications,” Cook told customers.

“It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed.

“At its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money.

“Taxes for multinational companies are complex, yet a fundamental principle is recognised around the world: a company’s profits should be taxed in the country where the value is created. Apple, Ireland and the United States all agree on this principle.

“In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States. European companies doing business in the US are taxed according to the same principle. But the Commission is now calling to retroactively change those rules.”

Cook rightly points out that beyond the targeting of Apple – and, let’s face it, Ireland – the European Commission is running the gauntlet of costing Europe investment and job creation opportunities.

“Apple has long supported international tax reform with the objectives of simplicity and clarity,” Cook said.

“We believe these changes should come about through the proper legislative process, in which proposals are discussed among the leaders and citizens of the affected countries. And, as with any new laws, they should be applied going forward — not retroactively.

“We are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment. We firmly believe that the facts and the established legal principles upon which the EU was founded will ultimately prevail.”

Without saying so much, both the Irish Government and Apple have shown the European Commission up for what it is trying to do in a cynical way: harmonise tax across Europe by making crude examples of a few pawns, rather than taking a more enlightened, legal approach.

They are readying their legal resources and have said they are confident of overturning Vestager’s decision.

As a result, a legal Pandora’s Box is about to be opened and it could place the European Commission even further away than ever from its goal of EU-wide tax harmonisation.

European Commission building image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years