Caleb Larkin – Synthesis Paper 1 – September 21st, 2016 – IAGE 6800
Apple’s $14.5 Billion Tax Evasion Bill from the European Union
Business and politics often clash with conflicting interests. In cases where an institution is large enough to deal in state to business trading, the corporation has the ability to represent its nation of origin in international trade, resulting in highly complex business to state interactions. Such complexities are exemplified in the European Union’s recent $14.5 billion tax evasion bill issued to Apple.
Apple’s business practices in Ireland and the consequential European Union’s policy responses can be viewed in two separate and conflicting perspectives. (1) Apple’s practice to decrease corporate taxes is simply good business, making the tax evasion bill a targeted, political action or (2) the European Union has every right to require taxes for businesses operating within their boundaries and to pursue as well as collect from any corporation participating in tax evasion.
As simple as these two views seem, the complexity of the situation requires business and economic experts as well as political representatives to balance economic prosperities, cultural consequences and political policies. Yet in the ultimate end, for both business practices and political enforcement, organizations act to preserve their interests to maintain economic and political power.
Apple’s International Business Practices and Economic Justifications
Analyzing Apple’s grounds for operating under correct and ethical business practices, begins with understanding the business ideals from Apple’s nation of origins: The United States. Business practices in America are founded on the ideals of capitalism and competition. In a sense, the ethical guidelines are based on gaining a competitive advantage to increase revenues while simultaneously increasing market share percentages. For Apple to take full advantage of international trade, the company needed to establish a location offering the most benefits. CNN’s Ivana Kottasova reported that “in 2014, the corporate giant [Apple] paid just $50 in tax for every million it made selling iPhones and iPads to most of the world outside America. That’s a tax rate of just 0.005 percent” (Kottasova, How Apple paid just 0.005% tax on its global profits, 2016).
How did Apple achieve such an incredibly low corporate tax rate? The answer lies in several strategic moves to position themselves to the point where their tax rate was virtually zero percent in 2014. The first step came in choosing the correct location for a European headquarters. “Apple has funneled most of its profits from Europe, the Middle East, Africa and India through Ireland for decades” (Kottasova, How Apple paid just 0.005% tax on its global profits, 2016). Apple purposefully chose Ireland for its comparatively low corporate tax rate at just 12.5 percent, significantly lower than the 35 percent tax rate in the United States (Goulder, 2016). Yet Apple was not paying anything close to the standard 12.5 percent tax rate by 2014. Instead they were able to negotiate advance tax rulings in Ireland on two separate occasions, in 1991 and 2007 to reduce their corporate tax even further. The rulings allowed for Apple’s tax rate to drop to one percent in 2003 and finally to 0.005 percent in 2014 (Goulder, 2016).
Apple also arguably maintains an absolute advantage, originating from the US and Silicon Valley, in producing a finished product that cannot be replicated in a comparable way in Ireland. Therefore, the product itself would also essentially be irreplaceable for the Irish people. The absolute advantage also gives the company a unique balance of power in their trades and business conduct, allowing them to negotiate better tax rates.
Apple is also a transnational corporation, and as such is a “critical actors in the international economy because they operate in markets that span national borders and often transfer badly needed resources and know-how to developing countries” (Balaam & Dillman, 2014, p. 434) Therefore, Apple’s power rivals that of nations, including the European Union. It is only rational that a TNC would act in its own best interest and negotiate the lowest corporate tax rate possible. McKinsey’s Lowell Bryan, in a 2007 Quarterly article, asserted that “in the digital age, there is no better use of a CEO’s time and energy than making organizations work better.” In his view, that involved “remaking the organization to mobilize the mind power of the workforce and tap into its underutilized talents, knowledge, relationships, and skills.” With this mindset, Apple pursued international business tactics to increase their competitive advantage and tap into these underutilized resources in Ireland, including the simple resource of tax benefits.
Apple’s Cultural Impact in Ireland and Europe
Tim Cook, Apple’s CEO, responded to tax evasion bill by asserting Apple’s long standing positive economic benefit in both Ireland and Europe. Cook addressed the bill by stating that “Thirty-six years ago, long before introducing iPhone, iPod or even the Mac, Steve Jobs established Apple’s first operations in Europe. At the time, the company knew that in order to serve customers in Europe, it would need a base there. So, in October 1980, Apple opened a factory in Cork, Ireland with 60 employees” (Cook, 2016). Cook went on to explain the poor living conditions, economic prosperity and high unemployment rates in Cork at the time. He claims that “Apple’s leaders saw a community, rich with talent, and one they believed could accommodate growth if the company was fortunate enough to succeed” (Cook, 2016).
The economic and cultural impacts of Apple establishing a base in Cork were consistent with Cook’s claim of promoting economic prosperity in the Ireland as well as Europe. “Apple had helped create and sustain more than 1.5 million jobs across Europe, follows the law and pays all the taxes it owes,” Cook wrote. “The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process,” (Cook, 2016).
Despite the European Union’s potential to collect on the tax bill, not all nations are behind the action. One nation that is surprisingly against the action is Ireland itself. Forbes reported on the irony of the situation. “It’s the obligation of governments to impose tax and collect revenue. So you’d think Ireland would be happy about this. Except you’d be wrong” (Goulder, 2016). Ireland does not want to collect and even plans to appeal the decision on grounds that these taxes were never owed in the first place. “I’m sure Ireland has a few roads that need paving, or a few teachers who could use raises. But Ireland doesn’t want the money” (Goulder, 2016).
Kottasova from CNN Money also discussed Ireland’s unique position on the tax bill. “Ireland said it will appeal the decision, saying Apple paid what it owed” (Kottasova, EU hits Apple with $14.6 billion tax bill, 2016). Ireland’s stance shows that it is not just interested in the immediate economic benefits of a huge tax bill; the Irish are more concerned with long term economic effects. Ireland sees the bill not only affecting their relationship with Apple, its base in Cork and local economic benefits, but also other corporations becoming discouraged to setup business in the country. If tax processes and policies change in Ireland, the Irish government fears the loss of jobs and economic investment would outweigh any immediate benefits from a one-time tax evasion bill.
Forbes went further into putting the decision into layman’s terms by asking “why would a country turn away such a large economic windfall? In the case of Ireland, it’s the fear of losing foreign direct investment. What if other multinational corporations start to worry their tax incentives are also in jeopardy? They might take their business (and their jobs) elsewhere” (Goulder, 2016).
Apple’s Political Argument
Cook’s response also indicated Apple’s stance that they had not evaded taxes, but instead the EU had targeted the company without “basis in fact or law” (Cook, 2016). Cook went on the offensive in stating that “at its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money” (Cook, 2016).
The idea of “which government collects the money” is arguably supported with Irish government officials position to appeal Apple’s tax bill. The European Union, instead, appears more concerned with collecting a significant payday than a best interest focus on Ireland’s economy.
Apple also took the ground that they are “responsible corporate citizens” and hold their position as a promoter of economic development across the globe. Apple claimed to not only be the “largest tax payer in the United States, but the largest taxpayer in the world” (Cook, 2016). With this claim they also stressed that they have always abided by Irish tax law. In fact, Apple claims Irish tax authorities advised Apple on how to correctly follow local tax law policies.
After the European Union issued the bill opinion on August 30th alleging that Apples tax deals with Ireland showed favoritism, Apple responded by further proclaiming Ireland’s position on the bill. Cook wrote, “We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid” (Cook, 2016).
“The Commission’s move is unprecedented and it has serious, wide-reaching implications,” Cook continued. The CEO argued the European Union “replaced” Irish tax policies and reacted retroactively to how “the law should have been.” Apple also alluded to future complications with the EU asserting power over its sovereign states. “This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe” (Cook, 2016). The allusion comes at a critical time with the recent Brexit movement. Other nations may have a weakened trust the in European Union, diminishing its power, influence and credibility.
The European Union’s Political and Survival Justifications
However, the European Union’s for political authority may be just as valid as Apple’s “good business practices” argument. The EU reasoned the bill neither targets Apple nor surpasses its realm of political authority. Fortune reported that “the European Commission denie[d] that its shock demand that Apple hand 13 billion euros in back taxes to Ireland is, in the pungent phrase of Apple CEO Tim Cook, ‘total political crap’” (Rueters, 2016). Jean-Claude Juncker, European Commission chief, felt the decision came as an effort to “restore citizens’ trust in the global economy” through fair taxation. Juncker holds to the claim that the European Commission did not target Apple based on bias and asserted that “all companies must pay their fair shares of taxes in the countries where they make profits” (Rueters, 2016).
The European Union as a governing entity has a right to tax corporations who conduct business within nations under the union. Apple’s bill may be unprecedented, but their tax evasion practices may show an equally unprecedented effort. Fortune reported “the decision comes amidst a coordinated global initiative to crack down on tax evasion by multinational companies, spearheaded by the Paris-based Organization for Economic Cooperation and Development (OECD)” (Reuters, 2016). The European Union is not the only political organization concerned with TNC tax evasion.
In maintaining economic credibility, power, and control, the EU must exercise authority within nations under their jurisdiction. The European Commission’s desire to maintain authority in Europe may have led to the decision to slap Apple with a $14.5 billion bill in back taxes. With the United Kingdom’s recent withdrawal from the European Union or Brexit, EU officials needed to position their organization as a “trusted” organization in the global economy. To achieve greater trust, an organization must have power, authority, and the ability to enforce their policies. The European Union is arguably revealing itself as the dominant governing force in Europe through action. What better way to do that then to issue a $14.5 billion tax bill on a multinational corporation with origins outside Europe?
Just as Apple practices good business tactics to gain a competitive advantage to drive up profits, the European Union will continue to act in rational, self-preserving ways to continue to maintain high levels of credibility, loyalty and trust from its citizens. When a governing body loses its ability to enforce its own laws and policies, faith in the system will start to falter.
Sophie in’t Veld’s statements as deputy leader of the centrists group in the European Parliament countered the political targeting argument. “It’s political in the sense that, if the Commission is prioritizing the allocation of its resources, then clearly tax evasion and tax avoidance are very high on the political agenda everywhere” Veld said (Reuters, 2016). She concluded with emphasizing that citizens are highly concerned about corporate tax evasion and rightly so.
As Apple, and other TNCs, continue to grow in economic power and presence, the EU will work to control that power as an attempt to check and balance the European economy. From the European Commission’s viewpoint, Apple, is acting as a transnational corporation. The corporation is increasing its power as a world actor through “exploiting cheap labor and resources” as well as dominating “production, investment, sales and employment” (Balaam & Dillman, 2014, p. 435). In order to maintain its governing, cultural and economic autonomy and power, the EU is forced to enact laws to curtail corporations’, like Apple, power and dominion in the Europe.
However, Fortune also reported that “the ruling against Apple has pushed the issue into the limelight and raised the risk of significant push-back from the United States, analysts say, where some lawmakers are saying the result represents a European encroachment on the U.S. potential tax base” (Reuters, 2016). The European not only has to battle Apple as a TNC, but also its political backer: The United States.
The EU’s Political Strategy and Consequences
Some EU officials, however, do not attempt to conceal the political motive behind the tax bill. A senior EU Official said, “The $14.5-billion demand which angered the United States and worried Apple’s peers was engineered for shock and awe” (Rueters, 2016).
A US Treasury spokesperson spoke out disputing the retroactive tax and its long reaching political consequences. “The Commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU,” the Treasury spokesperson said (Kottasova, EU hits Apple with $14.6 billion tax bill, 2016).
Alan Rappeport, with the New York Times, on the other hand, reported the American official’s response as hypocritical. “Lawmakers have for years been assailing companies for dodging taxes with overseas maneuvers. But now that the European Union has done something about it by trying to wrest billions of dollars from Apple, those officials have offered a response viewed by many as rife with hypocrisy: collective outrage” (Rappeport, 2016) . Rappeport argued that American politicians are not upset that the tax bill is unfair, but are jealous they are not getting the benefits. “And for at least some American politicians, the anger stems from a simple calculation: The tax money that the European Union extracts from Apple should be going to the United States Treasury, not that they have figured out how to make that happen” (Rappeport, 2016).
Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency Coalition found the entire situation “terribly ironic.” Gascoigne argues that it is “remarkable to think that the administration has been flying over to Brussels on taxpayers’ dollars to lobby the European Union against collecting taxes owed in Europe when they’re not collecting the taxes owed here” (Rappeport, 2016). The political backlash, therefore, is not over the act itself, but instead that the U.S. did not have the prowess to enact and collect the tax bill themselves. The resulting political strain with the U.S. could arguably be out of envy not injustice, further assuring the EU’s stance. For if another governing body could enforce the tax, they would.
Economic Arguments for the European Union
Perhaps the European Union’s greatest argument lies in following the money. Kottasova reported, “In 2011, Apple Sales International made 16 billion euros in profits. Less than 50 million euros were allocated to the Irish branch. The rest went to the ‘head office,’ out of reach of any tax authority” (Kottasova, How Apple paid just 0.005% tax on its global profits, 2016). Not only was Apple paying .005 percent on corporate taxes, but it was funneling its profits away from nations where it conducted business and created the revenue. The Irish government benefited from the arrangement as well, attracting new corporations, higher employment rates and increased living standards for its citizens.
So who lost on this deal? The answer is most obvious: the European Union. “The European Commission, which administers EU law, said the Irish government had granted illegal state aid to Apple by helping the tech giant to artificially lower its tax bill for more than 20 years” (Kottasova, EU hits Apple with $14.6 billion tax bill, 2016). Even though the tax ruling is the “biggest the European Union has ever made regarding a single company” the hugely unfavorable agreement struck between Ireland and Apple forced the European Union to act out of self-interest and preservation.
Without the economic gains from a giant corporation operating inside their boundaries, the European Union continually lost power and credibility. The EU had to turn the tides in order to take advantage of the enormous wealth of opportunity from this one transnational corporation. The process had been overlooked for years. The retroactive tax bill covered from 2003 to 2014. Despite the bill’s huge sum, “Apple has more than $231 billion in cash on its balance sheet to cushion the blow” (Kottasova, How Apple paid just 0.005% tax on its global profits, 2016). The motivations are clear, the European Union needed to act to maintain their judicial teeth, assert political and cultural independence, but most importantly gain from the economic profits. The “unfairness” of the retroactive bill can be left up to debate. However, in many ways the European Union let Apple get off with an interest free $14.5 billion loan for 11 years, where their corporate tax was virtually zero. Now they are finally wanting to collect.
Apple, as a transnational corporation, is trying through business practices and loopholes to make economic policy on their own terms. Apple would only be expected to attempt in every way to avoid corporate taxes, establish headquarters in location with the lowest cost, and perpetuate further profits. The corporation will do all they can through cultural appeals, political threats and backing, as well as economic factors, to continue their business practices and drive revenue.
The European Union desires to maintain its governing power in Europe. To do so the organization must be able to enforce laws, the most significant laws dealing with economic prosperity and stability. Despite the obvious political assertions and positioning for more cultural autonomy, the European Union, just like Apple, is driven by economic gains.
In the end the state institution and the corporate firm, in conducting trade together, must find a balance between industrial policy, government restriction and checks on power, with the transnational corporation’s interests. As states begin to lose the authority of control, and multinational corporations continue to rapidly expand in economic power and influence, more extreme cases of restricting laws will appear. As firms continue to show power above and beyond that of the state, nation or union, the balance in economic power will shift towards TNCs and away from the governing states. If states wish to maintain power, they must act, even gamble with extreme displays of power.
- Balaam, D. N., & Dillman, B. (2014). Introduction to International Political Economy (6th Edition ed.). (A. Dodge, Ed.) Washington, DC, USA: Pearson Education, Inc.
- Cook, T. (2016, August 30). A Message to the Apple Community in Europe. Retrieved September 2016, from Apple: http://www.apple.com/ie/customer-letter/
- Goulder, R. (2016, September 2). Can You Guess Who Will Pay Apple’s EU Tax Bill? Retrieved September 2016, from Forbes: http://www.forbes.com/sites/taxanalysts/2016/09/02/can-you-guess-who-will-pay-apples-eu-tax-bill/#624ef7db5b2b
- Kottasova, I. (2016, August 30). EU hits Apple with $14.6 billion tax bill. Retrieved September 2016, from CNN Money: http://money.cnn.com/2016/08/30/technology/apple-tax-eu-us-ireland/
- Kottasova, I. (2016, August 31). How Apple paid just 0.005% tax on its global profits. Retrieved September 2016, from CNN Money: http://money.cnn.com/2016/08/30/technology/apple-tax-ruling-numbers/index.html?iid=EL
- Rappeport, A. (2016, August 31). Yesterday, Outraged by Apple’s Tax Dodge. Today, by Its Tax Bill. Retrieved September 2016, from New York Times: http://www.nytimes.com/2016/09/01/business/yesterday-outraged-by-apples-tax-dodge-today-by-its-tax-bill.html?_r=1
- Reuters. (2016, September 4). EU’s Juncker Says Apple Tax Decision Is Clearly Based on Facts, Rules. Retrieved September 2016, from Fortune: http://fortune.com/2016/09/04/eu-junker-apple-tax-rules/
- Rueters. (2016, September 5). EU Reps Admit That the $14.5 Billion Apple Tax Bill Was ‘Political’. Retrieved September 2016, from Fortune: http://fortune.com/2016/09/05/eu-apple-tax-political/