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The European Commission this week ordered Apple Inc. to pay €13-billion ($19-billion) in taxes to the Irish government.

Simon Dawson/Bloomberg

For U.S. multinational corporations, an inglorious era is finally coming to an end. The fashionable global strategy of offshoring almost every business process, from manufacturing to finance, in order to minimize costs and avoid taxes is about to be slowly unravelled.

It will be a troublesome unstitching of complex corporate webs but it is necessary, and not just because the European Commission this week ordered Apple Inc. to pay €13-billion ($19-billion) in taxes to the Irish government. Multinational piracy must end and the privateering, offshore and mobile head offices towed into dry dock because they are becoming redundant.

The globalized, disaggregated industrial model was first about chasing sales in new consumer markets; then it was about chasing lower-cost manufacturing in cheap-labour economies; and finally it was about shifting profits into low-tax jurisdictions. During the 1990s, China became the United States' preferred manufacturing location, but it has been defeated by its own success and by demographics. The labour feast has turned to famine, wages are soaring and costs are ballooning as China invests expensively in new, foreign technology.

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Digital technology is at long last changing the cost structure of manufacturing; the price of an hour's unskilled labour is no longer the critical factor in locating a manufacturing centre. Robotics, telemetry and 3-D printing are making it possible to move production closer to consumption and, more important, it may move closer to head office – that is to say the brains, creativity and central mind of the enterprise.

This is key to the tax puzzle that is the modern U.S. multinational corporation. When the European Commission embarked on investigating the weird phenomenon of Apple's colossal European sales revenue but paltry tax payments, it knew it was hunting for that elusive thing, the profit centre. In this case, one might call it the pirate's treasure trove.

It is a basic principle of taxation, endorsed by the OECD's tax reform project (which is supported by the U.S. government), that profit should be taxed where the value is created. The odd thing about Apple's Irish tax arrangements is that sales made in Apple stores all across Europe were deemed to have been made by an Apple subsidiary in Ireland. Meanwhile, the Irish subsidiary bought Apple products for onward sale and paid royalties to Apple in the United States for use of intellectual property. Ireland has a corporate tax rate of 12.5 per cent, low enough to make the deemed Irish sales location very advantageous compared with much higher corporate tax rates in Britain, France or Germany, not to mention the United States, where the corporate rate is 35 per cent.

But even that was not good enough; according to the European Commission, Ireland agreed with Apple that the profit from selling Apple products through the Irish subsidiary would be deemed to have been made through a "head office" that "was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings." As a result, the Commission reckons that Apple paid a tax rate of less than 1 per cent on its European profit for a decade until 2014.

Curiously, the Irish government is furious, rather than delighted at the prospect of a monster tax windfall. Its anger makes sense, however if you see it as the Caribbean island of Tortuga, which in the 17th century issued letters of marque to English and French buccaneers, legitimizing their raiding expeditions.

Piracy was legal in the 17th century and the governors of the Caribbean islands profited from the activities of the buccaneers. Likewise, there is no moral turpitude implied in Apple's tax arrangements, which contravened no tax law, and Apple has said it will challenge the commission's ruling that the Irish government's agreement with Apple was in breach of EU rules on state aid.

The big issue for Apple is not Ireland, nor even the $13-billion bill, but the end of an era for companies such as Apple and their tortuous efforts to avoid the claims of national jurisdiction which are now bearing down on the tech company and on Ireland and on the United States.

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The threat to the global offshore business model is a threat to the American multinational business model, and it is a huge embarrassment to Democratic lawmakers in Washington who courted Apple and its West Coast corporate brethren. The Washington lobby mills were huffing and puffing this week about the European Commission's "cheap money grab," but they know full well that the mud will fly in Congress if the United States fails to secure its fair share of the hundreds of billions of dollars in multinational treasure trove currently hiding in havens offshore. Indeed, the European Commission held out that promise this week, suggesting that Ireland's tax recovery would be minimized if "other countries were to require Apple to pay more tax on profits."

The writing is now on the wall; the business model is broken and if it is not rewritten in Congress, it will be rewritten by Chinese labour costs or Japanese robots. We don't need these rotten ships skulking offshore: better to bring them in before they sink.

Carl Mortished is a Canadian financial journalist based in London.

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