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EU needs a country to claim Apple’s taxes

Tax ruling: European Union competition commissioner Margrethe Vestager. The EU says Ireland has given unfair tax benefits to Apple and must recover the unpaid back taxes (Photograph by Virginia Mayo/AP)

By ordering Apple to pay $14.5 billion (13 billion euros) in back taxes to Ireland, the European Union has created a somewhat farcical situation. Ireland doesn’t want the money, which amounts to more than four months’ tax revenue for the small nation, and the US, where the iPhone maker is headquartered, is on the tax-avoidant company’s side.

European Competition Commissioner Margrethe Vestager deserves praise, even if her move is underappreciated by its beneficiaries — and even if she made it for the wrong reasons, trying to establish EU control in an area where it should have none: taxation.

According to the European Commission ruling, most of the back taxes are owed by a company called Apple Sales International, which sold Apple products outside the Americas. Ireland’s Revenue Commission allowed it to allocate the vast majority of its profit not to its Irish operation but to a “head office” that had no employees and conducted no meaningful activities.

In that way, Apple exploited an inconsistency between Irish and US tax laws. In Ireland, a company’s domicile was determined by where it operated and was managed. In the US, it was the place of incorporation that mattered. So Apple Sales International’s “head office”, incorporated in Ireland but run from the US, ended up paying no taxes anywhere.

This ought to be a major irritant to both Ireland and the US. Instead, both are more concerned about the EU interference.

The US suspects anti-Americanism, arguing that Vestager’s actions (including far smaller rulings against Fiat and Starbucks) break with the EU’s own practice, stretching the bloc’s state aid rules to areas where they weren’t previously applied. In a white paper published last week, the US Treasury Department also wrote: “There is the possibility that any repayments ordered by the Commission will be considered foreign income taxes that are creditable against US taxes owed by the companies in the United States.

“If so, the companies’ US tax liability would be reduced dollar for dollar by these recoveries when their offshore earnings are repatriated or treated as repatriated as part of possible US tax reform.”

That’s a bizarre argument: there is no tax reform going on in the US because of political gridlock. It’s unclear whether the US will ever claim any taxes on Apple’s ten-year-long overseas tax-free stretch, which has allowed the company to amass its stunning $231.5 billion cash pile.

Why should other countries with more valid current claims on the money wait for US legislators to act? The EU has provided a path for the US to recover some of the money. Apple Sales International had a cost-sharing agreement with its US-based parent, Apple Inc, according to which it sent part of its profits to the US to cover research and development costs. Vestager said Tuesday that if the US reviewed this agreement and decided that a bigger part of the profits should have been repatriated, that would reduce Ireland’s tax bill. Vestager also said other countries could look at the materials from the EU investigation and claim some of Apple’s back taxes, if they determine that certain profits shouldn’t have been booked in Ireland.

That part of the EU ruling is particularly bothersome to the Irish government, which has claimed all along that it wasn’t owed any more money from Apple.

“While requiring Ireland to recover the tax sums, the Commission is also acknowledging that the sums may in fact be taxable in other jurisdictions,” finance minister Michael Noonan said in a statement on Tuesday. Ireland will now recover the money from Apple as required by the Commission, but it will be held in escrow while Ireland appeals the ruling.

Ireland is not really concerned about losing foreign investment because of the ruling: Last year, it revamped its tax system, closing the most notorious loopholes, which caused the statistical anomaly of a 26.3 per cent increase in gross domestic product. Major multinationals, including Apple, aren’t going to leave: Ireland’s statutory corporate tax rate, at 12.5 per cent, is still one of the lowest in the developed world. It’s a matter of principle for the island nation, though. “Ireland does not do deals with taxpayers,” Noonan said.

Ireland’s national pride and its reputation for being business-friendly, US fears of unfair treatment at the hands of Europeans, even the legal arguments about what constitutes state aid and whether the tax loophole benefited Apple exclusively, or other companies, too — this is background noise that obscures the real issue. What’s at stake is ensuring that huge multinational corporations are taxed. The essence of Vestager’s case against Apple is that the company wasn’t taxed on tens of billions of dollars of profit earned outside the US — and considered this situation normal. “If my effective tax rate was 0.05 per cent going down to 0.005 per cent, I’d want to take a second look at my tax bill,” Vestager said.

It doesn’t make sense that Apple’s business outside the Americas was essentially tax-free. Vestager forces Apple to put billions of dollars in escrow for governments to claim. That’s more than anyone else has been able to do about tax avoidance by multinationals, particularly tech and pharma giants, whose business depends on intangible intellectual property.

That the national governments are not prepared to tackle the issue is their problem, not Vestager’s: she’s just setting a precedent that will make many companies “take a second look” at their tax-avoidance measures. They may turn out to be too good to fly, and if some corporations realise that, it’ll be enough to assure the competition commissioner’s place in history.

As for Apple, it can afford to pay. It should have done so when it made the profits.

Leonid Bershidsky, a Bloomberg View contributor, is a Berlin-based writer.