The European Union (EU) is working strenuously to stop giant American companies from avoiding taxes in its region. EU regulators have been studying tax arrangements between its member countries and US companies such as Apple, Amazon, Google, and McDonald’s. Just last week, the European Commission (EC) ruled that Apple owes Ireland €13 billion ($14.6 billion) in back taxes.
From an economic point of view, the EC’s ruling makes sense because Apple, with the help of the Irish government, separated the profits it reports and the taxes it pays from the business activity that generates those profits. From a legal point of view, the EC claims that Ireland unfairly allowed Apple to move the profits of its Irish business, which includes profits from all its European operations, into a theoretical head office that only exists on paper, which is not subject to taxation in any country, thus reducing the effective tax rate of key Apple subsidiaries below 1%. However, Ireland denies this and is already planning to appeal the decision.
One might think the Irish government would be grateful for the extra funds worth up to $14.5 billion, however, all of Ireland’s political parties agree that interference from the EC would disrupt its economy and push US companies away from Ireland. A conservative Prime Minister, Enda Kenney, said that Ireland, as a small country at the western edges of Europe with few natural resources, had no alternative to the course it has pursued. He also states that competition for mobile investment has been higher than ever and that Ireland competes intensely in this field but within the rules.
Since Ireland joined the EU, its economy transformed into one of Europe’s strongest and became a business hub for tech giants. The EU assisted Ireland throughout the process, spending massive amounts on upgrading the country’s infrastructure to make it more appealing to foreign investors. Additionally, Ireland set an attractive corporate-tax rate of 12.5% for most companies. This led to a large influx of US companies seeking to open an export center in Europe.
However, there are some critics in Ireland. They want Ireland to abandon its model entirely as they feel that the tax treatment and other support that Apple is offered is not available to local companies, therefore making local businesses’ development slower. They also think all the taxes that the government did not collect could be used for a better cause, such as spending it on better health services and education.
In the US, corporate tax avoidance will continue to grow as profits of U.S. subsidiaries in tax havens, such as Ireland, British Virgin Islands, Cayman Islands, and Luxembourg, have been increasing tremendously since 2000. In 2004, US controlled companies’ profits equaled 7.6% of Ireland’s total GDP, and in just 6 years the percentage went up to 42%. In the Cayman Islands and British Virgin Islands, the profits of US companies equaled 20 times the local GDP in 2010. One of the reasons behind this is the ease with which intangibles, such as patents and software, can be moved between foreign jurisdictions. Currently, there is $2 trillion of deferred income overseas that US companies hold to avoid being taxed. The Treasury Secretary Jacob Lew said that "The combination of the relatively high U.S. corporate rate, our complicated system for taxing multinational businesses, and our aging infrastructure has encouraged and facilitated the erosion of our tax base and made America a less attractive place to do business.”