Take a big bite of Apple

The FT reports today that the US administration is very upset with the EU, specifically with the Commission, for its attempts to get Apple to cough up billions of euros in unpaid taxes. The US Treasury is cited as being particularly worried that the Apple case “sets an undesirable precedent that could lead to other tax authorities . . . [seeking] large and punitive retroactive recoveries from both US and EU companies”.

As a character in a beloved BBC sit-com of my youth was fond of saying, dead-pan: Oh dear. What a pity. Never mind.

Without delving too deeply into the specifics of the case, a number of crucial issues are raised by this controversy, not just in the narrow area of taxation but for the European integeration process more generally.

We are seeing, thankfully but belatedly, an intensifying debate on the distribution of the gains from globalisation. The ability of internationally active and thus “mobile” companies to play off national tax jurisdictions against one another and to use transfer pricing and other tricks to concentrate book profits in low-tax jurisdictions is one of the most pernicious effects of globalisation as it has been implemented over the past three or four decades. Whole armies of corporate (tax) lawyers optimise financial flows so as to minimise tax liabilities. The largest companies reach tailor-made deals, primarily with smaller economies, The resultant “race to the bottom” is an important reason why capital (and higher-skilled , also mobile wage-earners) have reaped most if not all the gains, while most workers have been left out or seen declines in living standards. The tax burden is shifted onto “immobile” factors, especially labour and the ability of national governments to finance compensatory measures (welfare benefits, active labour market policies) to offset the losses caused to some by globalisation has been constrained.

The fact (according to the FT) that Apple, one of the world’s wealthiest companies, pays a (sic) 2% rate of corporation tax thanks to its deal with Ireland is a particularly egregious example of where this process has led us. The Lux leaks scandal or the fact that Ireland’s recorded GDP increased in 2015 by an incredible 26%, largely as an indirect result of various “tax efficient” schemes (long here, short here), give a taste of the scale of the issue.

Against this background it is highly welcome that the EU Commission is tackling the problem, targeting a number of well-known companies including US giants like Starbucks and Amazon, but also Italy’s Fiat. It is a long overdue step. (See for instance the call here, p 65. Probably a not insignificant factor in increasing the pressure to act is the fact that Jean-Claude Juncker, Commission President, was heavily implicated in the Lux Leaks scandal. Tant mieux!).

Now, one might imagine that the American public authorities would seek a common cause with their EU counterparts. After all the profits that Apple declares in Ireland (on which it pays 2%) could otherwise have been booked in the US, and subject to (substantially higher rates of) corporation tax there. However, the harsh reaction by the US Treasury indicates that this is viewed, rather, as a European assault on an American national champion. The two most important arguments the American side has put forward – and a response to them – are as follows:

The first is that the EU is moving the proverbial goalposts in tax determination and then retrospectively demanding huge revenues in “unpaid” tax that is not, in fact due under the existing legislation in force. The US claims that a “new approach” has been adopted. I expect a robust defence. Much has come to light in recent years and months about intransparent sweetheart tax deals. Where such deals are reached it is reasonable to see them as a form of “state aid” that is prohibited by existing EU law as it clearly distorts competition.It is not retrospective action to demand that such taxes be paid (with interest).

The second is that the Commission, specifically the Competition DG responsible for overseeing State aid, is a “non-tax agency” that is interfering in international tax coordination issues, undermining processes such as the OECD transfer pricing guidelines and bilateral trade treaties. It notes that, in contrast, “the tax authorities of the United States and EU Member States generally
have entire departments whose sole responsibility is to examine transfer pricing issues”. It is a little hard to suppress a smile here. Experience suggests that it is precisely the problem that, as discussed above, in the context of mobile capital and complex rules, national tax authorities are likely to have huge incentives to collude with international companies to cut deals that benefit the home country at the expense of all others, in doing so unleashing a pernicious race to the bottom. Thus it is no coincidence at all that it is a supranational authority, concerned with a level competitive playing field, rather than tax issues per se, that is now leading the fight to rein in harmful tax competition.  It reminds me of the fact that Al Capone was not ultimately arraigned for his direct criminal doings but for non-payment of tax!

The EU is often criticised for being a facilitator of market opening and liberalisation, while at the same time preventing “market correcting” interventions by Member States and being unable to enforce EU-wide rules and norms. (See the voluminous literature in the positive-vs-negative-integration tradition, eg. here). There is more than a little truth in this critique, although I consider it exaggerated. In this context the State aid rules tend to have a bad press, not least in “progressive” circles. However, Apple and its related cases show that EU State aid rules can be a powerful force preventing races to the bottom that are otherwise extremely hard to stop, unless one retreats into some form of autarkic system. Of course this is not enough, and the EU must, through various means, increase its capacity to enact market-correcting mechanisms and reduce the extent to which it undermines national norms (provided these do no have negative spillovers on other countries). There are many ideas out there (a recent contribution is here) and developing them is an important medium-run task for Europe’s progressive economists, political scientists and legal experts.

In the short term the EU Commission needs to stand its ground. And take a big bite of Apple.