Apple Tax — The US needs to learn to love the EU
5 reasons why US politicians were wrong to lash out against the EU’s landmark fine against Apple
Charles Schumer and Paul Ryan, politicians from across Washington’s deeply divided political class, united to attack the European Union after they slapped Apple with a a record €13bn fine for tax avoidance on Tuesday.
Washington’s politicians may think that sabre rattling in defence of the misdeeds of their global corporations plays well at home, but it is no way to build a global tax system that works for all of us.
This post seeks to cut though some of the bluster from politicians seeking to appeal to nationalist sentiment in the wake of the EU’s ruling.
1. The EU was not fining Apple for avoiding US tax
“This is a cheap money grab by the European Commission, targeting US businesses and the US tax base,” Senator Charles Schumer
The idea that the EU is trying to get its hands on taxes due to the US is simply wrong. Senator Schumer, who has long followed the finance industry, should know better.
Apple pays taxes on profits made in the US. It is also liable to pay taxes on profits made in other countries to the governments in those countries. If a company owned by Apple in Italy makes a profit in Italy, it should pay Italian corporation tax. Simple.
However, for years, Apple has been shifting profits from its European subsidiaries to tax havens in the Caribbean via Ireland. This deprives those European governments of tax revenue. It can do this because it struck a deal with the Irish government. Ireland would charge Apple a tiny rate of tax and allow the company to use their country to rip off the rest of the European Union. Ireland sees this as good for them because they get some jobs and some revenue in Ireland as a result, but they do so at the expense of everybody else.
This scheme has deprived European nations of tax due to them, but hasn’t deprived the United States of anything.
As this press release from the Tax Justice Network demonstrates, the fine of €13bn is broadly in line with estimates of how much tax the company has been avoiding in European Countries. The European Union has also clearly stated that if the US feels they have apportioned profits wrongly that were actually made in the US, then their door is open for further discussion with US authorities.
€13bn sounds like a lot but Apple is a hugely profitable company that has been engaging in tax avoidance on a vast scale.
2. The US has no automatic right to tax European profits
The one exception to this is that had the Europeans not acted, then it would have been open to the US to collect more corporation tax from Apple.
Under US tax rules, companies based in the United States are taxed on profits made around the world.
That does not mean that taxes on European profits are not taxable by European countries. It simply means that after those profits are brought back to the US (after the European governments have taken their share) the US government holds that it has a right to some of those profits after having applied a discount for any taxes paid abroad.
By way of example, say Apple makes £100m profit in the UK. The UK applies corporation tax of 17% which leaves £83m. Apple brings that £83m home. The US has a corporate tax rate of 40% on the global profits of the company. Apple’s tax bill is £40m in the US, but it can deduct £17m which has already been paid to a foreign government. The US government therefore gets to keep £23m. In effect this means that the US company pays the same rate of taxation of their profits at home and abroad, regardless of the tax rate they pay abroad.
Clearly, if US companies rip off European countries and bring that money back to the US, then the US gets a benefit as it keeps more of the taxes on foreign profits. But this isn’t anything that the US has a right to, it only comes about if Europeans choose not to tax the profits of US multinationals made in Europe.
But all of those profits that Apple made in Europe were never brought home. Instead they were left in a financial no man’s land in the Caribbean. Apple and many other companies were playing a double game, ripping off both the US and Europe and keeping everything for themselves.
The scale of this practice by US companies is huge. Current estimates are that that US companies hold more than $1 TRILLION in cash in the Caribbean. What makes this particularly galling is that US taxpayers are paying interest on the cash held offshore.
What to do about this giant offshore cash pile has been a subject of lots of debate in the US but little action. The EU has taken their share of it, but that doesn’t mean the US can’t take theirs. The problem is that US policy makers have been unable to determine how to do that. That is not the EU’s problem however.
3. The European Union has a right to do this
[The action by the commission is] in direct violation of many European countries’ treaty obligations. This is precisely the kind of unpredictable and heavy-handed taxation that kills jobs and opportunity.
Paul Ryan, Speaker of the US House of Representatives
European countries decided long ago that they would agree to live by a set of rules. One of them is that businesses operating in the Union should be subject to free and fair competition. The obligation to ensure free and fair competition falls on the member states. If they take action which prevents companies from competing freely then the European Union can intervene to ensure that the country levels the playing field.
Clearly, if one country, for whatever reason, decides that it will support one company by providing them with benefits not available to others, then that will give that company a competitive advantage over others.
This is what Ireland has been doing with Apple. Instead of providing a general tax benefit to companies operating in Ireland, it struck a specific deal with Apple which allowed it to reduce its taxes across all of its European operations. Apple effectively had its own bespoke tax rate in Ireland and that is what the European Commission has found to be unlawful.
4. This is good for America
For many years politicians in the US have been highly critical of US companies who have left the US to take advantage of the low tax rates offered abroad. This practice is called a corporate inversion. It happens when a US company buys another company in a low tax jurisdiction like Ireland and then moves their headquarters there to take advantage of their tax system.
The incentive for companies to do this is not just about tax rates. It is also about the opportunity to avoid taxes by taking advantage of tax rules which allow the company to extract profits from other countries (as Ireland has been allowing Apple to do in Europe). It is also about the willingness of some governments to create bespoke arrangements for companies.
The European Commission has just made both of those things much more difficult and Europe a much less attractive destination for US corporations wanting to avoid US taxation. The US government should be thanking them, not complaining.
5. But this is still an imperfect solution
The transatlantic political friction this has caused has largely come about because the world has not come to an agreement about how to apportion the profits and taxes due from global corporations between countries. This policy lacuna has created a world where tax havens flourish, and that is bad for everybody.
The OECD tried early this year to solve the problem with the BEPS programme. This might have curbed some of the more absurd abuses of the global tax system, however it was seen by many as a failure because lobbying by the US and UK undermined global agreement on many key issues.
What the Apple tax case has demonstrated is that BEPS was not the end of the story. There is an urgent need for global policy makers to reapply their minds to creating a fair and equitable system of taxing global companies.
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