IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
After a three-year investigation, on the 30th of August 2016 the European Commission has concluded that Ireland should recover up to €13bn (£11bn) from Apple. The Commissioner, Margrethe Vestager, said that Ireland allowed Apple to pay substantially less than other businesses, in effect paying a corporate tax rate of no more than 1% (the standard rate of Irish corporate tax is 12.5%). Specifically, the Commission’s investigation concluded that Apple had effectively paid 1% tax on its European profits in 2003 and about 0.005% in 2014.
Ireland and Apple both said that they disagree with the decision and would appeal against it. As a matter of fact, Apple is not the only company that has been targeted for securing favourable tax deals in the European Union. Last year, the commission forced the Netherlands to collect €30m (£25.6m) from Starbucks and Luxembourg to collect a similar amount from FCA. Similar views are spreading in various European countries.
If numbers are confirmed, this ad hoc tax deal struck between the Irish national government and Apple seems clearly a case of illegal state aid. Under European law it is illegal to negotiate tax deals with individual companies. At least on paper, the rationale behind the legislation is that the Union aspires to create and protect a fair competitive field for all companies operating in Europe. In turn, the idea of protecting fair competition is based on the expectation that in time the most innovative and efficient firms will thrive, while inefficient enterprises will disappear. Using public funds to support selected firms, a government clearly creates distortions, with ripple effects on the dynamics of a market. In other words, favourable tax deals to large multinationals create unfair competitive pressure on small enterprises and, ultimately, impede the development of future successful companies.
The fact that the European Commission has recently investigated a tax benefit agreement negotiated in 1991 is nonetheless difficult to defend only on economic and legal grounds, especially since the Irish government has declared it is unwilling to collect the money. This decision has clearly political implications. The Commissioner is spreading the message that ad hoc tax benefit deals (especially with foreign multinational enterprises) will be no longer tolerated. Moreover, it appears that European centralised investigations will increasingly try to overturn long-standing national governments’ decisions.
Forms of state aid to individual firms are illegal and should be persecuted. However, questioning and punishing 25-year old agreements (that have revitalised a dying economy) does not seem to be the right way to go about it. While it is clearly pleasing many Europeans who despise multinational firms, the decision of the Commission creates a climate of economic and political uncertainty that will have effects on future investments in Europe. Foreign firms that have decided to invest in Europe and have negotiated for years with national governments may find those agreements overturned and, in addition, be fined in the future. National government will be losing credibility and, with it, bargaining power in negotiations with large enterprises.
On the specific case of Apple, the approach of the Commission seems also blunt and myopic. Historically the agreement between Apple and the Irish government has effectively created massive economic advantages (both in terms of employment and R&D spillovers) to the whole country, with effects also on the Union. It appears now rather narrow minded to revisit that agreement without looking at the whole picture, including the historic and economic situation when the agreement was struck and the repercussions that a reaction from Apple may have on the Irish economy in the future.
It would have been preferable if the Commission had expressed a strong commitment to investigate and disclose future agreements made by national governments with large multinationals, and citizens/consumers were given sufficient information to assess the desirability of those agreements. If any form of tax-benefit deal were made public, together with an assessment of the effects that the deal has created to the economies involved, then public opinion and taxpayers would be in a position to decide on the desirability of such deals. In other words, more information and greater transparency would have been better than punishment.
Surely we now have to expect a series of long battles. On one side, multinational companies will fight the Commission’s decisions in court, while threatening to withdraw investments in Europe. On the other side, there will be legal and political battles between individual European Member States and the Commission. Ultimately, we also expect an increase in frictions with the US, to the detriment of trade negotiations with them.