The European Union vs. Apple: Tax Showdown

The European Union vs. Apple: Tax Showdown

Source:  Flickr

Source: Flickr

By Eli Gershon

In late August of 2016, the European Union (EU) announced that the largest corporate taxpayer in the world, Apple, owed an additional $14.5 billion in back taxes.  In what has been described as a “shock demand,” the EU has decided to take on not only Apple, but Ireland as well.  According to the EU, Ireland is the beneficiary of this massive order to pay back taxes.  Ireland, however has appealed the decision.  Ireland has, in the last few years, been seen as a European tax haven, offering a home base for companies looking to keep as much money as possible.  Though it is possibly detrimental to the health of the broader European economy, Ireland’s reputation as a tax haven has proven quite beneficial.  According to Apple CFO Luca Maestri, Apple is the largest taxpayer in Ireland.

The EU says that Apple did not pay enough in taxes, and that Ireland is to be paid immediately.  Apple contends that it broke no laws and was not given special treatment.  Tim Cook, the CEO of Apple, said that the ruling had “no basis in fact or in law” and that it was an effort to “rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.

A supranational union should not be able to retroactively change the laws of individual countries.  It is morally and legally fine to change laws going into the future, and for the supranational union to impose those laws on constituent states, however, it is wrong to enforce a law that was not active at the time of the “offense.”  The EU should not be able to demand payment of taxes that Apple was not aware that it owed, as it sets a dangerous precedent.  The idea of retroactively enforcing laws could be used for nefarious activities in the future, should the EU decide to use the practice.

A main theme of European Commission President Jean-Claude Juncker’s time in office has been fair taxation.  Along with the European commissioner for competition, Margarethe Vestager, Juncker has gone after other American companies, like Starbucks in the Netherlands.  Juncker calls Vestager his “Rottweiler” for her fierce attacks.  Vestager has said that she was brought up with strong values, including “that you should always protect the few and the small against those who want to misuse their muscle.

One of the strongest criticisms against the EU is that this decision seems to be purely political.  Tim Cook stated simply that it is “total political crap.”  A spokesman for Juncker said that fighting tax avoidance had been a top priority of his even before he took office as Commission President in 2014, and that being political should not be confused with being politicized.  Vestager has stated that "The ultimate goal should of course be that all companies, big or small, pay tax where they generate their profits” and that “we need a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.”

Sophie Veld, a deputy leader in the European Parliament, has said that “It’s political in the sense that, if the Commission is prioritizing the allocation of its resources, then clearly tax evasion and tax avoidance are very high on the political agenda everywhere."  Other officials in Brussels have made clear that a political approach does not mean that it lacks legal basis and that Vestager must win in court against the best tax attorneys Apple can buy.

A diagram showing the European Commission's account of Apple's tax practices. Source: European Commission, accessed through  Daily Mail .

A diagram showing the European Commission's account of Apple's tax practices. Source: European Commission, accessed through Daily Mail.

Because of the EU decision, Apple has made changes and announced that it would repatriate part of its profits to the US, probably starting in 2017.  Previously, the CEO insisted that it would not repatriate, and that the move is due to changes in the US tax code.  However, it is almost certain this move is due to the EU demand.  One tax expert said “Apple is unique in having this structure and I can't fathom how they didn't fix it. It was always high risk, . . . I don't understand how Apple's tax advisers didn't tell them to change this ten years ago.

It certainly seems that the EU tried to enact tax law retroactively and without proper warning.  Apple is understandably upset at having to pay an exorbitant fee, and Ireland does not want to accept the fee.  The EU should respect the decision of Ireland and make moves to right the perceived wrongs in the tax structure.  What the EU should not do, however, is charge a major international company for taxes it was never told it had to pay.  Apple clearly took advantage of an Irish loophole, but they did so legally.  The EU should not be able to make what amount to ex post facto laws.

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