Depending on the outcome of an official investigation, Apple may face a bill that is estimated at between $8 billion and $19 billion for underpaid taxes to the Irish government. The Irish government really, really doesn’t want to get this money and is fighting as hard as it can to avoid receiving it. That may sound weird to ordinary people, who assume that governments want to squeeze individuals and businesses for as much taxes as they can get. But if you understand the politics of international corporation tax, it all makes sense.
Apple wants to avoid paying U.S. taxes
As Gabriel Zucman argues in his book on international tax evasion and avoidance, “The Hidden Wealth of Nations,” many U.S. firms locate as much of their activities as possible in low-tax jurisdictions like Ireland to minimize their tax bills. This is often easier for sophisticated technology firms, since so much of their profit is tied up in intangible activities and assets such as design. Hence, they can structure their operations so that much of the profits go to subsidiaries based in Ireland, Luxembourg and elsewhere, minimizing their U.S. tax exposure and deferring the point at which they have to pay U.S. taxes. Apple has approximately $200 billion salted away overseas. Businesses like Apple have also sought individualized tax “rulings” from countries like Ireland and Luxembourg that legitimize their specific tax arrangements. Critics describe these rulings as sweetheart deals, while defenders say that they assure long-term confidence and stability.
[American businesses gave themselves a 6% tax cut over the last 15 years. Here’s how they did it.]
Apple’s tax ruling has come under fire
Other European countries are very unhappy with the low tax rates in Ireland, Luxembourg and other corporate tax havens. They believe that these countries are deliberately trying to lure business and investment away from them. However, under E.U. law, they haven’t been able to do much about it. Corporate taxation policy is mostly left to the discretion of individual European countries, providing few angles of attack for countries or officials who don’t like tax havens.
However, the European Commission, the executive and administrative body of the European Union, has recently come up with a clever new legal argument. Even if E.U. law doesn’t really cover corporate tax laws, it does allow the E.U. to act against “state aid” — arrangements under which E.U. member states provide specific help to businesses in ways that distort market competition. If the European Commission treats tax rulings for individual firms as forms of state aid, it may be able to undermine them. This is what is happening to Apple. The European Commission is investigating whether Apple’s special tax deal with Ireland is a form of state aid. If it concludes yes, as everyone expects it to, it can make Ireland stop its special treatment for Apple and force Apple to pay whatever taxes to Ireland the commission thinks it should have paid.
Ireland isn’t happy
You might expect that Ireland — a country with heavy debt emerging from a serious recession — would be delighted to get its hands on up to $19 billion of unanticipated tax revenue. It isn’t. If Apple is forced to pay these taxes to Ireland, then Ireland will seem much less attractive to other footloose multinationals looking to minimize their tax liability. For example, Google too uses Ireland as a haven to minimize tax payments. The Irish government has clearly decided that the long-term economic costs of getting the money will outweigh the short term boost to revenues, and is lobbying against a large tax settlement.
The U.S. isn’t happy either
Every presidential election sees a lot of political rhetoric aimed at low tax jurisdictions overseas that are tempting U.S. businesses to locate their activities outside America. You might think that U.S. officials and legislators would be delighted to see these low-tax jurisdictions running into trouble. Again, you’d be wrong. The Senate Committee on Finance has just announced that it considers the European Commission’s investigation to be a “direct threat” to U.S. interests. The likely reasons are twofold. First, companies like Google and Apple have a lot of political clout on Capitol Hill. Second, and likely more important, if Europe succeeds in forcing U.S. companies to pay more taxes, Uncle Sam will probably have to foot much of the bill. The affected companies are likely to claim tax credits in the United States for taxes that they have to pay overseas, leaving the U.S. government and U.S. taxpayers worse off.