Earlier this month the European Commission ruled that Ireland had essentially conspired to deny itself enormous tax revenues by providing preferential tax treatment to Apple. It’s important to point out that, technically, the Commission took this action against the Irish government, not Apple. But that’s no comfort to Apple, since the ruling requires Apple to pay $14.5 billion in back taxes and penalties.
Why does the EU insist that Ireland is owed $14.5 billion in back taxes when Ireland itself disagrees? Does the EU just love Ireland more than Ireland loves itself?
No, what the EU actually believes is that Ireland’s tax laws deprived other EU member states of tax revenue, and those states are using the power of the EU bureaucracy to gang up on Ireland. The EU’s actions are best understood as an attention-grabbing strategy for its long-term plan to centrally coordinate tax policy to maximize tax revenue from multinational companies through its “base erosion profit shifting” (BEPS) proposal.
Essentially, the EU wants member states to coordinate rather than compete when it comes to tax policy, and promises that, through coordination of policy and concentration of political power, countries can be assured of maximum tax revenue.
In other words, the EU’s tax grab is not just about Apple—it’s about ensnaring all multinational companies in a scheme to extract significantly higher taxes.
That’s why Apple is only the beginning. As proof, just yesterday Margrethe Vestager, the EU Competition Commissioner in charge, said that more such actions against multinationals are likely.
This emphasis on cooperation and coordination at the expense of competition is one of the EU’s major problems, and is at least one reason why Brexit became such a compelling issue in the UK, and may appeal to other EU countries.
It is fundamentally a matter of sovereignty. “Irish tax policy is and ought to be the sole business of the Irish government,” says Cillian Fleming of the Adam Smith Institute. The tension for Ireland, and other EU countries, is that the EU is a sovereignty-defeating enterprise. Its member nations must either limit the power of the EU bureaucracy or decide whether they, too, should exit.
Importantly, US failure on tax reform has contributed to this problem. Our sky-high, uncompetitive corporate tax rate and counterproductive international tax regime has given not only Apple but scores of other US companies no incentive to repatriate their profits and put them to work in the US—making them an attractive target for foreign countries. Congress’ understanding of its own complicity in this problem is so poor that, in 2013, Senate Democrats piled on, accused Apple of hiding US profits overseas in order to avoid US taxes.
The US government has an obligation to defend its domestic companies against this tax grab by the EU, and to reform our international and corporate tax regime to encourage companies to be legally sited in the US, to bring their profits home, and to invest their profits in US-based R&D and employment. Until we do, that apple is just too tempting for the EU and others to resist.