Corporations are more and more in the habit of telling governments that they are the boss of them. If corporations get their way, "trade" agreements like the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will formalize their dominance. But not quite yet.
The European Union (EU) just told Apple that it is the boss of them, and not the other way around. The EU has ruled that Apple's tax-avoidance scheme with Ireland's government is illegal, and Apple owes Ireland $14.5 billion — plus interest. The EU decided that Ireland's tax deal with Apple, based on Apple demanding a tax break to "bring jobs" to Ireland instead of somewhere else, constitutes "state aid" to the company. The EU pointed out that other, smaller companies are hurt when giant corporations like Apple get special tax deals.
In other words, the EU has ruled that it is illegal for an EU government to give in to corporate extortion, because giving in and paying the extorting company a tax break ransom means the government is providing "state aid."
In other other words, where last week Apple's CEO told the US government that the giant corporations are the boss of government, this week the EU told Apple that, actually, government is still the boss of the giant corporations.
The story, as reported in the Guardian, "Apple ordered to pay up to €13bn after EU rules Ireland broke state aid laws":
Apple has been ordered to pay up to €13bn (£11bn) in back taxes to Ireland after the European commission ruled that deals between Apple and the Irish tax authorities amounted to illegal state aid.
The commission said Ireland’s tax arrangements with Apple between 1991 and 2015 had allowed the US company to attribute sales to a “head office” that existed on paper only and could not have generated such profits.
The result was that Apple avoided tax on almost all profits from sales of its products across the EU’s single market by booking the profits in Ireland rather than the country in which the product was sold. The figure of €13bn is the equivalent of the annual budget for the Irish health service and campaigners are also calling for the windfall to be invested in public housing.
The taxable profits of Apple Sales International and Apple Operations Europe did not correspond to economic reality, the commission said. Apple paid an effective tax rate of 1% in 2003 on profits of Apple Sales International. The rate dropped to 0.005% in 2014.
Implications Of This Apple Tax Ruling
Corporations have learned they can go to governments and demand special treatment, or else they will "take the jobs somewhere else." They go to countries and tell them their taxes are "too high," and they will just pack up and move somewhere else if they don't get lower taxes. Inside the US, many companies extort tax breaks from communities and states, threatening to take the jobs somewhere else if they don' get tax breaks or tax cuts.
The EU just ruled that giving in to this and enabling such extortion constitutes "state aid" to those companies. This gives such companies an advantage over other (often smaller and local) companies that do not extort and pay their fair share.
David Meyer, writing at Forbes in "Here's What You Need To Know About Apple's $14.5bn EU Tax Bill," noted the following:
“In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple’s decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.”
Meyer writes about the significance of this,"In other words, the Commission is inviting other countries to see what was booked in Ireland that should have been booked in their own countries, and try to get it back."
Speaking of "other countries" that Apple has dodged paying taxes to, using this Irish tax scam that has been ruled illegal. The US government gives multinational corporations a special "tax deferral" tax break reward for shifting profits out of the US into non-US subsidiaries. The US "parent" pays no taxes until the subsidiary transfers ("repatriates") profits "back home." Because of this "deferral" loophole in our tax laws, companies come up with all kinds of schemes to move profits to non-US subsidiaries. Some actually move production and/or profit centers, while others just appear to do so.
Apple, for example, pretends that an Irish "subsidiary" owns their "intellectual property" IP) -- patents, copyrights, designs, etc. This "subsidiary" charges Apple a "license fee" for this IP in all the products Apple sells, so much of the profits are made by the Irish subsidiary instead of Apple.
Other companies move production out of the US to subsidiaries — or use subsidiaries as intermediaries between the producing country and the US. These subsidiaries charge the US parent a large amount for goods or services entering the US so they make the profit, not the US company.
If the logic of the EU ruling were applied to the US case, this "tax deferral" is really illegal state aid to these multinational corporations, allowing them to escape taxes that smaller US companies have to pay.
So this ruling is a big, big deal. How big? Carried to the logical conclusion, it means that US corporations could finally have to pay around $700 billion in taxes owed on more than $2.2 trillion they are holding in non-US subsidiaries, plus another $90-100 billion each year.
Irish, US Governments Defend Apple?
This will take time to play out. Ireland's government is fighting the ruling, saying they could lose the ability to "attract jobs" by offering such "state aid" tax breaks to giant multinational corporations. The Obama administration is also fighting the ruling, while companies are arguing that this is and "anti-business" and "political" and will fight this tooth and nail.
The WSJ, in "EU’s Apple Tax Hit: Ire In Ireland, Confusion Elsewhere," notes that the Irish government is against this ruling bringing them 13 billion Euros:
You might think the Irish government would be grateful for extra funds worth up to €13 billion ($14.5 billion)—a figure equivalent to about 30% of its total tax receipts last year. This could be seen as a chance to recoup some of the estimated €43 billion controversially spent on bailing out banks in the wake of the 2008 financial crisis.
But Irish Finance Minister Michael Noonan “disagrees profoundly” with the Commission. He evidently wants to maintain the jobs and income tax associated with his country’s reputation as a tax-efficient base for multinationals. If his position is at odds with that of the Irish people in such a high-profile case, it says little for Irish democracy.
Ireland will appeal the ruling. Advisers say it could take five years before any final decision emerges.
If Ireland doesn’t benefit from this ruling, who does? Not Washington, which has argued that the Commission’s approach “undermines the international tax system.”
The NY Times, in "Apple Must Pay Billions for Tax Breaks in Ireland, E.U. Orders," notes that the US government is similarly unhappy about the ruling, the logic of which could lead to around $700 billion in US tax revenue:
... American officials have warned that the commission is overstepping its power given that taxes are typically left to national governments to oversee and that European officials should not retroactively issue penalties in past tax rulings. They also emphasized that such cases undermine continuing efforts to overhaul global policies and create measures to curtail tax avoidance.
Apparently, Ireland's and many of our own public officials have learned to be very aware of their "post-government career opportunities." (If you know what I mean.)
Statements -- "Shame On Apple"
Statement by Former Senator Carl Levin:
The royalties Apple collects for its overseas sales of products designed and developed in the U.S. should be taxed in the U.S. But Apple has avoided the billions of dollars of taxes it owes the U.S. by transferring its intellectual property to itself in Ireland. Apple also negotiated a special tax rate for itself of less than 1% in Ireland. When Apple used those tax avoidance schemes, it is understandable that Europe would try to go after them. The IRS has failed to stake a claim for U.S. taxes on those revenues for a decade or more. It has been passive and so Europe attempts to fill the vacuum. Shame on Apple for dodging U.S. taxes. Shame on the IRS for failing to challenge Apple’s tax avoidance.
Americans for Tax Fairness (ATF) Executive Director Frank Clemente's statement:
... “Apple has more than $230 billion in profits stashed offshore on which it has paid less than a 5% tax rate. Most of these profits are in tax havens, mainly Ireland, which is why Apple could owe the American people more than $60 billion in taxes.
... “Apple is using some of the same transfer pricing tools to rip off U.S. taxpayers that it is using in Germany, France and elsewhere in Europe. Countries around the world need to come together to halt Apple’s massive offshore shell game.
“Congress needs to close the deferral tax loophole that creates the opportunities for this massive profit shifting by Apple and dozens of other U.S. multinationals. Over the next 10 years, the deferral tax loophole will allow corporations to avoid paying about $1.3 trillion in U.S. taxes they owe on profits held offshore until those profits are repatriated to the U.S. If the loophole is closed, corporations would have no incentive to transfer profits offshore and stash them in tax havens.
“While it’s at it, Congress needs to collect the up to $700 billion in back taxes that Apple and other multinational corporations owe on the $2.4 trillion in profits now offshore, most of which are stashed in tax havens. We do not need any sweetheart deals negotiated between Congress and corporate lobbyists to cut the amount of money these tax-dodging corporations owe the American people.”
Clark Gascoigne, the deputy director of the Financial Accountability & Corporate Transparency (FACT) Coalition, issued the following statement:
American taxpayers lose more than any other country to abusive tax dodging by multinational companies—upwards of $130 billion in 2015. Beyond draining much-needed revenue from the public, this rigs the playing field against small- and medium-sized business who can’t afford the high-priced lawyers and accountants that Apple can.
The largest companies like Apple already have a competitive advantage over smaller businesses—they have nearly unlimited access to capital and can buy in bulk, reducing their operating costs.
While small and medium-sized businesses in this country pay the full rate of 35%, we shouldn’t further tilt the playing field against them by letting multinationals like Apple get away with paying less than a tenth of one percent in tax.
Europe understands this—they’re forcing Apple to pay the proper taxes due on their Irish-booked profits. Instead of lobbying against competition and innovation, Congress and the Treasury Department should be following Europe’s lead and working to level the playing field for American businesses.