The European Union is a highly flawed creature that could fall apart under the weight of Brexit, the refugee crisis and the rise of anti-euro parties. But it remains a success story and a world leader in one area – competition law and trust busting.
The EU's competition commissioners have rarely run for cover when confronted by big corporate beasts and the newest commissioner, Margrethe Vestager, Denmark's former deputy prime minister, is tougher than most of her predecessors. As if to prove the point, her desk in Brussels is, according to the Financial Times, decorated with a ceramic hand with its middle finger raised, a somewhat ruder variation of the sign that sat on the presidential desk of Harry S. Truman: "The Buck Stops Here."
On Tuesday, as expected, Ms. Vestager, outlined her case against Apple, the iPhone maker that she alleged benefited from dubious Irish tax benefits. What was not expected was the size of the tax bill – up to €13-billion ($19-billion), plus interest – that the European Commission (the EU's executive arm) insists must be handed back to the Irish state. Even for a company of Apple's size and cash reserves, that's not pocket change. "Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other business over many years," she said.
The charges, and the size of the tax bill, immediately triggered a transatlantic firestorm. Apple itself insisted it had done nothing illegal, that it was not cut any special deals, and vowed to appeal. "We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them more than we've already paid," Apple chief executive officer Tim Cook said in letter addressed to the "Apple community" in Europe.
Fearful that the tax ruling could scare away big-name tech companies – Apple alone has almost 6,000 employees in Ireland – the Irish government said it would appeal, too. For its part, the U.S. government accused the European Commission of "actions [that] could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU."
Never mind that the U.S. tax authorities themselves are well-known tax rottweilers routinely accused of international overreach, of that they created a system that encourages big American companies to park profits overseas, where they are taxed at lower rates. Or hardly taxed at all if they set up tax-avoidance entities in Ireland, which could bill itself as a cold-water version of the Cayman Islands or British Virgin Islands.
None of the threats and arguments is likely to intimidate Ms. Vestager. Mr. Cook had been encouraging her for a long time to back down. She didn't; Apple may be her biggest target, but it wasn't her only big target.
The European Commission, through Ms. Vestager's office, found that the tax rulings granted to Apple by Ireland in 1991, then again in 2007, saved the company fortunes by allowing it to pay an effective tax rate on its European profits of 0.005 per cent to 1 per cent. The commission also said that the sweetheart deals were not available to Apple's competitors. The scheme, it argued, amounted to illegal state aid under EU rules.
There is no doubt that exceedingly low tax rates in Ireland and other countries have encouraged Apple and other big-name American companies to funnel gushers of profits overseas. As of June, Apple reported cash, cash equivalents and marketable securities of $231.5-billion (U.S.), of which almost 93 per cent was held in foreign subsidiaries.
Ms. Vestager is 48, has an economics degree from the University of Copenhagen and became the EU's competition czar in 2014. On her own, in little Denmark, she would not be taken seriously as a competition regulator. But backed by the mighty EU and its 28 member states, which constitute the world's biggest trading bloc, she has emerged as a formidable force.
She has focused on state aid to companies and price fixing. She charged Google (now Alphabet) and Russia's Gazprom, the world's biggest natural gas company, with antitrust violations. She imposed big fines on a cartel of Japanese car-parts makers and is looking into the tax affairs of Starbucks, Amazon and Fiat, the Italian car maker. Over the summer, she slapped Europe's largest truck makers with a €2.9-billion fine for illegal price fixing.
It's far too early for Ms. Vestager to declare victory in the Apple case. The appeal could take years and result in a victory for Apple and Ireland or a negotiated settlement that might amount to a slap on the wrist. Or Apple and Ireland could get whacked.
But even if Apple gets the better of her, she can declare victory in the wider sense. Her cases have already warned big multinational companies that the notoriously generous, and perhaps illegal, tax-haven statuses available in some countries is coming to an end. The EU's middle class, which has long complained that it is being taxed out of existence, while wealthy business people and companies get an easy ride, will cheer.
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What is the EC alleging?
The European Union's (EU) executive arm has ruled that Ireland made a deal with Apple that had no basis in tax law. The Commission said this involved cutting Apple's tax bill to almost zero, in return for Apple building factories in Ireland.
The EC says that is unfair and that Apple must pay Ireland the tax it would have paid if normal tax rules were applied.
Why does the EU care if Ireland does not tax Apple?
The EU believes sweetheart tax deals help divert investment and jobs away from countries where it would normally go. Also, the tens of billions of dollars in profits which Apple enjoys tax free in Ireland each year are generated almost exclusively outside Ireland. Hence, Ireland's deal deprives other EU countries of tax revenue they might otherwise earn.
Is Ireland about to land a windfall?
Not anytime soon. Ireland's finance minister said he plans to appeal the ruling in Europe's highest court. That will likely take two years or more and Apple may make legal challenges and is also likely to be able to fight any demands from Ireland's Revenue Commissioners in Irish courts, tax lawyers say.
Might Apple settle?
It can certainly afford to, with more than $200-billion in cash or readily marketable securities. But since $13-billion is not a major sum for Apple, investors won't be too worried about the uncertainty it faces and consequently it won't be under pressure from shareholders to settle. The company has been aggressive in defended its tax practices, with CEO Tim Cook testifying to Congress on the issue.
What does the U.S. government think?
The U.S. Treasury and lawmakers have criticised the EU approach of using competition law to challenge tax rulings. They say the approach is targeting U.S companies, deviates from accepted international practice and threatens U.S. investment in Europe.
A U.S. Treasury Department White Paper last week said "it continues to consider potential responses should the Commission continue its present course." U.S law allows the President to double taxes on citizens and companies from countries which apply "discriminatory or extraterritorial taxes" on U.S. firms.
If the EC prevails, does this means that multinationals won't be able to avoid tax in the EU?
No. The Commission's case against Ireland was helped by its ability to secure access to documents in which Irish officials were unusually frank about the agreement they made with Apple.
EU states wanting to secure investment by helping companies avoid tax will in future be more careful about leaving a paper trail which could suggest a tax ruling is a sweetheart deal.
The EU's principal legal adviser on tax, Richard Lyal, wrote in a legal journal last year that "It is likely to be only in extreme cases that one can with confidence say that a particular decision reflects a misapplication of the chosen method."
Without evidence of an "extreme" deviance from accepted norms, the Commission would likely be reluctant to initiate a tax case.
Reuters
Eric Reguly