The European Commission issued a formal decision on August
30, 2016 that the state of Ireland “recoup roughly €13 billion ($14.5 billion)
of unpaid taxes accumulated over more than a decade by Apple, Inc.”[1]
The decision “shows companies could be on the hook for past behavior and
potentially be handed big bills for allegedly unpaid back taxes.”[2]
E.U. law “forbid companies from gaining advantages over competitors because of
government help.”[3]
This applies both the federal government and the state governments, so the law
could be better stated as, “No state government shall help companies gain
advantages over their competitors.” Presumably Ireland’s government made the
offer of help, rather than Apple getting that government to comply with the
company’s wishes. If so, the state government rather than the company should be
held responsible. Put another way, if Apple’s board and management considered
the Irish offer to be legitimate at the time, Apple should not be held to pay
the back taxes; rather, the state government should pay a penalty to the
Commission.
In the wake of the decision, Tim Cook, CEO of Apple, wrote, “Apple
follows the law and we pay all the taxes we owe.”[4]
In other words, the company took the Irish offer as legal and thus paid only
the taxes owed as per Ireland’s position. To be sure, the arrangement was sweet
for the company. According to the Commission, Ireland offered Apple tax
arrangements in 1991 and 2007 allowing the company “to pay annual tax rates of
between 0.005% and 1% on its European profits for over a decade to 2014, by
designating only a tiny portion of its profit as taxable in Ireland.”[5]
Ireland allowed the company to allocate profit at an Irish-registered unit
called Apple Sales International, which purchased Apple goods from its outside
manufacturers and sold them at a markup outside North and South America. In
2011, the unit brought in €16 billion in profit, and allocated under €50
million of it to Ireland where it was subject to taxation. The rest was
allocated to a “head office” registered in Ireland and thus outside of U.S.
jurisdiction.[6] The
tax benefit is clearly unfair prime facie, to the U.S., and to other foreign
companies doing business in the E.U. It should be noted, however, that the U.S.
tax system encouraged “companies to find as low a foreign tax rate as they can,
book as much profit as possible outside the U.S. and leave the money overseas.”[7]
This is precisely what Apple did.
The principal question before us here is not whether the
arrangement was fair, but, rather, whether the state government or the company
was to blame, and thus deemed culpable to be fined or taxed. It is significant
that the E.U.’s antitrust commissioner, Margrethe Vestager, noted that the
commission’s investigation “concluded that Ireland
granted illegal tax benefits to Apple, which enabled it to pay
substantially less tax than other businesses over many years.”[8]
The state government is thus the culprit here in that it granted the illegal benefits. Doubtless Apple’s management and
board had no reason to suspect that an offer from a government would be
illegal. When a U.S. state government makes an offer to a company so it will
build a factory in the state, the company’s management does not have reason to
suspect that the offer is against U.S. law.
Hence, a spokeswoman for the U.S. federal treasury observed
that “retroactive tax assessments by the commission are unfair, contrary to
well-established legal principles, and call into question the tax rules” of the
E.U. state governments.[9]
Apple’s benefits may be quite unfair, yet so too are retroactive tax
assessments when the company had no reason to call into question Ireland’s tax
rules. I suspect that the unfairness in the former biased E.U. federal
officials against viewing the state government rather than the company as
culpable. If the issue is that of a state government violating federal law,
then the federal executive should hold the state government to account, and
thus fine it rather than the company.
[1]
Natalia Drozdiak and Sam Schechner, “$14.5 Billion Irish Tax Bill,” The Wall Street Journal, August 31,
2016.
[2]
Ibid.
[3]
Ibid.
[4]
Ibid.
[5]
Ibid.
[6]
Ibid.
[7]
Richard Rubin, “EU Decision Upsets Treasury, Congress,” The Wall Street Journal, August 31, 2016.
“Companies based in the U.S.
owe the full 35% corporate tax rate on their global profits. They get tax
credits for payments to foreign governments, and they don't pay the residual
U.S. tax until they bring the money home.”
[8] Drozdiak
and Schechner, “$14.5 Billion Irish Tax Bill,”, italics added.
[9]
Ibid.
