Taking a Tax Bite Out of Apple

The European Commission ruled that Apple should pay retroactive taxes to the Irish government for alleged tax avoidance over the last decade. What makes this case unusual is the fact that Ireland doesn’t want the money, and both the Irish government and Apple plan to appeal the ruling. Apple CEO Tim Cook rightly expressed frustration with the ruling, but then again, so did officials in Washington.

Reactions to the ruling bring the often complicated public-private partnerships to the forefront of the foreign trade policy debate. Finding the right balance between collaboration and independence presents challenges for the political and business sectors. For state-owned companies, the delineation is simple and firms often become tools in the state policy arsenal. For private companies, the lines remain far more ambiguous. Iconic brands become cultural exports and at times can be perceived as an unofficial extension of U.S. foreign policy.

Washington’s involvement in the Apple case unnecessarily complicates these ties and further exposes the U.S. government to political risk by connecting state interests to an entity over which the government has no influence.

In European Commissioner for Competition Margrethe Vestager’s own words, the Commission undertook the Apple case in the name of fair competition in Europe. Washington sees it differently. The U.S. Treasury said the ruling endangers EU-U.S. economic relations and represents a targeted campaign against large U.S. corporations. Of note, the European Commission is also investigating cases against other iconic U.S. companies such as Alphabet, Amazon, and Facebook.

Regardless of the validity of the ruling, U.S. government involvement in the Apple case could undermine the EU judicial process and cement the perception that large multi-national corporations have undue influence in politics. Washington faces a no-win situation: if the court rules in favor of Apple, Washington’s critique will have been for naught, but Euro-skeptics could question the independence of the EU court system and allege that U.S. officials swayed the court decision. In the current framework of increasing populist support, Washington will have inadvertently fueled further distrust of the EU.

In case the court upholds the Commission ruling, Washington will have two options. If it chooses to keep calm and carry on, inaction will represent tacit acknowledgment of the limits of U.S.-EU cooperation. If it chooses to not keep calm and resorts to action, any response will effectively weaken the EU-U.S. trade relations, which will negatively affect economies on both sides of the Atlantic.

Professionell-Pflegende, © 2014

Professionell-Pflegende, © 2014

EU Commission President Jean-Claude Juncker commented that the ruling was meant to shock and awe, and it did. However, Washington should not let its discontent translate into policies that would be detrimental to U.S.-EU relations. Private corporations should not become representatives of national governments and a feud with Apple should not be seen as a feud with Washington. With or without the support of the U.S. government, Apple will continue to be a successful company.

Principle rather than short-term financial considerations drives Apple’s decision to appeal. Apple holds more than $200 billion in cash and the maximum potential tax payback of $14.5 billion equals Apple’s profits over a three-month period. Apple seeks to both prove the legality of its actions in a court of law and avoid setting a precedent wherein its financials can be retroactively targeted by other European capitals. Tax arbitrage is legal and enables companies to structure their transactions in order to pay the least amount of taxes across different jurisdictions. However, years from now, even an unfavorable court verdict will simply represent a short-term political setback for Apple.

Washington should encourage EU policies that promote competition and openness, but beyond that, the Apple ruling should have little bearing on U.S. trade policy with the EU. Doing so would expose the U.S. government to unnecessary risk. If anything, Washington should wait for the dispute to play out in the EU courts.

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