The tax battle between Apple and the European Commission can seem abstract, especially if you’ve actually read the EC competition arm’s explanation of why it is demanding Apple pay $14.5 billion of back taxes.
How exactly did Apple create a company with no employees, no office and no country of registry? Why did Ireland rule not once, but twice, that such a setup was legal? Why doesn’t Ireland want to collect the money the European Commission says it should have received in taxes up to 2014?
But beyond these particular questions, there’s a much bigger and more important dynamic playing out. Margrethe Vestager, the EC’s combative competition commissioner who handed down the ruling on Tuesday, is demonstrating there’s only one way to roll back multinational companies’ growing exploitation of hugely complex tax avoidance schemes, dubbed “the dark side of globalization” by Nobel prize-winning economist Joseph Stiglitz. And that is for the really big political blocs to act in concert.
United, they can stand against the financial engineering that shifts billions of dollars out of taxation’s reach. If they’re divided against each other, tax rates and receipts will fall, and government deficits will grow, prompting more austerity even as the big companies grow perplexingly richer.
Of course that’s not how the big companies want to see it. Apple’s chief executive Tim Cook released an open letter on Tuesday, complaining that Apple is “the largest taxpayer in Ireland, the largest taxpayer in the United States, and the largest taxpayer in the world.” Ireland’s tax authorities ruled not once but twice that Apple’s evanescent company, untied to any location, was legal. The EC, Cook says, “has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.” Apple and the Irish government say they will appeal the ruling.
The trouble is that when companies can use financial engineering to pick and choose precisely where they’re taxed, it creates a financial black hole in two ways. First, you can’t see quite where the money has gone once it enters such a setup; finding out what Apple does with its revenues is a challenge for anyone who is not well-versed in the language and methods of tax arrangements, with revenues appearing to flirt back and forth between near-identical corporate entities. And second, while in the beginning it is small islands such as Bermuda and the Channel Islands that compete to be the tax haven of choice, over time the financial gravity pulls in larger countries such as Ireland.
That’s why so many American multinationals cherry-pick their company “locations” to minimize their tax in Europe. They’re richer than any individual will ever be, and so countries fight each other for their custom. It’s an inverse of the “Dutch auction,” where two people pay to bid for something — say, a dollar — but specify that both the loser and winner must pay. In this case of large corporations, isolated countries vie to lower their corporate tax rates. When one country lowers its rate, it prompts another one to soon follow, to the detriment of pretty much everyone else.
A perfect example came immediately after the Brexit vote, when Britain’s then-Chancellor George Osborne said he would cut corporation tax by 5 percentage points (from 20% to 15%) to prove to investors that the United Kingdom was still “open for business.” It looked more as though he was worried that once outside the EU trading bloc, the United Kingdom would need sweeteners for multinationals, such as lowered tax rates.
But do we need companies to pay more taxes? When US presidential candidates bemoan crumbling infrastructure (paid for by, yes, taxes) and the combination of unemployment and pensions for an aging population is stretching governments’ finances more than ever, then yes we do. The amounts potentially available are staggering. A brief history of tax havens in 2009 reckoned that individuals use them to avoid between $800 billion and $1 trillion in tax every year. You could probably multiply that many times over for corporations. That would repave a lot of old roads, build many new hospitals and schools, and expand a variety of social programs to help those struggling to pay their bills.
However, Ireland’s government is refusing to collect the tax that Vestager says Apple owes it, even while it has record levels of homelessness. Publicly, it is satisfied it applied tax laws correctly, and didn’t favor Apple over other companies (the definition of “state aid” under which Vestager found against Apple and Ireland). But it also looks like a government worried about losing the financial edge that made it attractive to companies including Google, Facebook, Microsoft, Twitter and Uber, all of which base their European operations there.
Clearly, it’s difficult to get countries to act in everyone’s long-term interests when their own short-term ones are threatened. Yet it would be in everyone’s long-term interests if Ireland’s government and Tim Cook relented on this one.
Charles Arthur has been a technology and science journalist for more than 20 years, including working as technology editor for UK national newspapers The Independent and The Guardian. The views expressed in this commentary are his own.