Apple Might Destroy the EU

| Devil's Advocate

It looks like the European Commission (EC) will rule against Apple and Ireland’s tax arrangement. If the European Union (EU) bullies Ireland (via the EC or other proxy)—and basically rules that Ireland doesn’t have the sovereign right to set its own tax rates—there is some chance it could be a wedge issue that pushes Ireland to decide to leave the European Union.

Could Apple Destroy the EU?

So while I’m far from an expert on EU tax laws, I’ve talked with some of my more learned EU friends to get a sense of what is going on. The rough issue is that the EC doesn’t like how low Ireland set its tax rates. These low tax rates for tech companies have resulted in quite an economic boom for Ireland, making it the “Celtic Tiger” of the region. Needless to say, Ireland isn’t likely to be pleased with the EC telling it to change its tax rates, which may interfere with Ireland’s relatively good economic performance.

Subsidies

The EU position, again in rough form, seems to be that member states agree not to provide anti-competitive subsidies to companies or industries, and as a member, Ireland has agreed to that. But this is where things get a bit murky in what constitutes a “subsidy.” Some in Ireland might say any negative tax rate, (i.e., not only does the company/industry not pay taxes, but it gets money from the government) is a clear subsidy.

The EU and others will say if a tax rate on a company or industry is dramatically lower than other countries, even though it still taxes that company (e.g., say Apple gets a 2% tax rate when other countries in the EU charge a 25% tax rate), well then, that’s a subsidy.

I think if I were in Ireland, I would have the view, as long as the tax rate is not below 0%, it has the right to set whatever tax rate it wants. After all, what’s more of a sovereign act than a country setting its own tax rate? And some are already charging that the EC is abusing its own rules by finding against Apple and Ireland on this issue.

Political Philosophy

Beyond the mire of EC/EU tax/law issues, there is a more understandable issue that may act to anger Ireland, namely: That other countries in the EU cannot run their governments as efficiently with as low a tax rate should not be the burden of Ireland. This gets into Ayn Randian types of philosophical issues.

If government A can run itself perfectly fine at a 2% tax rate, and government B is less efficient and cannot pay its bills with a 25% rate–why should government A be punished and brought down to operate like that of the lowest common denominator as a way to prop up government B’s inefficiencies?

If Ireland is close to the composition of Northern Ireland, which voted to remain in the EU by a slight 55.8% majority in the Brexit referendum, Ireland may well be pushed enough by this to decide that such onerous EU policy encroaches too far on its sovereignty.

And if Ireland leaves the EU, there is a higher chance that more EU countries will domino, and with that, Apple may be the catalyst to bring about the collapse of EU.

20 Comments Add a comment

  1. This article should have ended after “I’m far from an expert on EU tax laws”

    Since Ireland was broke in the bank crisis it is a bit optimistic to speculate that they run efficient on 2% corporate tax. There is alway leeway what a state/region/town can do to be attractive to business. Getting a 10,5% reduction is quite nice but there is only so much before a reduction becomes a subsidy. Taking Irlands financial issues into account it does seem that 2% are not enough and therefore it is deemed a illegal subsidy.
    The ruling is not based on comparison to other EU member states. That makes paragraph 4 wrong.

    Since the conclusion of the thought is based on incorrect assumptions (first 55,8% zu vote out of EU – since corrected, that Ireland can run on 2%, that the EC ruling is based on comparing member states, etc) you should just take this article down.

    On the other hand: let’s wait until Trump becomes next president. Common US corporate tax is about 35% (on average, local adjustments are possible) and from the strong words that I read he wants to have US companies pay taxes in the US. Would that then mean Apple to leave the US? 12,5% in Ireland seem more appealing that 35%. I know there is quit some wrong in this.

  2. At the risk of piling on I would question the conclusion that this might drive Ireland out of the EU. Ireland has been acting as an EU tax haven. If they were to leave they would lose access to the EU market. The tax haven deals they used to get a number of companies to base in Ireland would be null because profits earned in the EU could no longer be listed in Ireland. The 2% would be meaningless because companies would also have to pay EU tax. This would be devastation for the Irish economy. I just don’t see it happening.

  3. John Kheit

    To Louis Q. The ruling isn’t relevant to the reasoning behind it, which is a push by the EU. As noted in this cited article. http://www.telegraph.co.uk/business/2016/08/28/brussels-mustnt-achieve-tax-reform-by-using-state-aid-rules-crea/

    “However, its reasoning is flawed. Firstly, the arm’s length principle is not a rule of international law and no member state is obliged to implement it in national law. Indeed, some countries, Ireland among them, have not implemented it.

    To counter this, the European Commission is now claiming the concept has its roots in EU law and the principle applies irrespective of whether it exists in domestic legislation.

    The Commission’s actions threaten to distort the delicate balance between EU state aid powers and member states’ fiscal sovereignty. It creates ambiguity and undermines confidence in the legal system. What’s more, attempting to apply rules after the fact amounts to harmonisation through the back door, and is dangerous for Europe.”

    In other words, the real reason behind the push is the the difference in rates among countries, and the commission in essence is trying to harmonize things as between states. Certainly you may feel that the EC is acting above board, but at least some others do not.

  4. John Kheit

    As to Geoduck, that is indeed an interesting possibility. Clearly it didn’t stop Brexit. However, if Brussels takes away Ireland’s ability to set a lower rate to start with, then that itself reduces the allure of Ireland, which one may argue, is exactly what the EU would want. It would send companies that like Ireland for its cheapness to other countries in Europe. That may not sit well with Ireland. To be sure, it’s quite a speculation.

  5. Ireland CAN set a lower corporate tax rate. Where did you read that the low tax rate was a problem for the EC? The problem ist, that Apple essentially got a tax break, which in the ruling was categorized as a subsidy, which is forbidden under EU laws. Whay should Apple essentialle be exempted of taxes and other companies, working in the same street/city/country, be subject to full taxation? So, the problem is not having low taxes, it’s that fair competition is not possible when company A(pple) pays way less taxes that company B. Sure, those tax breaks were the icing on the cake (the already low taxes) to lure Apple and other companies into Ireland, but the EC’s ruling is in favor of fair competition. Actually in 2014 Apple paid 0.005% (no joke) taxes in Ireland. How is company B supposed to compete against that? Ireland will not leave the EU, because the mechanisms allowing these breaks have already terminated in 2015, so no new “special deals” can be made. The author states that “basically rules that Ireland doesn’t have the sovereign right to set its own tax rates”. This is completely wrong. The low tax rate of 12,5% was not the problem. Ireland can still lower that IF this applies for every corporation taxed in Ireland. The sovereign right to set the tax rate is not the point nor under discussion.

  6. John Kheit

    The technical argument from the EC is that Apple got a sweetheart deal in Ireland (which Ireland says is available to other companies that are large multinational companies, down the street–some argue that the rate should be the same for all companies, but again, others argue that it’s within the purview of a sovereign state to set up different tiers of rates and as long as the tier isn’t to a company of 1, then it’s a rate the government has a sovereign right to set). But the motivation behind this push, as argued by some like in the the article cited in the piece, is that the real motivation is to harmonize EU states.

    http://www.telegraph.co.uk/business/2016/08/28/brussels-mustnt-achieve-tax-reform-by-using-state-aid-rules-crea/

    “However, its reasoning is flawed. Firstly, the arm’s length principle is not a rule of international law and no member state is obliged to implement it in national law. Indeed, some countries, Ireland among them, have not implemented it.

    To counter this, the European Commission is now claiming the concept has its roots in EU law and the principle applies irrespective of whether it exists in domestic legislation.

    The Commission’s actions threaten to distort the delicate balance between EU state aid powers and member states’ fiscal sovereignty. It creates ambiguity and undermines confidence in the legal system. What’s more, attempting to apply rules after the fact amounts to harmonisation through the back door, and is dangerous for Europe.”

  7. John:

    If government A can run itself perfectly fine at a 2% tax rate, and government B is less efficient and cannot pay its bills with a 25% rate–why should government A be punished and brought down to operate like that of the lowest common denominator as a way to prop up government B’s inefficiencies?

    In typical Yank fashion, you’ve demonstrated a fundamental misunderstanding of the nuances of the European Union and its Commission. The EC is not trying bring government A’s inefficiencies in line with government B’s inefficiencies, they’re trying to standardise the inefficiencies across the EU. Crikey, man. Get it right. Once inefficiency achieves equilibrium across the Union, nothing will move. Ever. Brilliant, right?

    In fact, rumour has it that the EU have petitioned the IOC (that would be the International Olympic Committee) to enter a new event into the 2020 Olympics, the Darwinian Sprint, in which contestants race to see who can be the first to become extinct, with extra points awarded for perversely stupid creativity (you won’t see that in gymnastics, extra-curricular swim team perhaps).

    With today’s monumentally heavy-handed ruling by the EC, stipulating that Ireland must collect €13bn from Apple, despite premonitory warnings from economists, the US and Ireland governments, and Apple – the latter three of whom have immediately protested the ruling – the EC led EU should be an early favourite to take gold in the Darwin foot race.

    Indeed, the UK, ever in search of that silver lining for the Brexit, are already throwing hints that London is open for business, and whilst not having as low a tax rate as Ireland’s, are nonetheless an attractive option relative to the EU.

    And if all of this works, it will prove, yet again, that to become extinct, one doesn’t need some giant rock from outer space, just some bloody-minded grey matter between the ears.

  8. John Kheit

    Well apparently the Telegraph misunderstood as well then.

    http://www.telegraph.co.uk/business/2016/08/28/brussels-mustnt-achieve-tax-reform-by-using-state-aid-rules-crea/

    “However, its reasoning is flawed. Firstly, the arm’s length principle is not a rule of international law and no member state is obliged to implement it in national law. Indeed, some countries, Ireland among them, have not implemented it.

    To counter this, the European Commission is now claiming the concept has its roots in EU law and the principle applies irrespective of whether it exists in domestic legislation.

    The Commission’s actions threaten to distort the delicate balance between EU state aid powers and member states’ fiscal sovereignty. It creates ambiguity and undermines confidence in the legal system. What’s more, attempting to apply rules after the fact amounts to harmonisation through the back door, and is dangerous for Europe.”

  9. @John:

    Indeed, I’d say that the Telegraph (and you) got it just right.

    This behaviour, which has precipitated a challenge not only from Apple, but protest from a member state, represents but the latest existential threat to the European Union, which has been bedevilled by allegations of not only over-reach but corruption.

    The EC, however, seems determined to rescue defeat from the jaws of victory.

  10. I know little about the EU, but after Britain’s complaints about EU policies, and then Brexit, my intuition wondered about over-reach by the EC. Then it asks if such EC tactics may (secretly) intend to break up the EU.

  11. Apple grossed $NZ732M and paid $NZ9M in taxes. That’s 1.2%. The corporate tax rate here is 28%. There’s no way that Apple can break the EU. But it’s not doing Ireland, the EU, the US nor this country any favours. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11607279

    If Apple pays all the taxes that the law allows, then the laws need to be changed. It’s moving its money around the world so that it pays virtually no tax anywhere. Fie on you Apple (and Facebook and Google and ExxonMobil and all the rest).

  12. John Kheit

    @Laurie. Many would argue if the government set up its laws wrong, the people and corporations shouldn’t have to pay for that error (particularly retroactively). I’m sure if the laws were changed and Apple had to comply with new laws that raised their rates they’d likely comply without a fuss.

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