Ireland, the US, the EU Commission and the dilemma over how to play an #AppleTax wind fall…

It’s awkward. Ireland’s FDI policy has been in train for nearly 70 years. It has shaped its economy not simply through cutting deals and sustaining low tax, but developing its education and outreach through its diaspora.

It wasn’t just sentiment that brought big US companies ‘home’.

The decision (available only by presser), by what amounts to the EU’s Civil Service, that Apple (a private company with approximately £600 billion in its savings account) must pay Ireland some €13 billion in unpaid taxes for the decade 2004 to 2014.

As Jolyeon Maugham notes what has followed has been a domestic 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?

The Commission believes (long commentary here) that Ireland has advanced Apple state aid, by recognising a virtual headquarters – that has no geographical base –  as Apple Sales International is the last known and substantial whereabouts of its humungous profits before they hit the bank.

Broadsheet have transcribed a fascinating exchange between Professor Richard Murphy and Fine Gael MEP Brian Hayes, which illustrates the tensions between Ireland’s national interest and that of the single market.

First Murphy:

It is the right decision, yes it is because if we believe in fair markets, if we believe that that’s the way we should organise the world, then everybody has to compete on a level playing field. And, as any economist will tell you, we need transparency. Well, this was a secret deal, it was done without people knowing.

Then Hayes:

…most of the cases on this top-level are being taken against small members states of the European Union – Belgium, the Netherlands, Luxembourg and Ireland. Countries that have, traditionally, certainly in the case of Ireland, have no industrial revolution, have since the 1960s got to open its doors towards inward investment and now we’re being asked, in terms of the entire corporate tax structure in Europe, to take these cases on.

Aside from the problematic politics, there is a legitimate objection to the idea that Ireland is solely responsible for the collection of tax on up to 60% of Apple’s global profits, and that’s the one lodged by Seamus Coffey:

…even for Apple stores it’s not clear that the customers were buying from ASI.  Apple Retail UK Ltd which runs Apple stores in the UK had £900 million of sales in 2014 (accounts here).  The shops might have bought the devices from ASI but the customers bought them from Apple Retail UK Ltd.

Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

And this is the contradiction.  We have “specific provisions in the Irish tax law” in the first extract saying the profits are not subject to Irish tax and the factual position set out by the Commission that only the Irish branch has substance.  The Commission are going for substance over law. [Emphasis added]

So what about the prospects for a resolution? David McWilliams takes a relaxed view, saying that Ireland has nothing to fear from pushing for a challenge (remember, for all the hysteria at the moment, the ruling may not be published for weeks or months yet):

Before we assess this unique opportunity given to us on a plate by the EU Commission, rest easy, because we win either way.

If we lose the appeal, Ireland gets a windfall of €13bn, or about €2,600 per person. This is enough to wipe out our budget deficit for years to come, spend on what we will, or use in another way, which I will explain a bit later.

If we lose, we will be seen by corporate America as its only friend in Europe. This is exactly where we want to be. It is not pretty, nor heroic, but it’s realpolitik. When you have no capital base, you have to borrow someone else’s.

He expands upon that point in this interview on CNN:

McWilliams’ framing is interesting, if a little extreme. He is clear that in this fight, Irish economic interest is far better served by staying much closer to Boston rather than Berlin since this is where most of the country’s capital originates.

That it cannot control the outcome (Ireland, in this case, is merely the grass beneath the feet of two fighting elephants) may be a pragmatic virtue in the sense that in launching an appeal Ireland gets off the hook with its US investors.

The Commission statement makes it clear that it is not questioning Ireland’s tax structure, at this stage at least. So, so long as this US-EU argument does not escalate, its current FDI policy should not be adversely affected.

Irish Times Apple Tax

Fintan O’Toole argues that Ireland should just take the money and hang the consequences. He provides a nice range of policy suggestions that the €13 billion could usefully pay for…

More likely the government will appeal the ruling, and the money put into an escrow account until it’s made its way through the European Court system. But money deferred until several days after tomorrow is not as appealing to the electorate as money today.

And if there is one set of TDs in the Irish government who understand that better than most it is the independent populist members of the cabinet. The Irish Times reports rumours of a split, quoting a pithy Michael Noonan likening acceptance of the money to “eating the seed potatoes.”

Final word to Maugham

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 strange state of affairs 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 we have seen in the Euro crisis, what makes sense at the centre of Europe does not always work in the same way at the edge. Ireland would do well to play this one with it’s own longer national interests at the centre.

It remains to be seen if the electorate is in any kind of mood for such a shortcut.