Perils Of EU Super-State: Why The Irish Said ‘No, Thank You’ To $14.5 Bn Apple Tax

Consider the likelihood of this scenario: a regulator tells a company to pay $14.5 billion in back taxes, and the beneficiary country says, “No, this is bad for me.”

Why would a state refuse to take its tax dues?

The answer: it can happen when a country sees greater advantage in keeping the company invested than in claiming taxes from it.

The decision of the European Union (EU) to order Apple to pay $14.5 billion to the Republic of Ireland for alleged illegal tax benefits given in the past points to the inherent conflict between national sovereignty and globalisation. National sovereignty is about states using their powers to directly benefit their citizens; globalisation is about ceding some of those powers to supra-national bodies in order to enable greater gains, some of which may not materialise.

Ireland granted Apple what could be called “sweetheart” tax deals in order to create jobs in the country. According to the EU Competition Commissioner, Margrethe Vestager, “Tax rulings granted by Ireland have artificially reduced Apple’s tax burden for over two decades, in breach of the EU state aid rules. Apple now has to repay the benefits.”

Both Apple and the Irish government plan to appeal against this ruling, with Bloomberg quoting Irish Finance Minister Michael Noonan as vowing to uphold “the integrity of our tax system, to provide tax certainty to business and to challenge the encroachment of EU state aid rules into the sovereign member-state competence of taxation.” (Italics mine)

Clearly, despite the obvious advantages of globalisation, national sovereignty is not something states want to barter away endlessly. After the Brexit vote in June 2016, Ireland’s move on Apple is one more brewing revolt against the EU super-state.

In June, Britain voted to exit the EU precisely because some of its sovereign powers – including the power to control immigration – were taken away by the EU. While immigration was a hot-button issue in the Brexit vote, Britain’s large contributions to the EU budget without commensurate benefits were also a sore point.

Issues of national sovereignty, including taxation powers, are coming to the fore in an era where growth is weak and states are facing pressure from below over low incomes and jobs growth. The United States (US), being the world’s largest economic superpower, has passed supra-national laws like Fatca (Foreign Account Tax Compliance Act) to ensure that no company or a US national evades domestic taxes.

At the G20, almost all countries are committed to working against tax havens, as all of them believe that they are losing out on taxes from rich individuals and profitable companies, who emigrate to tax havens.

While all states have a legitimate reason to rail against tax havens, which merely facilitate evasion by creating artificial tax jurisdictions, Ireland is different. It is a low-tax state, and not a tax haven that offers companies facilities to evade taxes. That the EU thinks even this is wrong means it wants to make tax rates more uniform across the Union to prevent one country from poaching jobs from another.

The problem with globalisation is that it is based on the assumption that it is always possible to ensure “fair” competition and equality of treatment. Globalisation presumes the free movement of factors of production (capital, labour) and investment decisions based on competitive advantage. It follows that when a state offers an unfair advantage to someone, supra-national regulators must step in to level the field. Supervising the global field for distortions is what creates huge transnational bureaucracies that are largely unaccountable to anyone.

Another problem relates to defining fair competition: does the lack of labour law enforcement in India or China or Bangladesh give an unfair advantage to businesses that want to use cheap labour in these countries? To combat this, the EU forces its own ideas of fair labour laws down the throats of its trading partners.

Tough emission rules for airlines in the EU can be interpreted as a trade barrier or an enlightened approach to global warming. Or consider this example: if one country (or trade bloc) eases rules to make it cheaper to do business and another imposes tough regulations that make compliance costlier, can the latter impose tariffs on products from the former on the ground that they have an unfair advantage due to easier regulation?

When labour arbitrage, credit cost arbitrage and regulatory arbitrage impact competitive advantage, one can hardly blame tax arbitrage as somehow more unfair than the rest.

Consider the case of Ireland and Apple. Is the offer of tax incentives an unfair advantage conferred on businesses located in the Republic? Ireland thinks not, but the bigger countries of the EU disagree. The higher-taxed EU nations want low-tax jurisdictions like Luxembourg to stop attracting companies purely for tax reasons.

It is by no means certain that the EU will win its case against Ireland and Apple.

The Apple tax deal with Ireland is simple: the company creates jobs in logistics and distribution for around 5,500 people in return for which the bulk of its earnings from the local operations are deemed non-taxable, as the value is created elsewhere. This is how it works: Apple licences its technology to its Irish unit, which then sells the stuff it makes to Europe and Asia for a huge margin; the Irish tax authorities agree that most of the value is created outside Ireland, and therefore taxes only a minuscule portion of the profits generated; the bulk of the profit is assigned to a notional “head office”, which actually employs no one.

The EU does not regulate national tax rates, and so its decision to force Apple to pay alleged back taxes has been relabelled as illegal state aid to Apple. That is, the taxes the EU says Apple ought to have paid to Ireland amount to “state aid”.

While the actual case may be decided in EU courts on the technicality of whether or not Ireland’s decision was state aid or a legitimate recognition of lower value created inside Ireland, the reality is that globalisation has its limits.

The gains from globalisation have to be balanced against the losses of the losers, not to speak of the cost of enforcing global rules on everybody. Globalisation creates its own hurdles to the ease of doing business, and it is pointless to pretend that it offers untold nirvana on all fronts.

There is also a tradeoff between political sovereignty and potential gains from participation in globalisation and free trade. Sometimes, you may want greater control of your economic destiny, and at other times you may be willing to cede control for greater prosperity.

Man does not live by bread alone; nations do not live only to trade freely. They have other concerns, too.

Brexit confirmed it. And the EU’s foray into taxation has given the Irish and Apple a reason to rethink what the EU is all about.

Globalisation is not fair to everybody, and so trying to enforce fairness in global competition is an impossible task. What you will get by trying to be absolutely fair to everybody is a huge bureaucracy that will reduce the ease of doing business and impose costs on everybody.