Wednesday, 31 August 2016

The rank hypocrisy of Obama’s ‘Appletax’ reaction

The US claims the EU's Apple decision is “political”, but it is the American reaction that is guided by politics. And US disrespect for EU law has a long history.

In the summer of 2001, the US government was furious with the European Union.

Iconic American firm General Electric had just seen a multi-billion dollar merger with Honeywell, which had already been cleared by the US, blocked by the European Commission on competition grounds. US politicians were furious, business leaders were flabbergasted. 

Two years later, the newly-emboldened Commission struck again. It slapped a €497 million fine on American tech giant Microsoft for abusing its dominant market position. Again, there was much sabre-rattling in Washington.

Both companies were caught completely off guard, as detailed in Jeremy Rifkin’s 2005 book The European Dream. The American business community, and the politicians supporting them, were furious. Who were these snail-eating surrender-monkeys to tell American businesses what they can and cannot do? 

Rifkin painted a picture of an American business community that had not yet adjusted to the new reality. There was a new regulator on the global stage, one that would be taking a far tougher stance on consumer and taxpayer protection than the US had.

The Bretton Woods world, in which the US acted as the West’s sole economic arbiter, was over.

Appletax

15 years later, it seems that US politicians and business leaders still haven’t gotten the message. The reaction to this week’s competition ruling by the European Commission, dubbed "Appletax" on Twitter, was a replay of the GE and Microsoft reaction. The EU ordered US tech giant Apple to repay €13 billion in illegal state aid from Ireland in the form of a sweetheart corporate tax savings deal.

Chuck Schumer, tipped to be the next leader of the US Senate, called it a “cheap money grab” by the EU (nevermind that the money is going to Ireland, not the EU). The Obama administration has been equally indignant. The US Treasury Department called the decision “unfair” and warned of "wider ramifications" (read: retaliation). Orrin Hatch, the current chair of the Senate’s finance committee, said that the Commission, and specifically Competition Commissioner Margrethe Vestager, is “targeting US businesses by rewriting already existing tax policies”.

Apple CEO Tim Cook said the decision is “invalid” and “politically-based”. Were the situation reversed, and the US Supreme Court found that a US state’s sweetheart tax deal with a European company violated US federal competition law, can you imagine a European CEO calling that decision “invalid”?

So, what's really going on here?

What was the ruling?

What is at issue here is the so-called ‘tax inversion’ done by Apple to be technically based in Ireland but actually based in the US. The Commission found that Ireland offered Apple a sweetheart tax deal in order to lure the company to its shores, a deal in which Apple paid just 0.005% corporate tax in 2014, according to the EU.

Such a sweetheart deal, which Ireland has been offering to a lot of US companies, constitutes unfair competition with other EU member states, the EU found. It was illegal state aid – essentially the Irish taxpayers were subsidising Apple in exchange for the company coming to the country and providing jobs. The Commission’s competition department makes these rulings in order to ensure that businesses, and governments, are competing on a level playing field and to prevent a ‘race to the bottom’ in offering sweeties to corporations. A similar investigation of such practices by Luxembourg is ongoing.

The US has similar rules. While corporate tax is set by individual states (Delaware is well-known for offering companies very low rates), states cannot make sweetheart deals with specific companies at the expense of other states. In such an instance, the federal government would step in and rule that the company has to pay the state the fair amount, just as happened in this EU case. Few would question the US federal government's right to do so.

Is the EU punishing Apple?

The Commission’s investigation is not against Apple, it is in fact against Ireland. It found that Ireland offered Apple an illegal deal, and it has decided on an amount that would have been legal that now needs to be payed as back taxes. Ironically, Ireland is monetarily the beneficiary of this ruling against it. But Ireland doesn’t want the money. It was arguing that Apple’s tax rate was legal, and is now considering whether to appeal the decision.

Why doesn’t Ireland want the money?

Cook is very openly pressuring Dublin to appeal. But the government is in a difficult position. €13 billion is a lot of money for the cash-strapped country. If the government appeals the decision it will look like they are sticking up for the profits of a rich American multinational over the interest of the Irish taxpayers. With the current government hanging by a thread, it’s a risky move.

Such an impression by the public wouldn’t be far off reality. But the Irish government has built an entire economy around being the European gateway for American companies. A €13 billion windfall may seem nice right now, but the government is worried that without the sweetheart tax deals Ireland will see a mass exodus of American companies that, in the long run, will cost the country far more than €13 billion.

Why was Apple caught so off guard?

As Politico's Ryan Heath details in his column today, Apple has not made much of an effort to know or be known in Brussels. They have only two full-time lobbyists in Brussels, while Google has eight and has spent more than five times as much money. 

Had Apple had its ear to the ground in Brussels, they may have seen which way the wind was blowing before they accepted Ireland's generous tax offer. Had they better understood EU law, they might have known that Dublin did not have the final say on such matters and such arrangements were increasingly attracting the Commission's ire.

When Cook met with Vestager earlier this year to talk to her about the case, he was reportedly dismissive and frequently interrupted her. It is an attitude European politicians have grown accustomed to from American businessmen. 

Isn’t Obama against offshore tax avoidance?

Yes, and that’s why the administration’s reaction stinks of hypocrisy. The US has not taken a stand against these so-called ‘tax inversions’ yet, and so the EU has stepped in and done something. The ruling is meant to stop European governments from offering any more such deals, and to discourage governments from taking them if they think they may be undone by Brussels later.

Obama wants to stop tax inversions. This week’s decision will help stop tax inversions (between the US and Europe at least). So why is Obama mad?

The reason is that this is money that would have otherwise gone to the US. The administration has looked the other way for years while this was going on, perhaps planning to pounce later. But the EU beat them to it, and now a European country is getting the money instead.

It isn’t just about money, it’s also about politics. If the EU takes the lead in cracking down on tax avoidance, it could mean that whatever solution is eventually found will be tilted in the EU’s favor, or be weighted toward a European economic approach. The US still sees itself as the chief arbiter of the world's economic issues. After all, the majority of the world’s most successful companies are American – particularly those that stretch into the consumer space. The US fears losing regulatory control to other jurisdictions. 

Is the EU making a political decision to target US companies?

There is no evidence for this being a politically-motivated decision. In fact, it’s quite the contrary. The European Commission had every political interest to not take this decision.

The Commission is still reeling from the Brexit referendum result in June, which challenged the EU’s legitimacy in a way nothing has come close to before. The last thing they need right now is to be issuing a complex decision that appears to be against business interests.

The Brexit-related reactions have been predictable. ‘Thank god we’re getting out’!’ shouted the pro-Brexit British press this week. American Republicans made thinly-veiled references to Brexit, implying that these types of decisions were why people see the EU as unfriendly to business. Paul Ryan, the Speaker of the House, said it “sends the wrong message to job creators”.

But the law is the law. Yes, there was room for interpretation in this case. But the EU has very strict competition rules, and the Commission’s (assumedly) impartial analysis found that the tax deal with Apple violated those rules. To come out with any decision other than what was announced this week, therefore, would have only been due to political considerations.

Often, the US government and US companies are successful in pressuring European countries into bending the rules for them. Not this time. Because this time, they’re dealing with the combined strength of all 28 EU member states.

It is absurd to suggest that the Commission is particularly targeting American companies. They are also in a high-profile competition investigation of Russian gas giant Gazprom – a ruling which will have even more political pressures than this one. 

Yes, many of the other big headline companies facing these investigations, such as Starbucks and Google, are American. But as Vestager told me last year, “These days American companies are very successful and they are global. It has more to do with the era that we’re in and the fact that a number of US companies are very successful and strong when it comes to the digital economy and the digitalisation of our societies."

What’s the solution to all this tax avoidance?

One encouraging sign from all the US reaction this week is that while the first part of the politicians' statements were full of righteous indignation toward Europe, the second half, from both Democrats and Republicans, stressed that some kind of global solution needs to be found.

“This is yet another example of why we need to reform the international tax system to ensure these revenues come home,” said Schumer. ““Above all, this is yet another reason why we need to fix our tax code,” said Ryan.

If global action is finally taken, it will be no thanks to the Obama administration, which has spent 8 years turning a blind eye to this issue. There is a reason that the EU is increasingly coming to be known as “the world’s regulator”. Where the US won’t act, the EU will.

Obama should be thanking Vestager for getting the ball rolling. Instead, his administration is letting petty politics, and neo-mercantilism, shape their response.

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