The European Union and the U.S. Both Want to Tax Apple

Anatomy of a multi-government shakedown.

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Apple
Jordan Stern / Dreamstime

I'm slow to defend corporations these days because so many of them have built their business models around government-granted privileges and are free markets' worst enemies. However, for all the perks they get from governments, they also fall victim to their own government. And sometimes the shakedown is done by multiple governing authorities.

A few weeks ago, the European Union's antitrust regulator demanded that Ireland get back $14.5 billion in taxes from Apple Inc. At the heart of the issue are legal tax arrangements between Ireland and Apple passed in 1991 and 2007, which allow the company to pay an annual tax rate of roughly 1 percent on its European profits channeled to Ireland.

According to the European commission, if a country doesn't tax a company as much as the bureaucrats in Brussels want it to be taxed, somehow that's equivalent to giving the company a subsidy or a handout. So even though Apple followed the rules in Ireland and what it did is legal in both Ireland and the United States, the EU retroactively changed the rules and is now demanding lavish sums of cash from the company.

Forget about the Irish government's right to set its own taxes; when the EU wants your cash, tax sovereignty goes out the window. As you can imagine, the Irish government isn't pleased. It said it would appeal the decision in order "to defend the integrity" of its tax system.

Good luck with that, says Dan Mitchell of the Cato Institute. An appeal requires that Ireland persuade one group of European officials to overturn the decision of another. He explains, "Given the long-standing hostility in Brussels to Ireland's tax system, that's an uphill climb—particularly since European bureaucrats have set themselves up to be judge, jury and executioner on these issues." Also, considering the amount at stake through this Apple tax grab and the tax grab looming over other American multinational corporations, the EU is unlikely to change its mind.

Now enter the United States. U.S. Treasury Secretary Jack Lew complained in The Wall Street Journal about the EU's behavior—calling the move "unfair" and "contrary to well established legal principles" and noting that the move "threatens to undermine the overall business climate in Europe." True. But don't be fooled; the only reason Lew has opposed this EU move is that he would rather be the one grabbing that money.

Under the current punishing system, U.S. companies doing business abroad and repatriating their foreign earnings home get tax credits for the taxes paid to other governments before being hammered with a ridiculously high 35 percent tax rate. The more taxes companies pay offshore the less is left for Uncle Sam to grab. So if the tax payments to the EU qualify as a tax credit, that's potentially $14.5 billion less tax revenue in the U.S. tax chest.

The EU shakedown of Apple will soon become the EU shakedown of Amazon.com, McDonald's, and many other U.S. companies, so the U.S. Treasury proceeded to put in place its own shakedown mechanism. It's issuing new rules to restrict how corporations can use tax credits on their foreign tax payments to reduce their U.S. tax bills. The explicit goal of these rules is to avoid suffering a huge tax loss as a consequence of U.S. multinationals having to pay billions of dollars in taxes to the EU version of the Soprano family.

In other words, no matter how you look at it, U.S. corporations are in for a large shakedown from the EU and from the United States. It's sad, considering that the best solution to this mess would be for the United States to reform its corporate income tax by lowering its rate and moving to a territorial tax system. Such reform would guarantee that U.S. firms operating abroad would not park so much money abroad and subject themselves to arbitrary tax changes by foreign governments. It would also increase U.S. competitiveness and trigger economic growth. But if you think that scenario will happen soon, don't hold your breath.

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  1. Maybe the Irish should follow England with its Brexit, and then the next time the continentals get into a messy war they can thumb their noses across the channel Monty Python style.

    1. Maybe the Irish should follow England with its Brexit,

      Actually, I was going to suggest the inverse. Maybe England should follow Ireland on tax policy.

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  2. It’s sad, considering that the best solution to this mess would be for the United States to reform its corporate income tax by lowering its rate and moving to a territorial tax system.

    The best solution for who? You explicitly compared governments to the mafia here — good for you — now consider the incentives of that mafia in whether to steal as much as they can get.

    1. If you realistically want to avoid tax evasion, less burdensome taxes is typically the first place to look since there’s a pretty direction correlation between the two.

      1. For many if not most politicians, the incentive is to maximize taxes taken in — tax evasion, in their eyes, is just a cost to compare versus the benefits.

        Then you have the politicans who are obsessed with “fairness”, and are willing to take in less taxes if they can sock those immoral rich people good and hard.

        If the goal was to eliminate tax evasion, they’d quit collecting taxes.

        1. And the whole point being made here is that they are not maximizing taxes taken in.

          1. They are in the short-term, and that is all that matters to them. There are always new pots of money to go after (until there aren’t). Today’s failed policies are just the stones that pave the way for tomorrow’s failed policies.

    2. The entire free-shit brigade, both major American parties (one more than the other), and 90% of the media are arrayed against “the best solution to this mess”. It ain’t happening.

  3. It’s sad, considering that the best solution to this mess would be for the United States to reform its corporate income tax by lowering its rate and moving to a territorial tax system.

    Best for who? Apple bribed one government to protect it from another and it looks like that government might not be strong enough to provide the protection they paid for. Maybe it would be best for Apple if they bought their own government rather than renting someone else’s. There are plenty of other companies in the same boat as Apple, maybe they could go in on a timeshare together.

  4. It should be noted that Apple didn’t break any rules here. Even if the EU’s argument made sense, Ireland broke their agreement with the EU. So, if anyone should pay, it would be Ireland. But this isn’t about sensible or fair application of the law.

    I’ve confronted some people with the basic reality that this is a retroactive punishment and inherently unjust. People just claim Ireland provided ‘state aid.’ The argument doesn’t seem to have a shred of intellectual credibility to me. How does any country in the EU avoid a similar punishment unless they adopt a uniform tax code, really? Any country with a lower tax for a corporation is liable to be hit with the same sort of nonsense. When this agreement was signed, no states intended to give up the autonomy to set their own tax rates.

    1. ‘State aid’ – FFS.

      Government is your money that we decide to let you keep together.

    2. Make no mistake, this IS the game the EU wants to play. They are beyond redemption. http://www.eubusiness.com/news…..itics.120n

  5. Serves them right for pushing an IOS update that results in every App, tab, or screen change refreshing EVERYTIME.

    1. Serves you right for buying Apple.

      1. At it isn’t blowing up in his paws.

        1. Do reptiles have “paws,” or is there another term?

          1. Clawed, clutching dactyls?

  6. According to the European commission, if a country doesn’t tax a company as much as the bureaucrats in Brussels want it to be taxed, somehow that’s equivalent to giving the company a subsidy or a handout.

    Not taking is giving.

  7. The EU shakedown of Apple will soon become the EU shakedown of Amazon.com, McDonald’s, and many other U.S. companies, so the U.S. Treasury proceeded to put in place its own shakedown mechanism. It’s issuing new rules to restrict how corporations can use tax credits on their foreign tax payments to reduce their U.S. tax bills. The explicit goal of these rules is to avoid suffering a huge tax loss as a consequence of U.S. multinationals having to pay billions of dollars in taxes to the EU version of the Soprano family.

    So if you do foreign business, you get taxed twice? It sounds like the main hit here is going to be international trade in general. So, we’ll have a return to corporations that are strongly associated with particular nations right around the same time as a general rise in popular nationalism, which brings us closer to true fascism. And when goods don’t cross borders…

    1. Why wouldn’t the residents of Ireland want their hard-eared pounds flowing into the treasuries of Greece, Spain et al.? Stupid nationalists.

      1. All developed countries tax dollars are going outside the country – it is called the IMF and World Bank – every person here is paying into it with tax dollars.

  8. Better title: “The European Union and the U.S. Both Want a Bite of the Apple.”

  9. The guiding principle behind most tax regimes and laws is FYTW.

    And often the guiding principle behind FYTW – especially in the U.S. – is that there are more voters who pay no income taxes than there are voters who do. But all of their votes county equally towards letting politicians keep their privileges and creature comforts, so damn right they’re going to stick it to the minority to bribe the majority to vote for them.

    An added bonus is that corporations don’t vote at all and most voters cannot comprehend that when you tax a corporation that is money that comes out of the consumer’s pocket. It ain’t free.

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  11. Does anybody have any ideas on how to make money on a European Union breakup? Seems like a pretty sure thing. Of course I’ve been saying that since before they printed the first euros.

  12. It’s just going to end up being a tax on the people/consumer which is pretty much any government money grab of a corporation is. So in essence we are paying the taxes to the EU, fuck the EU.

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  14. Kleptocracy is Kleptocracy.

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  16. After Brexit, the Euroclueless will have even less exposure to free market ideas than before. The LP had its mid-term platform posted in Spanish, which was a good thing for Latinos in These States and libertarians in Spain. But no Spanish platform has yet been posted for the Big Enchilada coming up in November. Someone recently donated a Portuguese translation of the current platform and it’s not up at LP.org either. Whole cities on the East Coast are dominated by Brazilian, Portuguese and Spanish-speaking, immigrants who VOTE!
    Until the LP makes its case plain in at least the four European languages spoken in the Americas, communist anarchists “over there” will continue to “explain” that libertarian really means communist or anarchist assassin/terrorist, as occurred during the Spanish Civil War.

  17. I’ve stood up to a few people with the essential reality this is a retroactive discipline and innately uncalled for. Individuals simply assert Ireland gave ‘state help.’ The contention doesn’t appear to have a shred of scholarly believably to me. How does any nation in the EU keep away from a comparative discipline unless they embrace a uniform expense code, truly? Any nation with a lower charge for a partnership is at risk to be hit with the same kind of gibberish. When this assertion was marked, no states proposed to surrender the self-governance to set their own duty rates.

  18. Really Nice Post. Thanks for sharing with us.

  19. Perhaps it might be best for Apple if they bought their own government rather than renting a person else’s. There are plenty of different agencies in the equal boat as Apple, maybe they may pass in on a timeshare collectively. Trendy failed rules are simply the stones that pave the way for the following day’s failed regulations. Can Someone Write My Thesis For Me

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