Vestager Lights a Fire Under Corporate Tax Avoidance
EU competition chief’s tax ruling in Apple-Ireland case is expected to reverberate more quickly than international talks under way
Like Alexander the Great whose sword cut the Gordian knot, Margrethe Vestager has sliced through what until now has appeared to be an intractable problem: multinational companies earning billions of dollars in Europe and paying tiny sums in taxes to European governments.
The European Union’s competition chief ordered Ireland to recoup $14.5 billion in taxes from Apple Inc., a sum that is so large that it will light a fire under multinationals’ tax planning. The effects will reverberate far more quickly than the slow-moving international talks under way to reduce aggressive corporate tax avoidance.
For many in the U.S., Ms. Vestager’s decision looks like a mugging. But let’s look at it from her point of view. Big multinational companies like Apple shift profits, perfectly legally, to low-tax or no-tax jurisdictions then spirit the money out of the EU, helped by sophisticated arbitrage between differing national tax regimes.
These companies thus operate in the EU’s common market, while enjoying advantages local competitors don’t—and don’t pay much into public coffers.
The low tax rates are politically sensitive in hard times like the present. If aggressive tax avoidance isn’t tackled as multinationals take over a bigger share of economic activity, other taxpayers will face bigger tax bills or public services will need to be cut.
But Apple Chief Executive Tim Cook and the U.S. Treasury have protested the ruling, and they have a point too. For a quarter-century, Apple relied on agreements from Irish authorities that all of a sudden are adjudged to have provided it with billions of dollars in what the EU has now ruled to be illegal state aid.
Retroactivity is part and parcel of all state-aid cases—which traditionally focus on illegal government subsidies. But this time, Apple and the U.S. Treasury say, retroactivity has been accompanied by novel technical definitions—for example, relating to what constitute “arm’s length” transactions between subsidiaries of the same company—from Ms. Vestager’s department that the company couldn’t have known about ahead of time.
The EU ruling has also unloaded a political dilemma on the Irish government. After emerging from a painful debt crisis, Dublin now faces a decision of whether to recoup the money, equivalent to about 7% of its national debt, or join Apple in appealing against the decision.
The Irish calculation has been to facilitate corporate tax planning in return for jobs. Apple says it employs nearly 6,000 people across Ireland. Now, the European Commission is adding to the pressure it had already put on Ireland to alter its tax system—which has resulted in changes now being phased in.
It has also invited other EU governments to examine whether they, rather than the Irish, should have received tax payments from Apple, ensuring further government scrutiny that may make aggressive tax planning in Europe more difficult to sustain.
Mr. Cook condemned the ruling in an interview with the Irish Independent newspaper as “total political crap.” The Apple CEO told Irish public broadcaster RTÉ that the ruling was “coming from a political place” and was based on “no fact or law.”
Ms. Vestager retorted Thursday that she wasn’t being political, and that she’s just doing her job as outlined by the EU treaties. She said those treaties empower her to ensure companies aren’t getting an unfair handout from governments.
Mr. Cook isn’t the only one to claim Ms. Vestager has gone too far. One of her predecessors, Neelie Kroes, said Thursday in an opinion article for the Guardian that, “You cannot change the rules of the game through ad hoc state aid enforcement, and then seek retroactive recovery for unpaid taxes.” Ms. Kroes said it would harm competition, growth and tax-income in Europe and raise serious questions about legal certainty and the rule of law.
It’s better to shape a fair tax system for the future, Ms. Kroes said.
So far it has proved impossible to get 28 governments to agree to do that, which is why, in the face of a policy vacuum, Ms. Vestager seems to have decided to act. Even if the European Court of Justice eventually finds that she has overreached, her decision may well have the desired effect on corporate tax planning.
Ulrich Soltész, Brussels-based partner at law firm Gleiss Lutz, says competition policy and state-aid rules are sometimes used to implement political objectives.
In the EU, there is no tax harmonization and there is no direct means of dealing with unhealthy tax competition that leads to a race to the bottom. “But these political objectives, what are they? They are a fair, equal, level playing-field. I wouldn’t say this is completely illegitimate,” he said.
For all of Mr. Cook’s protests, the world’s largest company by market capitalization is never going to be able to avoid politics.