Why the EU overplayed its hand against Apple

The European Union just picked a fight with Dublin, Washington DC, and Silicon Valley all at once

Did the EU go too far?
(Image credit: Photo illustration by Jackie Friedman | Image courtesy iStock)

It almost sounds like a joke. The European Union finished its investigation and ruled that Apple must pay 13 billion euros, plus interest, in back taxes to the cash-strapped government of Ireland. Yet instead of celebrating, Ireland's political class looks at this sudden downpour of money as a Biblical flood meant to destroy them.

The issue is that although the ruling from Europe's executive body has the appearance of a lawful court order, it is a political powerplay. There was no trial. And the size of the ruling is Brussels' way of throwing the gauntlet down, challenging not just Ireland's low tax regime, but Silicon Valley's wealth and Washington D.C.'s willingness to defend it.

The European Commission senses an opportunity to create a little more fiscal unity by way of threats and punishments rather than by constitutional measures. It seems to be regretting lately the fact that Ireland is the only member state to have a treaty that forbids the EU from interfering in its tax policy. The ruling is clearly a violation of this proviso in the Lisbon Treaty. And Ireland correctly fears that by consenting to this windfall, it creates the kind of uncertainty that will slow down the foreign direct investment that has powered its economy for decades.

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Bad press in Europe and America, along with better rules in the G20, have already caused Ireland to phase out its tricky double-taxation policies. But Brussels hopes it can go further with a kind of penalty that looks like a gift. It surely noted how Hillary Clinton's campaign has dinged corporate inversions that bring profits and tax revenue out of the United States and into Ireland. Something like 700 American companies now have their European headquarters in Ireland.

But the European Commission may have overplayed its hand.

It may find that America's irritation with Irish inversions is superseded by the fact that the E.U. is practically extorting some of America's tech giants, and through them ordinary American citizens. Brussels wants to go after Facebook, Google, Microsoft, and Qualcomm, too. Already the E.U.'s Competition Directorate has gone after Intel. U.S. Treasury Secretary Jack Lew warned that the E.U. was trying "to impose penalties retroactively based on a new and expansive interpretation of state aid rules." The Treasury Department accused Brussels of effectively extorting money from the U.S. and its taxpayers. Every dollar that Apple pays in taxes in Ireland is a dollar it can deduct from its tax bill in America, after all. Is the idea to create a kind of fortress in Europe that can develop its own tech giants? It is hard to say.

For now the result is an absurdity. Some $19 billion will be put in an escrow account on Ireland's books. It's an albatross for the razor-thin conservative government that is holding on in Dublin, and mighty tempting to the nation's left-wing reformers who certainly have plans for that money. Naturally a sum so staggering has some Irish minds ticking about what can be done with what amounts to 2,800 euros for every man, woman, and child in Ireland. Ireland's shortage of hospital beds or affordable housing in Dublin will be high on the to-do list.

To hold out, Ireland needs some confidence that its business-friendly regime is both an asset to the country and not entirely fragile. Yes, corporations locate there for the tax benefits. But it's an easy choice because Ireland is an English-speaking country, with a well-educated workforce, a lower cost of living than the U.K., and a hint of romance about it. Tech giants also like placing server farms in its cool climes.

Ireland can correct the grossest instances of its hyper-low taxation, the fabled .005 percent, without losing the confidence of investors. And of course, Ireland should try to get more from its native talents and resources, rather than relying on "the splash" of the globalized economy. It could start by getting better control of its fisheries, and possibly the oil sitting underneath it.

But the wakeup call is also for the United States. The prime cause of this mess is the U.S. tax code, which claims to tax all earnings by Americans and American companies on a planetary basis. At 35 percent (and sometimes, higher in effective rates), the corporate tax rate is well out of line with the rest of the developed world. It is also a loophole-ridden mess, designed to favor this or that firm depending on which lobbyist is the most persuasive over a steak at Charlie Palmer's on Constitution Avenue in a given year.

Brussels' diktat means its time for the U.S. to man up. This same European Commission is lately going easy on gangster-state creatures like Russian Gazprom, while beating up on Americans in the Emerald Isle. It has no moral high ground. And if our companies are there, the U.S. ought to protect Ireland from the Brussels takeover of their tax sovereignty. And then perhaps, we should make our corporate tax code competitive with Dublin's.

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