It really does have it all, yesterday’s Apple story. But you don’t want to read 5,000 words and I don’t want to write them. So let me focus on the bits I think are interesting or important.
First, the political dimension.
Students of the history of the European Union will know that the European institutions have often acted to protect and enhance the functioning of the single market. As I’ve argued on these pages before, we can’t really have the level playing field on which a functioning single market depends with aggressive tax competition between member states. And the institutions obviously know that.
But the power to make tax law rests by and large with member states.
The inevitable result is a tension between those member states who would seek to tilt the playing field towards them through aggressive tax competition and the institutions who are interested in preserving and advancing the functioning of the single market by keeping it level.
I said a year ago that I believed the Commission had decided to use State Aid law to explore the limits of member states’ power to engage in ‘field tilting’ through the tax code. It had decided, to put it bluntly, to be a little more activist. Whether you think that’s a good thing rather depends on what you think about tax competition. And whether you think the single market’s important. But – and I bear in mind the old saw that you shouldn’t make up your mind until you’ve heard both sides of the argument – I have to say I’m surprised at the emergent consensus that the Commission’s decision amounts to overreaching.
Second, the importance of the Apple decision.
I think it’s really important. Indeed, I think it could be a game changer. If you’re contemplating setting up an unnatural structure for tax avoidance reasons, there’s a number of things you weigh in the balance. There are financial costs to setting up and maintaining that structure; there are reputational costs; the structure can be a green flag for investors attracted by the higher post-tax returns but it can also be a red flag for investors worried about the sustainability of higher post-tax returns that can be wiped out with a stroke of a legislator’s pen; and it can negatively affect your relationship with Government in the jurisdictions those structures are designed to denude of tax revenues.
What the Commission decision does is add a really important factor to that list.
The assumption you might once have made – that you will get those higher post-tax returns – you now can’t make. You might incur all the costs – all the negatives – and only discover years later that you didn’t get what you were banking on. The mere fact of the decision – irrespective of whether it is successfully appealed against – adds risk. And there will be many cases in which that will tilt the scales against unnatural avoidance.
Third, looked at in the round, the sort of practice imperiled by this decision is bad and so challenging it is good.
If you read the Irish press you’ll see the debate about whether to appeal against the decision couched in purely parochial terms: should we keep the windfall? or should we act to protect the advantages that come from tilting the playing field in our direction?
But if you look beyond those parochial concerns you’ll see that what Ireland has been doing is giving a subsidy to Apple’s shareholders with other people’s money – and keeping a touch for itself.
The subsidy to the shareholders comes in the form of higher post-tax returns than they would otherwise have enjoyed. As the Commission Press Release noted:
In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market.
The ‘other people’s money’ is the taxes that would have been paid elsewhere in the single market – including in the UK – and in the US too if Ireland hadn’t issued the rulings the subject of the complaint.
The ‘touch for itself’ is Ireland’s tiny slice – from 1 per cent falling to 0.005 per cent – of tax on Apple’s European profits together with the economic activity in Ireland associated with diverting those European wide taxable profits to Ireland.
If you look at the question whether to appeal or keep the cash purely through an Irish lens I’m perfectly content to accept there are sensible arguments both ways. But this shouldn’t blind us to the reality that Ireland’s modest benefit are at the expense of its European partners. And that the real winner is Apple which ends up paying materially no tax at all on its European profits. Not in the US, and not in the EU either.
Finally, the EU dimension.
If you agree with the proposition that it’s a good thing for big multinational companies to pay tax on their profits then you should be interested in how this result came about.
It wasn’t Ireland, or Germany, or France, or the UK that delivered it. It was the European Commission. The reality is that the smaller you are, the more difficult it is for you to generate tax receipts. You’re less important a market. And you’re less able to absorb the risks attached to widening your tax base or increasing your tax rates. Or to face down threats of retaliation. On the other hand, the bigger the market you are, the greater the heft you have.
As I argued before the referendum, writing then about State Aid rules, leaving weakens our bargaining position on tax matters. It puts us on the road to tax haven UK. And if you want an NHS, or free education, or decent pensions, or a social safety net, that’s not a good thing.
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Waiting for Godot 
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Reblogged this on Eat see hear Cardiff.
Jolyon,
Thanks for a different and wider perspective to most of yesterday’s reaction to the Apple story.
I’m particularly interested in your observation that “I have to say I’m surprised at the emergent consensus that the Commission’s decision amounts to overreaching.”
I had not got that feeling, more a sense of people not really being able to fully engage with the decision because we didn’t have (still don’t have?) the full detailed analysis of what evidence was obtained, the factual review and then the legal consequences. At the moment there seem unexplained gaps, such as the analysis of who the consumer is actually paying for goods, is there a difference between goods and services, how much profit the EU thinks falls to the USA, and how much (if any) in the countries where the consumers lived.
Personally, I can sympathise with the Irish analysis that says it is impossible to be sure how much money will eventually come its way when the Commission seems unsure how much ought to go to the USA and other countries. Cutting the profits cake in different ways could well produce even higher tax bills than 13bn.
I can also understand why the Irish State felt it had to defend a position it has taken for decades. Apart from the “touch for itself” there were also the wider employment consequences (the EU evidence in 2014 mentioned the Apple advisor in 1990 saying it was the biggest employer in Cork, with 1000 direct employees and 500 sub-contractors) and attractions to other companies. Whether that was a sustainable position is hard to say but it has endured for over 25 years and the EU decision is not really a penalty against Ireland, unless it loses current investment and reduces future FDI.
Economists will be better placed than I am to discuss FDI and Ireland gaining benefits at the expense of its European partners. It’s hard to see how such FDI can be anything other than helping one country at the (inevitable?) expense of another – regardless of the tax take. I doubt it’s possible to spread it evenly across the EU, and I’m sure there are those who might argue it ought to be made outside the EU, like back home in California.
Indeed, with the advances in technology for communications I wonder if Apple could even respond by relocating to a non EU jurisdiction, like Bermuda…
I also think there was no need for the Irish Tax Authority to say anything – the UK has always declined to comment on individual cases (unless the taxpayer gives specific consent). I wonder what it’s role will be in any Appeal against the Commission. Can it maintain its independence of the State and still be the main support for the Irish Government?
Thanks Jolyon. Really interesting. I’ve a more philosophical angle, namely where were all the Apple customers when this was going on? In other words, I’m pretty sure that if Apple had paid the correct amount of tax it would have made a difference to the unit price — I could be wrong of course. What that would have done for revenue, tax and global domination who knows. But perhaps the bigger governance question is why did Apple think it morally acceptable? Or more to the question, who on the board or which of the legal cohort inside or outside thought it a good trick? Only asking.
From the information in the public domain, the Apple case always looked the most vulnerable of the current cases to a successful state aid challenge. There was no overreaching: Ireland seems to have been playing fast and loose with its own rules, via tax rulings, to create a structure to “disappear” the European income of Apple. Such structures are much favoured by US multinationals. At no stage has the Commission challenged the Irish 12.5% corporation tax rate per se.
I don’t agree that leaving the EU sets us on the road to tax haven UK: see my comments on your previous post. Indeed it would not surprise me if the post-Brexit Autumn Statement points in a different direction.
Thanks for the article Jolyon, great analysis and wider context.
One question/observation. In a single market, with imperfect labour movement (de facto) and fixed exchange rates, what choice does a country like Ireland have but to compete on tax? It doesn’t have the work force or infrastructure to compete with (say) Germany on a level playing field. If there were no differences in tax rates, wouldn’t all large companies eventually end up in one spot to benefit from network effects and skilled worker pool?
This is obviously an issue in a single market with no fiscal transfers. But even with a federal system, would a country like Ireland wish to subsist on handouts?
Why isn’t Ireland being fined in addition to, or even instead of, Apple ?
@John
“what choice does a country like Ireland have but to compete on tax?”
The EU has not intervened in Ireland’s tax competition policy, as Jolyon points out. So Ireland can continue to compete on tax so as to attract companies to locate there. In short the EU is not attempting to bar Ireland from competing on tax.
Instead, it seems, the EU has intervened because EU competition law has been breached.
What corporate taxes could possibly be due to the UK beyond what was taxed in VAT, and why would avoiding tax in Ireland mean that tax (were it owed) is somehow lost to the UK?
This nonsense has been a staple of the British press for years. Taxes are not paid on corporate profits in the country of sales (in Apples case some taxes are due but only because they have a retail arm in many countries). Calling this transfer pricing is like saying JK Rowling transfers money to low tax UK to avoid taxes on her much larger American sales. Selling something at a wholesale price isn’t transfer pricing. Being taxed where the IP is isn’t transfer pricing. This is the commission reinventing corporate law.
The other problem with the ruling is that it fails to prove the deal was exclusive. In fact clearly it isn’t, as the law was available to other companies. It’s a retrospective tax grab.
Those are sins of commission, the sins of omission include the EU’s lack of investigation into member countries use of real tax havens (jersey etc.) actual transfer pricing in the banking industry, and real state aid given to the defence, aerospace, and banking industries. The latter was encouraged by the same commission, forcing sovereign nations to use taxpayers money to bail out some, but not all, banks.
No European company, with the exception of some minor investigation into Fiat is under threat, but the continent is rife with state aid, and real tax avoidance.
Two comments on multinationals & tax in Ireland that are worth reading, on Apple & Facebook respectively
http://www.irisheconomy.ie/index.php/2014/09/29/barking-up-the-wrong-apple-tree/
http://economic-incentives.blogspot.ie/2016/07/the-irs-are-investigating-crucial.html
The idea that Ireland has any obligation to collect taxes avoided elsewhere is absurd, and it isn’t going to happen. If the US govt permits companies to avoid tax on profits earned overseas and if transfer pricing of intellectual property is a factor in reducing tax liabilities the solution is to agree new international rules. This won’t happen as long as US election and politicians are bought by corporate money. (See So Much Damn Money by Robert Kaiser; The Best Democracy Money Can Buy by Greg Palast eg).
The UK, with its network of tax havens, is in no position to lecture anyone on tax and transparency. And it seems intent on making its position worse, not better, by copying out of the EU, one of the only institutions ever to have successfully regulated the activities of large multinationals.
If Mrs May is serious about a society that works for everyone she will reform Conservative party funding, ending it’s dependence on the City, rich landlords who make donations that help see off such “red tape” as reform of the UK’s grotesque leasehold property tenure that is RIFE with abuses. The days of the 0.01% buying the rules that suit them must end _everywhere_.
There are many paradoxes in this struggle for power between shareholders & citizens, and they will not be resolved by scapegoating, but by international consensus and solidarity. That is going to be a long term endeavour.
Not mentioned at all in most commentary is the timing and the political context in the US. Has the Commission really thought through — as in done some scenario planning — the possible fallout from its actions in the next 3 months, never mind the longer term? More than a few Europeans, including most Irish people, of course, suspect that the cost to Europe of a Trump presidency would make that of George Bush inconsequential by comparison.
If you want high taxes to pay for the NHS et al, then vote for parties that advocate that. Don’t use Europe to enforce a tax policy and public spending policy undemocratically. This is why I supported Brexit and will support Irexit. There is no opportunity for a low tax, low spend party to ever be able to implement policy while in the EU and it seems, the single market.
“If you want high taxes to pay for the NHS et al, then vote for parties that advocate that.”
Which the rest of Europe has done – to an extent, or at least a slightly greater extent the UK/Irish.
“There is no opportunity for a low tax, low spend party to ever be able to implement policy while in the ”
And the answer to that is that the EU did not stop the Irish from setting the rate of corporation tax to whatever they wanted (including the current low level of 12.5%), what was prohibited was an exception to normal levels of tax granted to particularly corporate arrangements.
> There is no opportunity for a low tax, low spend party to ever be able to implement policy while in the EU and it seems, the single market <
Really? The EU hasn't yet sought to nor does if have a mandate to harmonise taxes. It does have a mandate to ensure fair competition by stopping state aid. Whether it will succeed in its action against Apple remains to be seen but the idea that fiscally conservative party is unelectable inside the EU is not borne out by the facts. Irish tax rates are commonly claimed to be high. They aren't, by the standards of OECD democracies. Nor are UK rates. (Reminder: right wing parties have dominated Irish govt for most of the country's history as an independent country). What all developed countries have in common are high rates of tax avoidance by corporations and the very rich. What's needed is not do much harmonisation of tax levels but of the rules about the ways taxes are minimised, by, e.g., shifting intellectual property to low tax jurisdictions.
The EU has the clout to do that, individual countries don't.
Reminder: 11% of the property in Westminster is owned by British Virgin Island companies whose beneficial ownership is concealed. The tax losses to the UK of this kind of carry on (to say nothing of the use of trusts to avoid inheritance tax) make Apple rather small indeed. UK offshore havens are used to conceal trillions in wealth and London is full of people only too happy to cry "Look. Irish squirrel!".
As I understand it, the tax treatment in Ireland didn’t enable Apple to avoid tax in other EU Member States – that was a function of how it set up its sales operations there. Perhaps this will be an invitation to those countries to take a more robust view if they can re-open the issue.
The other important point is that it is the US tax system that has created the opportunity for Apple and others – which is why these cases have all concerned US MNEs. In order to preserve a headline corporation tax rate (effectively 39%) while permitting its MNEs to have the lower real tax rate they want to be competitive, the US has permitted effective deferral for US tax purposes for its MNEs by relaxing its controlled foreign companies rules. The MNEs have been able to use the same internationally agreed transfer pricing standards that they were once required to follow to maximise the US tax take to move profits instead offshore. It has become largely only the profits that are remitted to the US that are taxed in the US – and as BEPS and other measures move the place of taxation to the consumers’ jurisdiction, those profits will carry a much increased foreign tax credit. In the medium term it is the US tax revenues that will be impacted, not the MNEs’ post tax profits.
That is why the US Treasury is attacking the EU Commission’s actions. Influential politicians are hostile to the IRS over BEPS (and other parts of the broader package such as the CRS). Will the rest of the world proceed with all these measures if the US does not join in?
I’m not sure that’s right actually. By offering a low rate of tax Ireland is causing an EU wide business to establish there rather than in more natural locations across the EU. And the charging of, effectively, a zero rate of tax reflects the huge weakness of Ireland’s bargaining position vis a vis Apple.
Jolyon,
It’s certainly true a low rate was on offer but I suspect other countries might have been tempted (eg Luxembourg) and that an Internet based business has a much wider range of “natural” homes than say manufacturing or services.
I think that there were other non financial reasons. Google was laughed at for saying it valued the Irish labour force but I think this was a true statement. Ireland had a combination of a young, educated, English speaking population, a firm supporter and member of the EU, and historic links to the USA.
I wonder if it actually under priced itself on tax?
US high tech companies do not locate in Ireland principally for tax reasons.
http://www.taxjustice.net/2015/03/12/did-irelands-12-5-percent-corporate-tax-rate-create-the-celtic-tiger/
Naive question –
It seems agreed that it’s the shareholders that we are trying to tax through corporate income taxes. Why don’t we rely on taxing them directly on their dividends and capital gains, and do away with corporate income taxes altogether? Companies don’t consume, only their employees, owners and customers do. The less tax that companies pay, the more their investors will do, once they actually draw their income.
Maybe 0% corporate tax doesn’t actually matter, and the sooner we get to that rate everywhere, the sooner we level the playing field.
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Tax on profits (taxing success) is an idea that has had its day. Environmentally it makes much more sense to tax consumption only.
If corporation taxes are not subject to competition within the EU, and are the same in all member states, why would any company locate in a peripheral state like Ireland? They would all locate at the single most advantageous point – Brussels? Amsterdam? Berlin? Soon find out – but it won’t be Cork or Corfu.
“Why don’t we rely on taxing them directly on their dividends and capital gains, and do away with corporate income taxes altogether?”
I think there are lots of good reasons why we have corporation tax and why ending it (or reducing its rate to zero or near zero) is not a positive move. Although I’d disagree with some of the arguments in this link, or think some ought to be more nuanced, I agree with their overall conclusion, especially its role in preventing personal tax avoidance
http://www.taxjustice.net/2015/03/18/new-report-ten-reasons-to-defend-the-corporate-income-tax/
@r321
Although companies are not natural persons, they do have a separate legal personality. Some of the practical consequences of separate legal personality are:
Companies are able to enter into contracts in their own name (and sue and be sued in their own name)
They may own vehicles. If so, the vehicles will be owned in the company’s name. The company will be paying road tax in its own name.
Companies will pay insurance premium tax on any insurance premiums they have taken out.
Companies pay business rates.
These tax payments and liabilities will be in the company’s name, not the names of employers, shareholders, or customers.
Given companies are separate legal personalities, why should they not pay tax just like natural persons do? Why should companies not pay tax on their earnings (corporation tax), just as natural persons do?
Or are you suggesting companies should not pay business rates, insurance premium tax, and road tax etc as well?
PS. A further consequence of separate legal personality is that companies are protected by the Human Rights Act, which tends to reinforce the point that the distinction between artificial and natural persons is not particularly meaningful in tax and legal matters.
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@theuxbridgegraduate
Thanks, dunce’s hat applied! Interesting that the EU allows tax competition. I wonder if this would continue in a federal system.
Jolyon – in this context, please could you help me with the concept of the ‘stateless company’, to which I’ve seen a few references? I haven’t heard of this before.
Here’s an extract from the EU press release: sorry for shouting, but I’ve had to capitalise the relevant few words, as I can’t otherwise highlight them:
“The two tax rulings issued by Ireland concerned the internal allocation of these profits within Apple Sales International (rather than the wider set-up of Apple’s sales operations in Europe). Specifically, they endorsed a split of the profits for tax purposes in Ireland: Under the agreed method, most profits were internally allocated away from Ireland to a “head office” within Apple Sales International. This “head office” WAS NOT BASED IN ANY COUNTRY and did not have any employees or own premises. Its activities consisted solely of occasional board meetings. Only a fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the “head office”, where they remained untaxed.
EU has clearly missed a trick here. I want to see it issuing APNs at the start of its investigations. Then when it delivers it’s verdict years later, if the state aid rules have been breached it can turn the money over to the country in question. 1 million per cent penalties for failed appeals obviously and total discretion to pick a number for the APN itself. EU should be asking serious questions of itself for not following the UK lead on this. #softonbreachingstataidrulesandhinderingcompetionandsoftonthecauseofbreachingstateaidrulesandhinderingcompetitiondownwiththissortofthing
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