The EU commission had ruled that a sweetheart tax deal offered by Ireland (EU member country) to Apple, where it can save billions of euros in taxes, is illegal, prompting a fine of 13 billion euros which amounts to ten years of back taxes and interest. The US administration fumes in anger, and sees an undue targeting by the EU commission against a US corporation. A senior US Treasury department spokesperson said,
“The Commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU.”
Can the US effectively punish the EU? It is certainly much harder to do against a 27 country juggernaut, whose economy and population are larger than the US, than against individual European states. The EU uses its size to enforce their position, and the US is best poised to retaliate by targeting EU corporations active in the US (not that I endorse it, just laying out the likely options). It is unlikely that US corporations refuse more foreign investment into the EU, because the market is so huge and the infrastructure capacity is enormous.
Who is right in this dispute? It is hard to tell, but there is no doubt that the EU and the US both practice economic nationalism, because the US does not want the EU to take tax money from a US corporation even though that US corporation was doing business in the EU. Josh Earnest, a White House spokesperson, referred to the Commission’s decision as a transfer of funds from US taxpayers to the EU, because US corporations can claim a tax credit for every dollar in tax paid to an overseas, non-US entity. The 14.5 billion dollars in additional Apple-EU taxes would be deducted from the Apple-US taxes, such that Apple will pay only pay 35.5 billion dollars to the US (Newman 2016).
Whether all of that is just depends on the level of business that Apple carries out on both continents and what the respective tax rate is in each jurisdiction. The US has rather high statutory corporate tax rates (39%), but the effective rate is rather low (13%). Corporate tax take as share of total government revenues declined from 32% in 1952 to 10% in 2013 (Americans for Tax Fairness). The EU has lower nominal corporate taxes (range from 0 to 35%, whereby Ireland gives away the most corporate tax deductions; Estonia has 0% corporate taxes). Implicit (net) tax rates on corporate income have declined in many European countries as well (-32% in Slovakia from 1995 to 2010, -57.1% in Latvia, -13.3% in Netherlands, see Table 81 in Eurostat 2012). The multiple tax rate structure in the EU actually works in favor of Apple and other multinationals, because they can do business all over the EU and report taxes in the low-tax country (which the EU hopes to change with their ruling).
So in all developed countries, the corporations are paying a smaller proportion of their net income in taxes. The only rationale for lowering the tax capacity of countries is that they hope to attract more foreign business investment and that by facilitating greater corporate profits some of that wealth will trickle down in the form of jobs and more economic growth. At this point, we should realize that trickling up the wealth does not result in trickle down, but the neoliberal consensus has fixated lower relative taxes on corporate income and higher taxes on consumption and labor income. It is this peculiar corporate-friendly regulatory structure which increases the disparity in wealth and income between the rich 1% and the rest of society.
But some might say that the EU commission’s decision to stick it to Apple could turn this situation around. However, the EU is not discussing how to restore higher corporate tax rates. Many Eastern European countries coming out of communism would refuse to alienate their foreign investors and are unwilling to impose higher taxes. The other problem is that the US treats the EU decision as a zero-sum game, because the gain to the EU taxpayer translates into a loss for US taxpayers. While Apple appeals the EU decision, they might be hoping that the US treasury will be willing to let that decision go through, and the US then hopes to retaliate on Volkswagen (as they had with the emissions scandal) and other EU-based corporations doing business in the US.
In order to create rational corporate tax policy, it would be important to prevent economic nationalism and zero-sum games on the backs of taxpayers of one jurisdiction. A transnational corporate tax agreement would make sense, but it would be difficult to negotiate because the low-tax countries have to hike corporate taxes, and Ireland, which has banked much of its economic fortune on low corporate taxes, would scream in resistance. But the interesting thing is that small countries can easily be defeated if the will exists. For instance, Switzerland was considered an unbeatable haven for foreign dictator, businessman and illicit money and the bank secrecy laws are as holy as the Bible to Christians. But then the US applied some pressure on the Swiss authorities to release the bank data of wealthy US nationals, and they immediately caved. A similar force of pressure must be exerted on low-tax corporate jurisdictions like Ireland.
Besides, the US might, for instance, scrap or at least reduce the foreign tax credits and thereby allow a double taxation of corporate income. Apple investors will be furious, but we should not forget that Apple had 203 billion dollars in cash in 2015 (La Monica 2015), and is the most highly valued firm in the world. It is really pathetic to still complain about world hunger and crumbling infrastructure when there is plenty of available capital circulating in the world.
If the US would really change the tax law to allow more proceeds to be taxed then this would substantially change the way how corporations are treated, and would facilitate more corporate accountability to the public. It is small wonder that the corporate bosses are doing their best to negotiate the TTIP and TPP in secret without consultation of the public, because they want to rewrite the rules to facilitate the least amount of environmental, product safety and labor regulations, while creating a pro-corporate tribunal to arbitrate trade disputes against national governments and the public and in favor of corporations. For the corporate bosses and their government official cronies to have their way, democracy has to be effectively neutered.
For people, who celebrate the EU move to tax Apple as a first step to curb corporate power, we should not deceive ourselves, because it reminds me of the SEC fining US banks for selling fraudulent mortgages to clients, while the banks merely consider the fine as a cost of doing business. If the fine amount is less than 5% of total income generated under the fraudulent scheme, then the fine is no more than a bribe to government officials so they shut up. Any poor person deciding to rob the bank and being caught by the police has to pay back the entire amount stolen plus a fine, some jail time and a criminal record, while no banker has been put to jail or had to give up their business to my knowledge.
The big corporations have hired the best lawyers and former top level government officials to ensure that they would not have to face such a high tax bill. My hope is that the struggle between top EU and US officials does not take place solely on the backs of working people, who duly pay all of their taxes, but that more government revenue can be generated by corporate taxes so that we can finance the things which we all need to provide for good social policy, while also enabling these corporations to have their markets to continue earning profits. Socializing these corporations and making their revenues benefit all people would be the most desirable goal in the long run, but we still have a long way to go before reaching that objective.