With the recent ruling in the Apple tax case being spun as a “win for Ireland”, Stewart Smyth takes apart the propanganda, arguing that this is another example of tax-haven Ireland at work.
Readers of this website won’t be surprised that the common sense view of a particular event or activity is often misleading. For example, the idea that we were all in it together after the global financial crisis in 2008, which was clearly untrue. The recent EU court ruling in the Apple tax case – where the Irish state’s appeal was upheld meaning that Apple did not have to repay €13bn – is another one of these events.
For many, including this author, the Apple tax case was about a gargantuan multinational company flexing their economic might, and a willingly compliant tax authority (the Irish state) setting up two tax avoidance agreements.
However, this was not what the EU was concerned about. For the EU, the Apple tax case is about protecting their fantasy of how the common market should operate.
The Apple tax case
Following a three-year investigation, in 2016 the European Commission charged that Apple had an unfair market advantage due to the two agreements with Irish Revenue Commissioner in 1991 and 2007. These agreements allowed Apple to use a version of the tax avoidance scheme known as the Double Irish.
This scheme relied upon a loophole where income is shifted between two registered Irish companies but one is deemed to be controlled in a tax haven (Bermuda, in this case). The Irish Revenue Commissioners then consider the second company to be foreign and not subject to Irish tax rules.
Significantly for US tax purposes, the second company is considered to be Irish and therefore subject to tax in Ireland. In effect, multinational companies using the Double Irish produced profits that were stateless – not subject to tax rules anywhere on the globe.
In practice, for Apple’s EU profits (see diagram) the effective corporation tax rate declined from 1 per cent in 2003 to 0.005 per cent in 2014.
The European Commission were not concerned about Apple paying so little tax, from a moral, natural justice or fairness perspective. The investigation and charge in 2016 was based on an assessment that the “endorsed method to calculate the taxable profits of each company in Ireland gave Apple an undue advantage that is illegal under EU state aid rules.”
What is State Aid?
The EU state aid rule is in place to ensure no company gets preferential treatment from a member state that distorts the workings of the common market. This rule is contained in Article 107 of the Treaty on the Functioning of the European Union (TFEU):
“… any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.“
This rule is based on the neoliberal fantasy of efficient markets, where the state needs to get out of the way and let the market function with little or no interference.
It is rules such as Article 107 that form part of the socialist critique of the EU and why we argue the Union is actually a barrier to bringing about socialism, one that cannot be reformed. The state aid rule is often mobilised by mainstream politicians as the reason (excuse) for why we cannot bring organisations into public ownership.
For example, the government will argue that that they cannot step in and bring businesses that are in trouble into public ownership – such as Debenhams – as it contravenes Article 107. They are mobilising a partial truth, because if this was the case then a decade ago they would not have been able to nationalise the banks.
In reality, Article 107 does contain exceptions where state aid is acceptable, including where the aid is “to make good the damage caused by natural disasters or exceptional occurrences” or “to remedy a serious disturbance in the economy of a Member State”. Clearly our government interprets these rules to allow them to bail out finance capital and the banks following the 2008 crash fall; but any action that would bail out workers, from Thomas Cook to Clerys and now to Debenhams, is deemed to be outside the rules and unacceptable.
The EU has successfully secured previously avoided taxes by EDF in France, Amazon in Luxemburg and Starbucks in the Netherlands; but in each case it was the state aid rules that were the basis of the cases, by giving an advantage to those companies that was not available to others. The taxes owed for public services across Europe didn’t feature.
In short, the EU does not care about tax avoidance; it cares about trying to make the common market work according free-market economic theory.
And the actual wording in the ruling of the court is instructive. The court did not clear either Apple or the Irish Revenue Commissioners of constructing a tax avoidance scheme. Instead, the finding was more akin to not proven.
Or, in the formalistic words of the Court’s press release on the case:
“Although the General Court regrets the incomplete and occasionally inconsistent nature of the contested tax rulings, the defects identified by the Commission are not, in themselves, sufficient to prove the existence of an advantage for the purposes of Article 107(1) TFEU.”
This is hardly a ringing endorsement of the behaviour of both Apple and the Revenue Commissioners.
Understanding the global tax haven economy
Brian O’Boyle has written elsewhere on this site about how tax havens are integral to modern global capitalism. Think of a spider’s web with major financial centres (London, Hong Kong etc.) at the centre; then middle tier countries (like Ireland, Netherlands) which are conduit tax havens, funnelling income and profits to the sink tax havens (such as the British crown dependencies and exotic islands in the Atlantic) or back to financial stock holders.
Global and national regulatory authorities know all too well about these activities; and even though they may talk about closing this or that loophole, there is no serious attempt to close-down the use of tax havens as a whole.
The scale of activity through tax havens is staggering. A Christian Aid report in 2008, estimated that 50 per cent of the world’s trade flows through tax havens. The report made the argument that such activities are not harmless practices:
“The situation is stark and urgent. We predict that illegal, trade-related tax evasion alone will be responsible for some 5.6 million deaths of young children in the developing world between 2000 and 2015. That is almost 1,000 a day.”
The politics of the Apple tax case
The corporation tax (CT) policy is central to identity of the Irish state – the 12.5% rate is seen as a shibboleth. Anyone daring to question whether it is too low gets pilloried from mainstream politicians, commentators and news media. The main argument put forward is that any adjustment to CT rate would see thousands of job losses because multinational companies would take their investment elsewhere and leave the country.
This is an ideological position to defend the wealth being made by big global companies in Ireland that does not stand up to much scrutiny. For example, when there was a prospect of the 12.5% rate being increased during the last recession, we get this report from the Irish Examiner (in 2010),
“From an Irish standpoint, capitulation on the 12.5 per cent corporation profit tax would set the prospects of the economy back a step too far … Tom McCarthy head of the IMI [Irish Management Institute], said any move up from the 12.5 per cent rate would set back the Irish economy and lead to an outflow of US firms from here. McCarthy could not quantify what number of companies might leave or what the job losses would be.”
Multinationals consider a wide range of factors when deciding where to invest new production facilities – corporation tax rate is never the main driver, and rarely near the top of the list. Proximity to markets (being inside the EU’s common market for example), English language, stable political and legal systems, (relatively) good public infrastructure, cost of living for the workforce and a well-educated/skilled local workforce are all major influences on where foreign direct investment (FDI) goes.
Ireland is a Tax Haven
This helps explain why Apple first invested in Ireland in the form of manufacturing in 1983. The first tax avoidance agreement between Apple and the Revenue was not signed until 1991. Further, the Apple case also undermines the idea that the 12.5 per cent is a shibboleth, as the many multinational companies are paying effective tax rates considerably below that level.
Despite the common sense view that the Apple case court ruling means Ireland is not a tax haven, the reality is actually the opposite. In defending the case the Irish government was able to provide a list of up to nine other companies that had also availed of versions of the Double Irish. So no exceptional state aid but a general tax avoidance scheme for multinationals.
Another common sense argument put forward is that these profits had been made elsewhere in the EU and so Ireland would not have benefitted from the €13 billion; this money would be split among all those countries where the profits had been made. But this raises the question as to why profits are funnelled through Ireland – unless there is some (tax) benefit to the Apple.
So, the manner in which the Irish government chose to argue against collecting Apple billions actually illustrates how Ireland is a tax haven, despite the rhetoric.
As socialists we need to engage on the political/ideological level when it comes to tax avoidance in general, including corporate taxes. Our agitation over the past decade has been to highlight that even by the paltry ambitions of the Irish state (i.e. the second lowest headline CT rate in the EU) the corporations are still not contributing, with effective rates, in the main, between 4-6 per cent.
Corporations benefit enormously from the public infrastructure and skilled workforce in this country – corporation tax is the main way they contribute towards the cost of these social goods. Avoiding tax and paying effective rates of 1% or less means that others are paying for the infrastructure and educated workforce they use.
We also have no illusions in the actions or motivations of the EU. The EU is not a progressive organisation trying to make “bad” corporations pay their fair share. The Apple case and state aid rules show it was not tax avoidance that was their main concern but free-market fundamentalism of trying to make the common market work.
Ultimately who pays taxes, how much and what the money is spent on are political decisions and reflect the balance of class forces during any period. Tax is an instrument of class struggle. The past four decades have seen our rulers shift the tax burden from progressive tax forms (such as income tax) to regressive tax forms (such as VAT).
It is here that the tax avoidance measures for corporations mean the burden of paying for the remaining public infrastructure and services falls increasingly not on the corporate finance providers but on the working population in the country.
All this brings to mind the blatantly honest quote from Warren Buffet in 2006:
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning”.
In the first instance, our response must be to engage in this class war by understanding and popularising the idea that current tax policy and practices are political decisions made by the wealthy in benefit of the wealthy.