European Union’s Crusade against Corporate Welfare

October 28, 2016

Last week, it was reported that Apple is moving over $9 billion worth of their iTunes Intellectual Property assets to Ireland from Luxembourg. This level of commitment to the country comes less than two months after the European Commission ruled Ireland’s tax breaks to Apple were unlawful and ordered the American tech giant to pay $14.6 billion in “backed taxes.”  That decision is currently being appealed by both Ireland and Apple. The United States Treasury even claimed that the European Commission decision threatens the “important spirit of economic partnership between the U.S. and the EU.” Companies throughout the world have flocked to countries with low corporate taxes like Ireland who has a rate of only 12.5%. That positions them nearly 10% less than any other country in Western Europe and puts them at a definitive advantage in attracting companies like Facebook, Google, and Twitter. Beyond being competitive in Europe, the Ireland corporate tax rate is over 20% less than the current corporate tax rate in the United States of 35%.  The corporate tax rate in the United States has been the subject of countless political debates and will not be discussed in depth in this article, but as an example of the effect of disproportionate tax rates between the United States and European country is that United States companies currently hold 72% of their money outside the United States.
Within the scope of the Apple-Ireland taxes instituted by the European Commission, the problem, according to the EU, is not the tax rates but instead how Ireland was allowing Apple to only claim a portion of their profits in Ireland with the rest being only on paper that did not have to pay taxes. This allowed Apple to pay taxes as little as .005% of their actual European profits, nowhere near the 12.5% country corporate rate.

The European Commission is not merely examining Ireland and Apple, but have targeted countries like the Netherlands and Luxembourg for their dealings with Starbucks and Fiat respectively requiring the companies to pay millions.

The additional strange part of this case is that Ireland is appealing a decision that would create $14.6 billion gain for the country, as the European Commission’s decision merely mandated that Ireland collect the appropriate amount of taxes from Apple.
The EU being active in the taxation of member nations is something to closely watch in the aftermath of Brexit. Ireland in objecting to the commission’s ruling stated that in ordering of them to collect more taxes from Apple that the EU had created an “encroachment” on the country’s sovereignty. The EU does not have the power to set individual corporate tax rates, but the EU’s Treaty does not allow for state aid to corporations. The Commission is regulating under the premises that it is state aid to give some companies preferential tax treatment. This is a legitimate reading of the treaty and seems to be within the scope of the commission. However, since the commission is made up of member nation representatives, this large scale push to force countries to require equal taxes for all companies could ultimately lead to member nations banding together to move the Commission to a more relaxed approach to the state aid portion of the EU treaty. If that does not happen, then it could also cause member nations to decide whether it is in their best interest to continue as a part of the EU long term. This could be even more pronounced if competing nations like the United States reduce their corporate tax rates in order to attract companies, especially domestic companies that currently hold large portions of money or operations in EU countries. Apple’s recent moving of iTunes assets to Ireland is evidence that their commitment to Ireland is not requisite on tax deals, but where Ireland and Apple go from here is interesting as they move forward with their appeal and the European Commission moves forward with investigations into tax deals by France and other countries given to Amazon, McDonald’s, and Google.