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Apple case points up even more serious issues

Posted on February 24, 2017

Tom Healy, Director NERI
Tom Healy, Director NERI

Which Government, when offered the chance and opportunity to take in €13 billion in additional tax revenues declined the offer and, instead commenced a lengthy and potentially costly legal appeal to contest this?  You guessed.  With €13billion a society broken and fractured by years of lopsided fiscal austerity could do a lot of things like:

  • Establish a European class early childhood care system.
  • Abolish homelessness (yes it can be done and has been done).
  • Establish a single-tier public and free-at-the-point-of entry European National Health Service.
  • Invest in a European class water infrastructure to update the creaking 19th century piping system feeding into our major cities.

And more besides…

It is not suggested, here, that the Government did not want €13 billion extra in revenue (think of all the tax cuts that many would like to see implemented!). Rather, such is the passion, conviction and vulnerability of Consensus Ireland in relation to the matter of corporate tax in general and the infamous Apple case, in particular, that not only the Government of the day but a broad swathe of political and public opinion is firmly on the side of contesting the European Commission on this – much to the amazement and consternation of many including senior European politicians. The view taken by many, in Ireland, is that potentially huge sums of money by way of a windfall receipts may be sacrificed on the altar of Irish corporate tax policy and practice. That this is so points to a deep unease in Irish enterprise policy. Why do we place so much reliance on tax policy when we are likely to be fighting a losing battle as the new realities of Trump, Brexit and tax competition spread everywhere? Not to be outdone, a leading politician in Northern Ireland has recently advocated a 10% corporate tax in Northern Ireland to undercut a 12.5% proposed by others for the whole island of Ireland. Are there any takers on the southern side of the border for a lower than 10% rate? Why not 0%?  The consistent argument of the new Right since the 1980s is that tax cuts pay for themselves by stimulating more economic activity, effort and enterprise (a claim largely unsubstantiated by the empirical evidence).

However, two commendations are in order:

  1. To the Irish Government for recently convening a “High-level Multi-stakeholder Dialogue on the theme of Corporate Tax: Fairness, Responsibility and Leadership”
  2. To the European Commission and Margrethe Westager, European Commissioner, on Competition and her hard-working and courageous team of experts and officials in pursuing the matter of State Aid.

There ends the commendations!

The elaborate, complex and immoral practice of tax avoidance by large multinational companies is well known and documented. The use of elaborate and confusing arguments by the defenders of such tax avoidance to defend the indefensible is also well known and documented. The matter which concerns Irish policy makers and the general public is not whether this is moral or not (clearly it is immoral because such practices deprive citizens in many parts of the globe vital resources to meet vital public service needs and social investment). What concerns public interest, here, is whether or not the relevant Irish public authorities were complicit, under European law, in facilitating unfavourable tax treatment. The issue is not about tax competition per se. Rather, through special arrangements, it is claimed, the Irish Government was complicit in favouring a particular firm over others. This would be against European competition law. In case it might be thought that the European Commission is out to ‘get Ireland’ because of ulterior motivations stemming from certain large Member State envy or Ireland general approach on corporate tax it must be pointed out that the Commission has targeted other egregious cases of tax avoiding behaviour implicating countries such as Luxembourg, Belgium and the Netherlands (see Fair Competition and a level playing field).  A potentially dangerous development would be the invasion of British Eurosceptic tabloid claims about Franco-German hegemony over little nations. If there is at least one positive aspect of the European Union it lies in its capacity to coordinate at international level laws and rules about these matters. In the absence of a multilateral and multinational approach the multinational will continue to run rings around national governments and tax authorities taking advantage of every loophole and difference in tax provision to avoid paying tax.

Three cheers for the European Union on the issue of corporate tax, state aid under the guise of selective tax treatment and coordinated action to harmonise the tax base. The final decision of the European Commission (which is extremely difficult to find on the web is here).

BEPS?

But what about the Base Erosion and Profit Shifting (BEPS) initiative of the Organisation for Economic Cooperation and Development (OECD)? Is not this an adequate approach and one in which most countries including Ireland are bought into? BEPS is not without its critics. Some argue that it does not go far enough, quickly enough and evenly.  But, it is a start.  The stated aim of BEPS is to allocate the corporate tax base in a fair and transparent way to properly reflect the location of a given economic activity. However, BEPS had no legal binding. This is where a body such as the EU has the potential to make a difference (especially as the UK is almost surely exiting).

Reputation counts

A critical factor in future enterprise policy, in Ireland, is the issue of reputation. Whatever the arguments (and it will be argued that the problem is not Ireland’s but that of the US and other countries who have not reformed their tax laws) it is clear that Ireland Inc. has taken a battering on the issue of tax. This is not good for political good will and long-term strategic alliances. The point should not be missed especially as much will be on the negotiating table over the next 24 months ahead of Brexit2019.

A cynic might comment that if only the public authorities, here, were as passionate and diligent about resisting EU ‘encroachments’ on our fiscal and banking policy in 2008-2013 as it is now about facing down the EU commission on something that appears morally indefensible (whatever the legal, technical and political arguments) then we would be in a better position. The real game is not what worked in the past. It is the need to develop a strong, export-oriented, high-productivity, high-skill and resilient domestic enterprise sector. Notwithstanding spectacular successes in a number of sectors and firms we are still left with what I call the weak link in Irish capitalism – the dominance of low-productivity enterprises with a insufficient capacity to capture world market niches in areas such as food, energy and business services. Turning this situation around and adopting a plan B enterprise strategy to see us through the first half of this century will take years of work, preparation, capacity-building, mind-set adapting and changes in the way enterprises are run. This is the boring year-in year out stuff and is much less newsworthy than the latest big numbers scandal or upcoming marginal budgetary changes within some notional fiscal space that could evaporate as quickly as GDP bounces back or forward with one company reshoring its intellectual property. An example of much needed forward strategic enterprise thinking is contained, for example, in the recent NERI Working Paper published by my colleague, Dr Tom McDonnell [Innovative Competence, How does the Republic of Ireland fare and does it Matter?]

The official line of defence on Apple continues to be that ‘it has nothing to do with us’.  In brief, the claim is that the Irish branches of Apple Sales International (ASI) and Apple Operations Europe (AOE) merely carried out routine functions and all important decisions were made by Apple in the USA.  Taxes were levied by the Irish authorities on profits attributable to ASI and AOE and not profits that were ‘stateless’ or properly attributable to Apple activities in the US.

The European Commission line is summarised as follows:

 …the tax rulings issued by Ireland endorsed an artificial allocation of Apple Sales International and Apple Operations Europe's sales profits to their "head offices", where they were not taxed. As a result, the tax rulings enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules.

As the Taoiseach said on 1st February concerning Apple:

It is a subject of a court process at European level and will go on for a number of years.

Digital Revolutionaries