Irish Tax Shelter Comes Under Fire from European Commission

The luck of the Irish may be running out in light of the European Commission’s pending investigation into Apple Inc.’s allegedly preferential tax deals. In an incriminating 21-page report released last Tuesday, the Commission revealed that tax discrepancies were found in government contracts made with foreign companies. Special deals like this are a violation of European Union tax policies and other European Union member countries worry that they give Ireland an unfair advantage in attracting foreign business.

Ireland boasts one of the lowest corporate tax rates in Europe at 12.5 percent. According to Irish officials, the low rate was necessary for Ireland to attract industry and boost the economy in the aftermath of the recent financial crisis. As every country in the E.U. has the right to set its own tax rates, Ireland’s low [nominal] tax rate does not infringe upon European Union regulations. However, at less than 2%, Apple’s tax rate appears suspect of abnormally generous aid from the state—which could constitute a serious transgression under existing European Union mandates.

According to the New York Times, even Apple acknowledged that there was “no scientific basis” for the figures. Rather, Apple’s tax bill was essentially “reverse-engineered” during the negotiation process with Irish officials (in 1991 and 2007 respectively) to match the size of the profit that company representatives wanted. If foul play is proven, then Apple will potentially owe billions in back taxes to the European Union. That being said, the case is expected to take many years to unfold, and even the largest estimates of Apple’s financial obligation (approximately $6 billion if derived from Ireland’s full statutory rate) are relatively insignificant compared to Apple’s recent profits.

It is currently unclear how Ireland has benefited from Apple’s presence. The European Commission report details that “Apple enjoyed a 400 percent increase in sales revenue from 2009 to 2012.” Yet, “the operating costs used to calculate taxable income in Ireland reportedly grew only [by] 10 to 20 percent.” This discrepancy is what initially attracted suspicion from Brussels, and indicates that the amount of money Ireland received from Apple was negligible. This raises questions as to why Ireland would agree to such taxing leniency in the first place.

In response to these allegations, Apple has denied any involvement in so-called “sweetheart deals.” Apple CEO Tim Cook claims the company did not rely on tax gimmicks, and has paid every dollar it owed—both in the U.S. (where the Senate is also investigating Apple subsidiaries) and abroad. This defensive sentiment was also echoed by an Apple finance chief, stating recently that “Corporate taxes in Ireland have increased more than 10 times since the introduction of the iPhone in 2007.”

Regardless of determining culpability, it is important to note that Apple is not the only company under investigation within the European Union. The Commission is also looking into suspicious tax deals made between Fiat and Luxembourg along with Starbucks and the Netherlands. These investigations represent a larger international effort by governments to curb businesses’ attempts to evade tax payments. The G20 has been calling for years to force big multinationals to pay their fair share, and the European Commission’s recent flurry of activity may be part of a larger movement to harmonize corporate tax regimes across the E.U.

In the past, taxation regulation has been met with staunch resistance from national governments that sought to maintain as much autonomy as possible. However, with the expansion of authority in Brussels, governments are increasingly being forcefully subjected to implementing and enacting more uniform tax policies (or at least they are deterred from offering similar “bargain-basement” tax breaks).

Many E.U. nations rely on their tax code to make them internationally competitive and thus incentivize companies to take residence inside their borders despite high costs for labor and physical capital.  While this strategy has achieved some success, critics have described it as conducive towards a “race to the bottom”—a form of trade warfare—in which governments, infatuated by the possibility of attracting foreign investment, engage in counterproductive practices that might do more harm than good to the national economy.

At least in the short term, Ireland seems to have suffered from its tax policies. The meager growth in jobs resulting from the presence of foreign multinationals, although beneficial to local communities, has not justified all the hardship Ireland has encountered because of them.