Bruised Apple

Bruised Apple-Economist Magazine

The European Commission’s huge penalty against Apple opens up a new front in the war on tax avoidance

Apple, with its abundance of intangible assets, which are easier to play around with, has been one of the cleverest at exploiting the gaps. A bill of €13 billion ($14.5 billion) plus interest, the amount that the European Commission says Ireland must recover from the firm for tax avoidance, would pay for all the country’s health-care budget this year and barely dent Apple’s $230 billion cash mountain.

But in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant, at a time when big economies are meant to be co-ordinating their anti-avoidance rules. Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible.

The commission concluded that Irish rulings in 1991 and 2007 artificially lowered the tax Apple was due to pay, and that although the firm did not break any law, this arrangement was in breach of EU state-aid rules preventing member states from offering preferential treatment to particular firms. The spat centres on two Irish-registered subsidiaries that hold the right to use Apple’s intellectual property to make and sell its products outside the Americas. The commission argues that a dubious profit-allocation deal allowed most of their profits to be moved to a “head office” that existed only on paper and was tax-resident in no country—allowing Apple to shrink its tax rate in Europe to well below 1%.

The ruling is part of a broader assault on aggressive tax avoidance, led by Europe. This began several years ago, when post-crisis austerity produced calls for greater tax fairness. The commission is looking into questionable structures set up by several other (mostly American) firms, including Starbucks and McDonald’s—though these involve much smaller sums than Apple. The focus is on arrangements that allow the firms to minimise taxes paid in Europe on sales in the region, while simultaneously using deferral provisions in the American tax code to keep the profits offshore indefinitely—thereby also shielding them from a tax hit back home, where they would be taxed at a hefty 35% (minus any payments made in Europe) if repatriated.

Some see a bright side. Money paid by Apple and other American firms to European governments will not go into tax coffers back home; the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely. The commission has lobbed a grenade; a tax war may result.

Read more from The Economist magazine on this subject here and here.