Photo: AP
Photo: AP

Apple, EU, and bruised Irish sovereignty

Brussels can't allow Ireland to abuse the European commons by offering Apple a deal that no other EU state could

Despite their unequivocal Europeanism, the Irish have been serially mistreated by the European Union. When Irish voters rejected the Treaty of Lisbon in 2008, the EU forced them to vote again until they delivered the “right" outcome. A year later, when private Irish banks imploded, threatening their (mainly) German private creditors with severe losses, Jean-Claude Trichet, the European Central Bank’s then president, “informed" the Irish government that the ECB would shut down ATMs across the Emerald Isle unless Ireland’s taxpayers made the German banks whole.

Ireland acquiesced, its public debt ballooned, emigration returned, and the country remains bruised and despondent. With the EU still refusing meaningful reduction of a debt burden unfairly borne by the younger generation, the Irish remain convinced, correctly, that the EU violated their sovereignty on behalf of foreign bankers.

Ireland’s greatest weapon against the ensuing debt deflation was its ability to attract US-based tech giants, by offering them a combination of EU law, a well-trained, English-speaking workforce, and a 12.5% corporate-tax rate. Though the shell-like subsidiaries of global tech conglomerates have little positive impact on most households’ income, Ireland’s establishment is proud of its links with the likes of Apple.

Now, the European Commission is jeopardizing the government’s special relationship with Apple by demanding that it claw back €13 billion ($14.6 billion) in taxes from the company.

Is the Commission’s latest intervention another example of EU bullying? Comparing Trichet’s 2009 intervention and the current stand-off over Apple holds important lessons.

In the Eurozone’s early years, German financial institutions channelled a torrent of capital into Ireland’s banks, which then lent it to real-estate developers. The ensuing property bubble resulted in white elephants in Dublin’s financial district, row upon row of new blocks of flats in the middle of nowhere, and a mountain of mortgage debt. When the bubble burst after 2008, land prices collapsed, debts went bad, and Ireland’s private banks failed.

The ECB instructed the government to invoke “financial stability" to force Ireland’s weakest citizens to repay every euro the defunct private banks owed to German creditors. Financial stability was obviously a smokescreen: Taxpayers were forced to repay even the debts of a bank that had already been closed (and were thus systemically irrelevant).

The roots of the Apple deal are older than ECB. In 1980, a young Steve Jobs visited an Ireland eager to escape underdevelopment. Apple eventually created 6,000 jobs in the country, in exchange for a sweetheart tax deal allowing it to shield its European revenues from taxation by recording them there. To this day, the proceeds of every iPhone sold in Paris or in Stockholm (net of its Chinese assemblers’ production costs) go to Apple’s Irish subsidiary Apple Sales International (ASI). ASI pays a minuscule tax on these earnings, effectively exempt from the ultra-low 12.5% corporate-tax rate.

This arrangement also required the usually vigilant US Internal Revenue Service (IRS) to play along. ASI’s profits stem from Apple’s intellectual property (IP) rights, which are based on research and development conducted exclusively in the US (most of it underpinned by federal government funding). These profits should, therefore, be taxed in the US.

Curiously, the IRS is choosing not to enforce Apple’s obligation to pay tax on its profits from US-sourced IP returns. Instead, Apple charges ASI a symbolic fee for allowing it to profit from Apple’s IP rights, for which it pays a tiny tax to IRS. Meanwhile, ASI is allowed to keep, in Ireland, profits representing close to two-thirds of the revenue from the sale of every Apple product sold outside the US. As a result, Apple has amassed untaxed cash reserves of up to $230 billion.

The Irish government is protesting the EU authorities’ Apple ruling, pointing out that tax policy is in the purview of national governments, not the union. But they are wrong: Ireland’s sovereignty is not an issue. Apple would not have based itself in Ireland were it not for the EU’s single market, a commons that requires common rules. One of these rules is that governments cannot offer aid to some companies that is not available to others.

Suppose, the Greek government, seeking to attract 6,000 jobs, offered Apple a subsidy of €110,000 per job per year, or €660 million. Over two decades, the total subsidy would come to slightly more than €13 billion. Were the EU to permit Greece to offer Apple such a deal, the other EU member states, including Ireland, would revolt.

Suppose further that the Greek government proposed waiving corporate tax for 20 years on all revenue Apple earned in the rest of the EU but booked in Athens—say, €13 billion. The European Commission would then have a duty of care to the European commons to demand that Greece recoup that €13 billion —exactly as it is telling Ireland to do today.

The lesson to be learnt from comparing Trichet’s 2009 intervention with the Commission’s current stance on Apple is simple: Europeans’ real enemy is free riding by the few on the backs of the many. Trichet compromised Ireland’s sovereignty to facilitate German bankers’ free ride on the shoulders of Ireland’s taxpayers. As restitution, ECB should take on its books part of Ireland’s public debt.

But the EU must not allow Ireland to abuse the European commons by offering Apple a deal that no other member state could.

The right response to past injustices is to recover sovereignty in a Europe where the powerful—whether German bankers or American smartphone makers—are prevented from preying on the weak. ©2016/Project Syndicate

Yanis Varoufakis is professor of economics at the University of Athens and a former finance minister of Greece.

Comments are welcome at theirview@livemint.com

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