Apple’s tax troubles

The hefty > €13 billion in back taxes the European Commission imposed on Apple should have drawn Europe and the U.S. closer in their common quest to crack down on corporate tax avoidance. But the unprecedented penalty to hit the American tech giant has triggered angry outbursts at home and could well put paid to hopes for transatlantic cooperation, especially on the trade and investment partnership agreement, in the immediate future. The latest ruling by the European Union competition commissioner may not be the last against U.S. multinationals in what is increasingly being viewed as harmful to tax diplomacy. As with the > Starbucks decision in 2015 and the ongoing probe into McDonald’s, both concerning two different countries, the Commission alleges that Ireland’s ultra-low, single-digit tax arrangements with Apple were in violation of EU state aid rules. Notably, the Commission has not taken issue with Dublin’s 12.5 per cent rate of corporate taxation. Curiously, the possibility of clawing back billions of euros, estimated to be worth the country’s health-care budget for a year, is not an attractive prospect for Dublin, home to hundreds of multinationals thriving on its decades-old foreign direct investment policies that include low corporate taxation. Instead, Ireland, which risks losing jobs, has resolved to appeal the decision along with Apple, whose Irish subsidiaries account for 90 per cent of the company’s foreign profits.

On the other hand, there is no confusion on the other side of the Atlantic on what the move by Brussels implies. U.S. politicians are piqued that a big chunk of the money — that firms such as Apple may eventually have to pay European governments — could instead have filled domestic coffers, but for a domestic stumbling block. This is the regulatory loophole that companies exploit to defer, indefinitely, levies on profits from their overseas subsidiaries until they are repatriated. As matters stand, the 35 per cent tax rate in the U.S., compared to Ireland’s 12.5 per cent, is an incentive for American firms to retain the advantage of the deferral clause. Meanwhile, a 2014 regulation to curb so-called corporate inversion, a manoeuvre whereby American firms relocate their headquarters to benign countries to trim domestic tax bills, is said to have had limited effect in the absence of legislation. Global efforts backed by more than 80 countries to combat cross-border tax avoidance, known as Base Erosion and Profit Shifting, are still at an early stage. EU action targeting individual corporations could well be seen, at this juncture, as an irritant in that larger endeavour.

(An earlier version of the editorial had wrongly mentioned "...Irish subsidiaries account for 90 per cent of the company's overall profits", when it should have been "...company's foreign profts." The error has been corrected.)

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