An unholy tax saga: Apple and the European Commission

A black, apple-shaped balloon with the figure 13 billion painted on it
The European Commission wants Ireland to recover this amount in euros in taxes from Apple for the years 2003-2014, plus interest (source: dpa)

“The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid.”

Thus spake the commission. It wants Ireland to recover this amount in taxes from Apple for the years 2003-2014, plus interest. Both Apple and the government of Ireland are contesting the ruling. European Competition Commissioner Margrethe Vestager explained the commission’s position as follows:

“Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.”

Dubious charge

As Ireland’s practices could not be challenged by the EU on tax law grounds, a competition framework has been used. There is, however, a problem with such an approach: Apple’s accumulation of profit in Ireland has not distorted its pricing policies. Therefore, it has not affected the company’s competitive position in the market.

It is the convoluted tax rules that lead companies to adopt complicated tax optimization solutions

Moreover, it is a fiduciary duty of the executives of companies, especially of CEOs and CFOs, to optimize taxes paid by the companies. Apple’s tax arrangement in Ireland was not a secret. If the company and the Irish government stretched rules, it is irritating that the European Commission did not take action for at least 10 years – the deal has been known since 2003. Any practice, not just in business, that is public knowledge and goes on unchallenged for a long time will be considered as acceptable.

The commission not only stands on shaky legal ground on the issue. Disturbingly, it has resorted to blatantly populist rhetoric to justify its action against a profitable company. European Commission President Jean-Claude Juncker told the European Parliament that the funds would have been better used for building roads and hospitals in Ireland than in being in Apple’s account. This shows that the commission’s motive was simply a money grab, and the reference to competition rules a mere disguise.

Optimization is legal

At the moment, a lot of discussion is going on in Europe and in the United States on multinational companies’ tax optimization practices. Much of this talk focuses on alleged ethical issues and is divorced from legal facts. Tax optimization, which is legal, is often confused with illegal tax evasion. In fact, the best way of preventing the latter is to simplify tax systems in Europe and in the U.S. Tax laws have become too complex and contradictory. They drastically undermine the legal security of companies and individuals. The Apple case highlights the problem: it is the convoluted tax rules that lead companies to adopt complicated tax optimization solutions and, frequently, to make suboptimal business decisions.

In the Apple case, the commission’s ruling builds distrust in legal security in Europe.

There is another concern as well. Even though the European Commission and the U.S. Department of Justice are not exclusively punishing foreign companies in their respective areas of jurisdiction, the impression is growing that tax and competition rules are also being used as weapons in trade conflicts. One hopes that this is not the case, but the arbitrary application of laws on both sides of the Atlantic feeds the perception. As sound business and trade are built on trust, this perception is not helpful.

Unfortunately, Apple has not been the first victim of this abusive practice and probably it will not be the last. The shortsighted policy damages the economy and international trade.

At the risk of being repetitive, I insist: simplifying tax laws, making the system easy and internally consistent would go a long way toward resolving the tax avoidance problem. A streamlined tax law could also cut operating costs on the part of government, businesses and individual citizens.

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