As I wrote more than two weeks ago, one of the key conflicts to watch in 2018 is The (failed) EU vs. Silicon Valley. Long gone--really long--are the days when European technology companies were among the leading ones in the world. The more digital the world becomes, the more Europe gets marginalized in the most important fields of technology--fields in which Mediterranean statism never succeeded in the first place.
On Wednesday, Apple announced what is a huge victory President Trump and Republicans in Congress: a $350 billion contribution to the U.S. economy over the next five years (that's at a level with the entire public debt of the failed state of Greece) including a $38 billion repatriation tax payment to the Dept. of the Treasury.
That payment is due to the fact that Apple essentially parked money in Ireland at times when U.S. corporate tax rates were much higher. While other politicians thought they could name and shame Apple and other U.S. companies for totally lawful behavior, the dealmaker-in-chief, a businessman himself, simply recognized that the United States faced only two realistic choices: make those companies an offer they can't refuse and get them to bring a lot of money back to the U.S.--or otherwise they'd have to do what's best for their shareholders, which led to the absurd situation of Apple borrowing money so it could pay its dividends while it actually had plenty in Ireland.
When Apple announced that it "expects to invest over $30 billion in capital expenditures in the US over the next five years and create over 20,000 new jobs through hiring at existing campuses and opening a new one," it confirmed that the President's "Buy American, hire American" strategy is working out nicely so far, unlike the EU's failed economic, fiscal and monetary policies. The Trump tax reform is indeed increasing America's competitiveness, and the primary loser is that old, complacent, bleeding-hearted continent run by politicians who have everything in mind (even Africa) but the competitiveness of their economies in the digital age and opportunities for their citizens.
The EU "state aid" "case" against Apple--formally, against Ireland, which the EU even sued last year for alleged non-compliance with a ruling to recover "up to" 13 billion euros--is still on appeal. Last February I criticized the EU decision (after reading it a couple of times in full detail), among other reasons for misrepresenting an important thing:
In its decision, the Commission does recognize that under Irish tax law a company can be registered in Ireland without being subject to Irish taxes. The Commission describes those companies as "stateless," which again sounds like "never paying taxes anywhere, anytime" and is not the way it is: if a company is registered in Ireland but practically operates outside of Ireland and is managed in the U.S., its profits will be subject to U.S. taxes, just that the point in time when this occurs depends on repatriation.
The EU Commission doesn't say that such companies cannot legally exist. It's all about allocation: it's about how much is taxed in Ireland (and, in that case, taxed immediately) versus how much can be kept in Ireland for a while but will ultimately be subject to U.S. repatriation tax.
Now "the point in time when this occurs" is near. Apple is going to make that payment. A reporter then asked a spokesman for EU competition commissioner Margrethe Vestager at a daily Brussels press briefing what bearing Apple's U.S. tax payment would have on the EU "case." Reuters reports that Mrs. Vestager's spokesman said "nothing has changed" with a view to that matter. He obviously had to say so. The only alternative would have been for the EU to recognize its fundamental legal error and drop the "case."
At this stage of proceeding, the Commission is just a party to the case. Since both the Commission and the judges on the EU courts are appointed by the same national governments, it's not a given that Apple will be treated fairly, but at least there is the possibility of the judges finding the "rationale" underlying the Commission decision so irrational that they'll overturn Mrs. Vestager's decision.
I actually agree with her spokesman in the sense that "nothing has changed" about the decision having failed to distinguish between tax avoidance and deferred taxes (see this explanation by Apple and another one by Fortune). What has changed is the tax rate for Apple in the U.S., and that made it a better choice for Apple to repatriate mountains of cash. But the overall cross-jurisdictional framework, with the deferred tax system in the U.S. that applied to the years at issue in this "case," hasn't changed retroactively. The idea of any of Apple's money ever having been "stateless" (not taxed by anybody) was a complete misconception.
What has changed, however, is that it's now just a matter of legal structures but (additionally) a matter of fact. Apple can point to its U.S. repatriation tax payment and, on that basis, focus the whole debate on allocation (how much of its taxes it owes in the U.S. and how much in Ireland) as opposed to tax avoidance.
Considering that Apple's products are designed and engineered in the U.S., and not even manufactured in Europe, it shouldn't be hard to understand that most of Apple's taxes are due in the U.S., too. It doesn't make sense to me that the Commission wants Ireland to collect €13 billion (almost $16 billion), almost half as much as the $38 billion Apple expects to pay as a U.S. repatriation tax. If those EU jurisdictions got even 20% of the amount Apple pays in the U.S., that would already seem very high (almost outrageous, actually) to me.
While nothing has changed about what the law was in the years the EU "case" relates to, it's now easier than ever for the judges to see that Apple never engaged in tax avoidance. The Commission can no longer argue that Apple's "stateless" subsidiaries would never ever pay taxes anywhere.
What Apple announced this week ups the political ante for Mrs. Vestager in three ways:
The kind of propaganda that influenced public and political sentiment in the past won't work anymore.
While the details are not known, there's no question that an unjustified "recovery" of taxes from Apple by Ireland (under pressure from Brussels) affects the United States. At a minimum, any taxes Apple is required to pay in Europe reduce the amount of money it can repatriate. Possibly, there are other implications as well. So there is a potential a major political conflict between the United States and the EU.
Mrs. Vestager wields a big stick but depends on being backed by the governments of the EU member states. I haven't managed to find out what positions various governments have communicated to the EU court. There is, however, a possiblity of some governments now recognizing that Mrs. Vestager's approach is not going to be fruitful. Apple's public statement emphasizes that jobs are going to be created in the U.S., while Apple doesn't do much more in Europe than sales and marketing. The EU Commission's antagonistic attitude does nothing to spur investment in Europe. It just benefits the United States--and President Trump. It could be that some EU member state governments will understand this and be ever less prepared to back Mrs. Vestager's crusade.
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