Monday, December 19, 2016

Apple CFO: "What the [EU] Commission is doing here is a disgrace for European citizens, it should be ashamed"

When I described the European Commission as a "premier source of fake news" in yesterday's post, I knew from a Bloomberg tweet that the Commission's €13B "state aid" decision on Apple's Irish taxes was going to be published before the Holiday Season but didn't know that today was going to be the day. [Update] Here it is (PDF). [/Update] In order to counterbalance Commissioner Vestager's claims, the Irish government and Apple have just launched pre-emptive strikes:

  • Ireland has published a summary of its key arguments against the Commission ruling (PDF). In a nutshell, Ireland says the Commission misunderstands Irish tax laws, views as a preferential treatment what was available to any other international company, wants Ireland to collect taxes on what Apple should pay taxes on in the U.S., and accuses the Commission of improper procedures. It's clear that Ireland ideally aims for the Commission ruling to be overturned in its entirety but, as a Plan B, would at least like to limit its impact.

  • Apple's General Counsel Bruce Sewell and Chief Financial Officer Luca Maestri gave Reuters' Brussels competition expert Foo Yun Chee (a reporter I've been in contact with for many years and whom I regard as very thorough and objective) an interview in Cupertino. Apple's executives pointed out, among many other things, that their Irish operation "doesn't do any engineering, doesn't generate any intellectual property."

  • In parallel to the Reuters interview, Apple's CFO also gave an interview in Cupertino to Die Welt, a well-respected German newspaper that belongs to Europe's largest newspaper publisher, the Axel Springer group. That interview has only been published in German, so let me translate Mr. Maestri's strongest statement here:

    Maestri accuses EU competition commissioner Margrethe Vestager of pursuing a political agenda. "What the Commission is doing here is a disgrace for European citizens, it should be ashamed."

    Mr. Maestri, an Italian, is a European citizen himself. This statement is similarly tough as Apple CEO Tim Cook's initial reaction to the decision, calling it "total political crap."

    In the Die Welt article, Mr. Maestri then argues that Europe's economy will suffer massive harm at the end of the day, given that many companies must make decision on where to set up research and development. And in light of how the Commission is dealing with Apple, they may prefer such places as Singpore or Hong Kong.

Legal certainty is probably the most basic prerequisite for business and innovation. The same concern was raised three months ago by the Business Roundtable in a letter sent to political leaders of the EU's 28 member states. The Business Roundtable is an association of CEOs whose companies, according to the organization's website, have "more than $6 trillion in annual revenues and nearly 15 million employees."

I have been interested in the intersection of IP (which also plays a role in the Apple tax case) and competition policy/regulation for a long time, and my main concern has always been innovation. As a European (albeit a somewhat Americanized one and Donald Trump supporter) and as a startup founder (I founded an online gaming network in 1996 and sold it to Telefónica in early 2000, and in 2014 I started my current app development company), I care about this. And when it comes to Irish corporate taxes and corporate decisions on where to set up subsidiaries, I also have a personal connection to the subject: in 1995, I persuaded Davidson & Associates, then the parent company of Blizzard Entertainment (which later became the world's most successful computer games company on a per-title basis), to manufacture the German version of Warcraft II - Tides of Darkness in Ireland. Without my strong recommendation, the same activities would have taken place outside of Europe.

The EU's innovation policy has been a failure and a laughing stock. There was that thing called "Lisbon Agenda": they wanted to make the EU the world's most competitive and dynamic knowledge-based economy by 2010. By now, no one is even talking about it because, quite obviously, it didn't materialize to any noteworthy degree. Or, as my favorite political commentator, the insightful Rush Limbaugh, said in late August:

"The way the European Union is looking at Apple -- the European Union is nothing but a bunch of takers. The European Union wouldn't know how to produce diddly-squat."

This is sad but true. The Apple tax case won't make Europe more competitive, but it threatens to discourage investment in Europe. Ireland could have said: "Let's just collect an amount that corresponds to 26% of our national budget." Instead, Ireland's minister of finance said he didn't want to eat the seed potatoes: the longer-term implications of this are too bad, so any short-term windfall would be unwise to take.

It's not just a disgrace what the EU is doing in this "state aid" case (it's not "state aid" by any stretch of the imagination since it has nothing to do with giving one company an advantage over others). The EU's innovation policy as a whole is a disgrace, as are EU policies in some other areas (common currency, migration, cross-border crime).

I'm afraid that too many people in Europe will be misled by politicians who will portray Apple as a greedy large corporation that doesn't want to meet its obligations to society. It looks like redistribution if you tax the most profitable company in the world, but that's just populism. Before you have anything to redistribute, it must be created, and in order for something to be created, you need far better policies than the ones the EU has adopted and implemented so far.

A populist campaign against Silicon Valley isn't going to result in the creation of a European Silicon Valley. Instead, it will benefit other economies. In Asia, for example.

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