It really does have it all, yesterday’s Apple story. But you don’t want to read 5,000 words and I don’t want to write them. So let me focus on the bits I think are interesting or important.
First, the political dimension.
Students of the history of the European Union will know that the European institutions have often acted to protect and enhance the functioning of the single market. As I’ve argued before, we can’t really have the level playing field on which a functioning single market depends with aggressive tax competition between member states. And the institutions obviously know that.
But the power to make tax law rests by and large with member states.
The inevitable result is a tension between those member states who would seek to tilt the playing field towards them through aggressive tax competition and the institutions who are interested in preserving and advancing the functioning of the single market by keeping it level.
I said a year ago that I believed the Commission had decided to use State Aid law to explore the limits of member states’ power to engage in ‘field tilting’ through the tax code. It had decided, to put it bluntly, to be a little more activist. Whether you think that’s a good thing rather depends on what you think about tax competition. And whether you think the single market’s important. But – and I bear in mind the old saw that you shouldn’t make up your mind until you’ve heard both sides of the argument – I have to say I’m surprised at the emergent consensus that the Commission’s decision amounts to overreaching.
Second, the importance of the Apple decision.
I think it’s really important. Indeed, I think it could be a game changer. If you’re contemplating setting up an unnatural structure for tax avoidance reasons, there’s a number of things you weigh in the balance. There are financial costs to setting up and maintaining that structure; there are reputational costs; the structure can be a green flag for investors attracted by the higher post-tax returns but it can also be a red flag for investors worried about the sustainability of higher post-tax returns that can be wiped out with a stroke of a legislator’s pen; and it can negatively affect your relationship with government in the jurisdictions those structures are designed to denude of tax revenues.
What the commission decision does is add a really important factor to that list.
The assumption you might once have made – that you will get those higher post-tax returns – you now can’t make. You might incur all the costs – all the negatives – and only discover years later that you didn’t get what you were banking on. The mere fact of the decision – irrespective of whether it is successfully appealed against – adds risk. And there will be many cases in which that will tilt the scales against unnatural avoidance.
Third, looked at in the round, the sort of practice imperilled by this decision is bad and so challenging it is good.
If you read the Irish press you’ll see the debate about whether to appeal against the decision couched in purely parochial terms: should we keep the windfall? or should we act to protect the advantages that come from tilting the playing field in our direction?
But if you look beyond those parochial concerns you’ll see that what Ireland has been doing is giving a subsidy to Apple’s shareholders with other people’s money – and keeping a touch for itself.
The subsidy to the shareholders comes in the form of higher post-tax returns than they would otherwise have enjoyed. As the commission press release noted:
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.
The ‘other people’s money’ is the taxes that would have been paid elsewhere in the single market – including in the UK – and in the US too if Ireland hadn’t issued the rulings the subject of the complaint.
The ‘touch for itself’ is Ireland’s tiny slice – from 1% falling to 0.005% – of tax on Apple’s European profits together with the economic activity in Ireland associated with diverting those European wide taxable profits to Ireland.
If you look at the question whether to appeal or keep the cash purely through an Irish lens I’m perfectly content to accept there are sensible arguments both ways. But this shouldn’t blind us to the reality that Ireland’s modest benefit is at the expense of its European partners. And that the real winner is Apple which ends up paying materially no tax at all on its European profits. Not in the US, and not in the EU either.
Finally, the EU dimension.
If you agree with the proposition that it’s a good thing for big multinational companies to pay tax on their profits then you should be interested in how this result came about.
It wasn’t Ireland, or Germany, or France, or the UK that delivered it. It was the European Commission. The reality is that the smaller you are, the more difficult it is for you to generate tax receipts. You’re less important a market. And you’re less able to absorb the risks attached to widening your tax base or increasing your tax rates. Or to face down threats of retaliation. On the other hand, the bigger the market you are, the greater the heft you have.
As I argued before the referendum, writing then about State Aid rules, leaving weakens our bargaining position on tax matters. It puts us on the road to tax haven UK. And if you want an NHS, or free education, or decent pensions, or a social safety net, that’s not a good thing.
Jolyon Maugham QC (pictured) is a barrister practising from Devereux Chambers. He blogs at Waiting for Godot – Musings on Tax and can be found tweeting here.