We Romanians have an old saying, which I think is appropriate here – brother is brother, but the cheese costs money. Actually, it’s quite an appropriate equivalent for the arm’s length principle in transfer pricing, don’t you think?
Anyway, the issue of profit appropriation and tax collection following multinational intra-group transactions is still unclear. States still need more money (as says the father of the BEPS project at the OECD). So it's… WTF: the World Tax Fight.
On its collateral damage, please see the comment of Adrian Luca, TPS.
Dollar by dollar, euro by euro, we're in a full-blown World Tax Fight. The mere audience gets the… reflection.
”Is this a joke? Ireland challenges the EU decision to request Apple pay back 13 billion euros (to the Irish)?" – asks a Romanian reader who calls himself "Aramis", in a comment to the news shared all over the world on 30 August 2016. I don't know Aramis, but I noted the way the musketeer reader ends his observation with the famous combination which best voices the modern confusion. Willy-nilly, we're all caught in this confusion which already earned the name of… World Tax Fight. The global struggle for taxes did not begin with the Apple case, but surely this August 30 will be a milestone- the day the large-scale hostilities started.
Large-scale, but not because it's about 13 billion euros - the amount Apple should refund to Ireland for the past 10 years of selective fiscal treatment, as the European Commission has asked (Brussels would have asked even more, but the current legislation only allows recalculating aid for the past 10 years). It's a huge pile of money, but also just a crumb. On quarterly profits nearing 8 billion (in June 2016) and hundreds of billions cash, Apple could call tomorrow for wiring the money and settle the conflict. The problem is – what conflict?
Ireland does not seem to have a problem with this company, which happens to be a giant corporation today, although 36 years ago it was just the company of a guy named Jobs. This guy decided to come to some place called… Cork, and open a factory to produce something called… a personal computer (see here a mini-interview with Steve Jobs on the opening – it's unbelievable it happened in our days), employing 60 Irish. Today it's a plant with 4000 employees producing Macs, and the only production unit in Apple's portfolio.
Yes, Apple, which might only pay a profit tax of 0.005%, compared to… 1% in 2003, as per the European Commission's charges. But Ireland asking even this one per cent back (the operating profit rate is 12.5% in Ireland, in case you wonder) would be economic suicide, something like making fake whiskey, or whatever one might call undermining the whole edifice of 30 years in terms of attractiveness of the investment climate (which Brussels cannot pretend it didn't see). Not to mention that even tiny Ireland does not get drunk on 13 billion earned overnight. Just one month ago, this small country with a population of 4.6 has reviewed its 2015 GDP to 215 billion euros, which is 26 billion (or 2 x 13) the 2014 result. The reason? More and more multinationals are relocating to Ireland and bring investments on paper, accounted as a plus for the economy. But this really doesn't make the Irish more confident (public debt is 94% from GDP, remember? A few years ago was 120%), especially now with their neighbors on Brexit, bringing uncertainty and confusion to the gate.
Still, the question 'what conflict?' needs an answer. From the CEO seat of one of the world's richest and most influential corporation, without the ties of a politician, Tim Cook asserted on 13 August in an interview to Washington Post, "the basic controversy at the root of this is, people really aren’t arguing that Apple should pay more taxes. They’re arguing about who they should be paid to. And so there’s a tug of war going on between the countries of how you allocate profits. The way tax law works is the place you create value is the place where you are taxed. And so because we develop products largely in the United States, the tax accrues to the United States." Well, this global fight is the issue - profit appropriation, the size of the slices of this pie.
The American system allows IRS to tax all net income obtained worldwide by an American taxpayer, even if the collection can be deferred until money comes back home/is repatriated. The perennial deferment… is a problem, one fiercely debated by American politicians (see the 2013 Senate hearings), the present-day election campaign included. Cook reminded, however, that he will not repatriate the profits as long as an unfair rate of 40% is waiting for them back there (35% federal tax, plus local taxes), so he prefers to wait… for a reform of the system. But this is strictly a U.S. problem, not the Europeans' business.
As Uncle Sam said in very undiplomatic terms, even bluntly (Irish green, Irish grin?), "There is the possibility that any repayments ordered by the Commission will be considered foreign income taxes that are creditable against U.S. taxes owed by the companies in the United States. If so, the companies’ U.S. tax liability would be reduced dollar for dollar by these recoveries when their offshore earnings are repatriated or treated as repatriated as part of possible U.S. tax reform." It's right in the U.S. Department of the Treasury White Paper released on 24 August. Sort of 'hands off our money! Whether we collect it or not is our business, but you, Europeans, keep away of Apple's, Amazon's, Starbucks's, Chrysler-Fiat's taxes' (these being the cases opened so far by the DG Competition).
The 25 pages of technicalities ("the Commission’s approach will undermine the international consensus on transfer pricing standards, call into question Member States’ ability to comply with existing bilateral tax treaties, and undermine the progress made under the OECD/G20 BEPS project", etc.) are invoked to rebuff the Brussels Executive. The Commission is clearly told that it means to "expand the role of the Commission’s Directorate-General for Competition beyond enforcement of competition and State aid law under the TFEU into that of a supra-national tax authority that reviews Member State transfer price determinations". Our European pride tells us the Americans should not patronize us, but we must admit they're mostly right.
Like for a surgical strike, Washington accurately aimed the great vulnerability of Brussels, namely the lack of cohesion and consistency on a Community level, at least in the sensitive field of taxation. For instance, it's not clear who benefits from this act of independence of the European executive: how the competition climate on a Community level is fixed post factum, antagonizing a big company (Cook's Apple already communicated it provides, directly and indirectly, 1.5 million jobs in the EU). Antagonizing does not mean Apple will grab its gadgets and go home (no one can afford giving up such a developed consumption market), but at any rate it does not mean the European economy will become more attractive, at least for the big technology projects. Should we mention that ultimately neither Apple, nor Amazon, Google, not even Starbucks are products of the European economy?
Google might follow Apple, as the next high-profile trial in Brussels (the blamed tax arrangements are basically similar). But I will remind here the pragmatic approach of the Brits, on a national level, to the issue of incredibly small taxes paid by the Internet search giant. Despite the political pressure in the Parliament, HM Revenue & Customs made a deal under which the company should, at least from now on, use market-level transfer pricing, thus contributing higher taxes. An attitude not seen yet in France, which is still threatening to squeeze billions from Google. Until then, on the Thames, Google is doing its new homework on taxes, keeps investing in the UK, and refrains from rocking the boat about the thousands of jobs in Britain. Perhaps there's a reason for this pragmatic and pro-active approach of the administration being one of London's arguments it can stand the shock of parting ways with Brussels.
Meanwhile, Brussels is more concerned in its super-integration progress - for instance we expect the European reform of the CCCTB (Common Consolidated Corporate Tax Base, which is mainly a radical change in profit sharing/allocation) to come soon – and less in a harmony of 27 economies. (At any rate, that Community musketeer spirit does not exist yet - this is also in reference to our reader).
This is why I think Brussels's 13-billion stiffening about Apple is actually bad news for the European economy, firstly for the small Member States, which are practically denied any tax initiative of their own to draw investors.
I was reading this Monday that prime minister Cioloș displayed in front of our diplomats a slightly more critical attitude towards Brussels's actions "We have already voiced our opening to the European states that started internal reflection processes. (…) We will continue such contacts, and pragmatically offer proposals and ideas, while also constantly pleading for the need of a shared reflection process, a coordinated and inclusive one, which should not create or widen gaps between Community blocks." Reflection is generally good, but it seems some action is needed, too. Otherwise, Brussels will go on its way. Actually, where will Romania stand in the new World Tax Fight? The question really needs an answer.