Apple
fight tests Europe’s operating system
Margrethe
Vestager’s high-profile move raises question of who runs the EU.
Apple
was paying only €50 of tax per million euro of profit.
Apple
CEO Tim Cook frequently interrupted Margrethe Vestager during a
meeting earlier this year, according to sources
By
Tim
King
9/2/16,
5:29 AM CET
Apple chief
executive Tim Cook is at least half-right when he describes as
“political” the European Commission’s demand that Ireland
should claw back €13 billion in forgone taxes from the American
computer giant. The decision, he told Irish radio, had no basis in
law or the facts of the case.
Margrethe Vestager,
the European commissioner for competition, denies that the decision
is politically motivated. The European Court of Justice, she claims,
is not interested in politics, just the facts.
Yet there is no
denying that the Apple case is profoundly political in its
consequences and has now set in train a very political battle for the
backing of Europe’s finance ministers. Vestager has put into play —
in the most high-profile way possible — the question of who runs
Europe.
Not everyone
perceives the struggle in those terms. The Irish government and its
supporters dispute the Commission’s move into investigating tax
rulings, the agreements made between a national tax authority and an
individual company (which have previously resulted in adverse
judgments against Starbucks in the Netherlands and Fiat in
Luxembourg). They would argue that Vestager has raised the question
of who runs Ireland.
Margrethe Vestager
has put into play the question of who runs Europe
Margrethe Vestager
has put into play the question of who runs Europe | Frederocl
Florin/AFP via Getty Images
And the United
States Treasury Department has set out in a white paper its
objections to Vestager’s recent tax investigations, complaining
that the European Commission is laying claim to money that might be
owed to the U.S. tax authorities. It implies that the EU is
interfering with who runs the U.S.
* * *
The EU-U.S. tensions
are, however, a distracting decoration. Although it is tempting to
see Vestager’s decision as continuing a tradition of European
competition commissioners trying to cut American giants down to size
(Mario Monti blocked GE’s takeover of Honeywell; Monti, Neelie
Kroes and Joaquín Almunia pursued antitrust cases against
Microsoft), that would be to ignore other nuances in the Apple
conflict.
The Apple case
raises the question of how much tax income other countries might be
missing out on because of Ireland’s tax ruling.
First of all,
Vestager’s target is the national governments of the EU. Her
message is that tax competition cannot and should not mean a complete
free-for-all. That is the same message she previously delivered by
way of similar state aid rulings to the Netherlands, Luxembourg and
Belgium — but the sums involved in the Apple case are so great as
to make other countries sit up and take notice. More than previous
cases, this one raises the question of how much tax income other
countries might be missing out on because of Ireland’s tax ruling.
And her message is that if the EU does not stand united, the only
beneficiaries will be the multinationals playing fiscal arbitrage.
The message is not
in itself a new one. The EU’s debate about what constitutes fair or
unfair tax competition has flared at various moments in the past —
in 1998-1999 over Ireland’s corporation tax and in 2009 over
Slovakia’s tax rates for car companies, for instance.
What is new,
however, is the method chosen by the Commission to push its argument
— exercising its powers to police state aid. The idea has been
kicking around for some time. Monti, who had been single market
commissioner before taking the competition portfolio, argued that
unfair tax competition and the threat it posed to the single market
had to be countered by use of state aid powers.
Vestager is more
willing than her predecessors to test the extent of the Commission’s
powers.
But back then there
was no willing alliance between the commissioners for the single
market and competition. Those posts were held by a succession of
people who were skeptical about giving the EU more power over member
countries and who were by nationality protective of low-tax
arrangements: Frits Bolkestein from the Netherlands, Charlie McCreevy
from Ireland and Kroes from the Netherlands. And the Spaniard
Almunia, who held the competition portfolio from 2010-2014, was no
innovator.
In addition,
Vestager is more willing than her predecessors to test the extent of
the Commission’s powers, though her concerted use of state-aid
inquiries looks likely to be challenged by Ireland and Apple in the
European Court of Justice. That is not the only fight-back she must
face down: U.S. Treasury Secretary Jack Lew wrote to Vestager earlier
this year suggesting that her attack on tax rulings puts at risk the
existing cooperation in international fora — in the G20 and the
Organisation for Economic Cooperation and Development. Apple, too,
has accused the Commission of trying to “upend the international
tax system.”
* * *
Apple
CEO Tim Cook frequently interrupted Margrethe Vestager during a
meeting earlier this year, according to sources
What is significant
about that line of challenge is that it seeks to appeal to EU finance
ministers, who retain the prerogative to negotiate on tax issues in
international fora. The Commission’s powers over taxation are much
more circumscribed than on competition. The U.S. government is hoping
that a combination of the finance ministers and Jean-Claude Juncker,
the Commission president, might rein in the meddlesome competition
commissioner.
European Commission
President Jean-Claude Juncker | Frederick Florin/AFP via Getty Images
European Commission
President Jean-Claude Juncker | Frederick Florin/AFP via Getty Images
Vestager stands
accused of threatening a developing consensus that governments must
work together to combat tax evasion. That trend was accelerated by
the financial crisis, which put public revenues under severe strain,
by the crackdown on money-laundering and organized crime which
curtailed the room for secrecy, and by the LuxLeaks and Panama Papers
revelations. The finance ministers must decide whether Vestager’s
inquiries are part of that trend or run counter to it.
It’s clear where
Michael Noonan, Ireland’s finance minister, stands, but it is hard
at this stage to know how the various other finance ministers might
react to the information being brought to light by the Commission’s
inquiries.
Those who defend
Ireland’s right to style itself as a low-tax economy are quick to
point out that Vestager hails from Denmark, a high-tax economy. But
they might also pay attention to another supposed characteristic of
the Danes — a Lutheran-inspired fondness for openness and
transparency.
Apple
was paying only €50 of tax per million euro of profit.
It’s a significant
feature of the state aid inquiry that Vestager gets to make public at
least some of the terms of tax rulings that were previously secret
between national authorities and the multinational corporations.
In doing so, the
Commission may widen divisions between the finance ministers —
exposing both to the ministers and to their electorates the tax
revenue that is effectively not being collected. Sven Giegold, a
leading German Green member of the European Parliament’s economic
and monetary affairs committee, was quick to express mischievous
surprise that Wolfgang Schäuble, Germany’s finance minister, was
not more concerned about the loss of revenue. Until his recent wobble
over Spain and Portugal, Schäuble had always taken a hard line in
demanding that other national governments should reduce their budget
deficits.
* * *
Publishing details
from the tax rulings should also help Vestager in her struggle to win
the backing of European consumers. Her revelations that in 2014 the
company was paying only €50 of tax per million euro of profit, and
that Apple International in Ireland, through which the company’s
revenue was channeled, had no premises and no employees in Ireland,
might not cut much ice with tax lawyers and accountants, but they
will play well in the court of European public opinion.
The Irish
government has failed in its duty to be fair — a duty that it owed
not just to its own citizens but to the other EU member countries.
Apple may be a
darling of consumer electronics, but it does not follow that
consumers will give it a free fiscal pass. Nobody likes paying taxes.
What they like even less is having to pay taxes while watching others
escape them.
Vestager has couched
her demand that Ireland must recover the state aid as one of
fairness: Taxes must be paid and one company cannot be given special
treatment. The claim to be an arbiter of fairness is a very important
one. The underlying message is that the Irish government has failed
in its duty to be fair — a duty that it owed not just to its own
citizens but to the other EU member countries.
The assertion made
by Wednesday’s Commission decision is that, if an individual
country can’t stand up to the likes of Apple, Google, Microsoft and
— lest José Manuel Barroso is forgotten — Goldman Sachs, the EU
will. If not Margrethe Vestager, then who? If not the European Union,
then what? Those are profoundly political questions.
Tim King writes
POLITICO‘s Brussels Sketch.
