Was the EU right to order the Irish government to collect EUR13bn in back taxes from Apple after the European Commission ruled that the Irish government had previously provided preferential fiscal treatment to the tech giant in breach of EU regulations? This has been a hot topic of debate both in the mainstream and social media (under the hashtag used in the title) over the past few days.
Clearly for a great many people around the globe, fed up with what they see as the ability of large supra-national companies to engage in tax regulation arbitrage, the EU’s decision was the correct one. It has also been welcomed by Irish taxpayers who have suffered financially as a result of the bursting of the Celtic Tiger bubble and the corrective fiscal consolidation that ensued.
However, while emotionally and fiscally satisfying (at least for Ireland in the short-run assuming the ruling is upheld), the longer-run merits of the decision are far from clear. This is why Irish finance minister Noonan[1] announced that he intended to appeal against the EU ruling, a highly unusual situation; finance ministers contesting a wind-fall revenue gain that roughly equates to a quarter of annual government spending is hardly an everyday occurrence.
For Apple the ruling, while significant – EUR 13bn is not pocket change even for a company renowned for its large cash reserves – is hardly a game changer, particularly as it may be able to offset some of the EU tax bill via reduced payments to the US government; something that has not gone down well with US Treasury Secretary Lew who complained that this episode was an attempt by the EU “to reach in to the U.S. tax base to tax income that ought to be taxed in the United States”.[2]
Consistent with this fairly benign interpretation, Apple’s stock price barely fluttered when the news broke and at Amareos we have noticed very little movement in terms of crowd sentiment towards the company (see exhibit below). In our view, more important for investors will be how the upcoming release of the new iPhone 7 goes because what is apparent in the sentiment data is perceptions about Apple’s earnings trajectory had been on an oscillating downward trend over the past year.
Exhibit 1. Apple Stock Price vs. Crowd Sentiments
Source: www.amareos.com
For Ireland, in contrast, the EU’s actions are extremely significant.
The low corporate tax rate has long provided a strong inducement for inward foreign corporate investment, something that has been extremely beneficial to the economy[3]. In fact, saying that the low tax regime is the keystone of Irish macroeconomic policy hardly constitutes hyperbole. As the Irish economist David McWilliams stated in a recent article[4],
“without multinational investment, Ireland would be Albania with brutal weather.”
However, Ireland’s favourable corporate tax regime has always been viewed negatively by the rest of the EU amid concerns that it undermines their tax revenue base and international competitiveness. Moreover, it is also seen as impeding the EU’s drive towards greater regional tax harmonization, which in turn is considered to be a stepping stone towards their longstanding goal of transforming what is presently a monetary union into a more complete monetary and fiscal union[5],[6].
Indeed, this is not the first time the EU has brought pressure to bear on the Irish government over corporate taxation. During the crisis other EU member states, including Germany and France, demanded that as part of the fiscal consolidation programme Ireland’s corporate tax rate be raised from 12.5%[7]. These demands were firmly rebuffed by an otherwise strongly pro-EU Irish government, underlying the domestic importance of maintaining the low tax-regime status.
That said, what is particularly disturbing about the EU ruling over Apple’s tax bill is the retroactive application of the tax code, which undermines one of the principle foundations of law: legal certainty[8]. The increased uncertainty that naturally follows such a ruling not only threatens new investment into the country, but incumbent foreign corporations may consider it financially prudent to relocate elsewhere, beyond the reaches of the EU legislators. And, in light of the Brexit vote, one does not have to look very far for potential candidate countries[9].
Moreover, in terms of timing, the ruling could not have come at a worse time for Ireland. After the Brexit vote speculation increased that Ireland would see sharp rise in inward investment as companies sought to relocate in order to maintain access to the EU single market on the most favourable terms. This effect can clearly be discerned in the sentiment data as shown in the exhibit below. Following the Brexit vote, sentiment towards investment in the UK slumped, whereas Ireland witnessed a strong surge – a trend now put in jeopardy.
Exhibit 2. Investment Flows Sentiment
Source: www.amareos.com
All this raises a big long-term question for Ireland. How does it see its future role in the global economy?
Clearly it wants its economy to continue to benefit from being an integral component of the global supply chain, something that is threatened, if – as seems probable – the EU continues to investigate Ireland’s corporate tax arrangements with large multinationals.
Given the importance domestically on this topic, and despite many agreeing that large supra-national companies should pay higher taxes globally, it is quite imaginable that Irish voters begin to question the merits of remaining within the single currency area. This is particularly so when their second largest export market, the UK – which as we mentioned in our last blog appears to be faring better than many feared[10] – is no longer a member.
An Irish exit from the EU may seem a rather fanciful notion[11], but recall one of the key reasons UK voters backed Brexit was because they wished to protect their national sovereignty and for Ireland tax policy is a key element of national sovereignty. The Irish have no desire to see the EU encroach further in this area, but for the EU to complete its grand plan of monetary and fiscal union, encroach they must. It is these longer-term political and economic[12] tensions that flow from this week’s EU decision on Apple’s tax bill that makes this such an important event for investors.
*Sentiment Analytics are based on MarketPsych indices.
[1] While most of the major political parties in Ireland agree with the appeal there is not unanimity. Given PM Kenny’s coalition government is already in a minority, and relies on the support of independents to pass legislation, the situation is somewhat tenuous.
[2] Hardly a conducive backdrop to next week’s G20 meeting hosted by China.
[3] More than 700 US companies, including other tech giants like Google, Amazon, Facebook and Microsoft, have offices in Ireland, employing more than 140,000 people according to the American Chamber of Commerce in Ireland.
[4] See: http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-eu-is-a-thing-of-the-past-our-future-is-with-an-atlantic-ireland-35009330.html
[5] A goal explicitly stated in the Five Presidents report published last June – see: https://ec.europa.eu/priorities/publications/five-presidents-report-completing-europes-economic-and-monetary-union_en
[6] The UK was also strongly against tax harmonization, but this opposition will disappear as and when Brexit finally takes place, leaving Ireland increasingly isolated on this issue.
[7] See: https://www.theguardian.com/business/2010/nov/18/ireland-bailout-imf-europe-corporate-tax
[8] This is a legal argument that will unquestionably feature in the appeal.
[9] See: http://www.telegraph.co.uk/technology/2016/08/30/apple-ordered-to-pay-11bn-after-european-union-tax-investigation/
[10] As we outlined there is growing evidence that the negative downdraft from Brexit is abating. This is most visible in the sentiment indicators that we track at Amareos but it is also becoming evident in the lagging hard economic data as mentioned – see: https://amareos.com/blog/pride-and-prejudice/
[11] An Irish exit, if it were to occur, would have far reaching consequences. As Oscar Wilde famously quipped, “To lose one parent may be regarded as a misfortune; to lose both looks like carelessness.” Substitute member state for parent and we think you get the picture.
[12] The EU referendum was a political question with economic implications rather than simply an economic question, something the Remain campaign never appeared to grasp fully.
