Last week, the European Commission claimed that tax rulings issued by Ireland in 1991 and 2007 effectively granted Apple preferential treatment, which amounted to state aid. It ordered Ireland to recover up to €13 billion (plus interest) from the Silicon Valley tech giant.
But while journalists, analysts, and social-justice crusaders quickly began counting Ireland’s blessings, the country’s government was rightly outraged. The Commission’s decision is an attempt to forbid smaller jurisdictions from using more attractive tax regimes to compete for foreign investment with larger rivals. Ireland has confirmed it will appeal the decision.
Ireland’s reaction shows that the country’s government understands the stakes involved. Irish Finance Minister Michael Noonan immediately declared that Dublin would appeal the Commission’s decision “to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation.”
Over the years, Ireland has built a reputation for low corporate taxes, which helped place the country on the map for the global business community and overcome its limited scale and peripheral location.
The strategy paid off: According to the American Chamber of Commerce in Ireland, more than 700 U.S. companies, largely drawn in by the lowest corporate tax rate in Western Europe (12.5 percent), have established branches in the country, creating 140,000 jobs.
Apple, in particular, played a groundbreaking role in securing Ireland’s international recognition. As CEO Tim Cook reminded the world in an open letter, the company opened its first European office in 1980 in Cork, a region with high unemployment and low investment. That office started with 60 workers. Thirty-six years later, Apple employs 6,000 people in the country. And there can be no doubting that Ireland’s low tax rate helped provide Apple a reason for its continued investment in the country.
The Minister for Finance, Michael Noonan (right) and the Minister for Public Expenditure and Reform, Paschal Donohoe speak the media in Dublin on September 2, 2016 | Paul Faith/AFP via Getty Images
Tax rulings are and should be made by national governments. And indeed, under EU law, it is up to individual states to strike the right balance between corporate taxation and privately-generated economic development. This explains why the Commission has used competition law, rather than fiscal policy, to deal with taxation issues.
In a complex economy, tax agreements can help streamline the relationship between tax authorities and companies, which benefits both parties and prevents costly and wasteful litigation. That is to say, these agreements enhance legal certainty — something that is severely undermined when a third party steps in to question their validity up to 10 years later. In doing just that, however, the Commission has not only blurred the boundaries of its mandate, it has contradicted the rationale for its own competition policy.
The Commission appears to have forgotten about the consumers it is supposed to be helping. It is hard to contend that higher taxes would have prompted Apple to charge cheaper prices or produce better, newer products. Nor can it be said that users were deprived of alternative choices. Apple was also not the only beneficiary of such taxation arrangements — a point that weakens the argument that the company benefited unfairly from preferential treatment.
If neither Irish taxpayers nor European consumers are celebrating the decision, who is? According to Apple, “the Commission’s case is not about how much Apple pays in taxes, it’s about which government collects the money.” And indeed, the ruling gives worrying insight into the Commission’s thinking: “The amount of unpaid taxes to be recovered by the Irish authorities,” it reads, “would be reduced if other countries were to require Apple to pay more taxes […] in view of the information revealed through the Commission’s investigation.”
Apple is the latest, and perhaps the most visible, target in a streak of cases that include Amazon and Starbucks. But while it is tempting to rejoice when powerful corporations are hit by governments, the truth is that Apple is by no means the Commission’s biggest victim. The iPhone manufacturer has some $232 billion in reserve; it will barely blink if it has to pay the fine. But countries like Ireland — and consumers around the world — will be paying the cost of this misguided decision for decades to come.
Massimiliano Trovato is a research fellow with Istituto Bruno Leoni, a Milan-based free market think tank. Alberto Mingardi is the director general of Istituto Bruno Leoni and an adjunct scholar at the Cato Institute.