Politics & Policy

The Real Motivation Behind the EU’s Attack on Ireland and Apple

EU competition commissioner Margrethe Vestager (Reuters photo: Vincent Kessler)
There’s much more at stake than $13 billion.

Here’s a name to conjure with: Margrethe Vestager. Ring a bell with you? An old girlfriend from your backpacking days around Europe maybe? Or Emmanuelle’s best friend in the 1970s “sophisticated” series of sex movies perhaps? No? Nothing else come to mind? Okay, I’ll give you a clue. She’s Danish and she’s just told the Apple Corporation to pay the Irish government $13 billion in back taxes that Ireland says Apple doesn’t owe.

“Crazy name, crazy gal” as Private Eye writes from time to time? Not really. Apple, Ireland, the U.S. government, and the world’s multinational corporations all take Ms. Vestager very seriously indeed. She has clout. Ms. Vestager is the competition commissioner in the European Union.

That’s why you’ve never heard of her. Nor Neelie Kroes? She was one of Vestager’s predecessors as competition commissioner. Anonymity goes with the job of EU commissioner.

There are 28 of them, none elected, all appointed by their national governments, all wielding great power over everything from trade to justice throughout Europe, and none of them known outside their own families or the (often small) political parties in which they rose from (and to) obscurity. An exaggeration? Well, here are a few of their names: Kristalina Georgieva, Maros Sefcovic, Jyrki Katainen, and Neven Mimica, running the EU budget, energy, jobs, and international development commissions respectively. Not convinced yet? Well, Martin Durkin, who made the documentary Brexit: The Movie, showed photographs of leading EU officials to passers-by in the streets of Brussels and no one recognized them. In Brussels!

Becoming an EU commissioner is a little like joining an FBI witness-protection program. Yes, you have job security, a pension program, and people looking after you day and night, but you disappear from public view into a wilderness of committees — emerging again only if you have to appear in court.  

Ms. Westager may shortly have to appear in court to defend her decision to define a tax arrangement between Apple and Dublin (which doesn’t come under EU authority) as a form of “state aid” (which does) in order to hit Apple and other U.S. and multinational corporations with huge tax bills. Much EU business is dull beyond belief. But Ms. Westager’s ruling, supported by the entire European Commission, has really upset the Apple cart.     

As my two NRO colleagues Andrew Stuttaford and Kevin Williamson have both pointed out, it’s highly dubious on so many grounds that you could make coffee with it. Let me list a few:

1. It violates the EU’s own treaties which reserve tax policy for national governments.

2. It therefore violates Ireland’s national sovereignty.

3. It undercuts what has been the highly successful Irish strategy of offering a low business tax rate in order to attract foreign (especially U.S.) corporations to Ireland as a jumping off point into the EU.

4. It ignores or overrides a specific EU guarantee, (given to persuade Irish voters to reverse their rejection of the Lisbon Treaty) that Brussels would not challenge Ireland’s low-business-tax regime. This ruling does exactly that in a particularly sneaky way.

5. It’s an extremely poor return on Ireland’s loyalty to the EU during the banking and euro crises. Irish voters accepted very heavy burdens — cutting spending, raising taxes, reducing public-sector salaries sharply — in order to keep their banks solvent. That belt-tightening also bailed out German and other European banks with assets in Irish banks. Now the EU is seeking to bully the generous Irish into abandoning one of the main policies that underpin the economic rise of the “Celtic Tiger.”

6. It’s a retrospective ruling requiring the imposition of taxes that go back more than a decade. Retrospection is particularly objectionable in tax law because, among other things, it allows a government to target particular individuals or companies for plunder or even destruction. Here the suspicion is . . . but see below.

7. It’s a direct intervention in Irish politics designed to exploit the “populism” that EU institutions routinely denounce to embarrass Dublin into complying with its ruling. By offering a $13 billion windfall to the Irish government, by stating that Dublin can spend it on whatever it wishes (contrary to EU rules), and by exploiting the current mood of hostility to tax avoidance by the multinationals, Brussels is exploiting populist passions to make it politically difficult for the present Irish government to resist its ruling, to sustain its successful tax strategy, and even to hold together as a coalition. 

Taken together, these objections amount to a serious indictment of the ruling on legal, economic, and especially political grounds. EU officials usually show great solidarity in sticking together in defense of Commission policies — especially, those promoting greater uniformity (“more Europe”) — when they come under attack. On this occasion, however, there are slight hints of nervousness and shame around Brussels. It’s especially noteworthy that Neelie Kroes has spoken out against the ruling in unusually strong and specific terms:

“You cannot change the rules of the game through ad hoc state-aid enforcement, and then seek retroactive recovery for unpaid taxes. Doing so would be fundamentally unfair and would harm competition, growth and tax income in Europe. And it raises serious questions about legal certainty and the rule of law.”

Less surprisingly, the Irish political and business establishment has stood firm against the Commission and it will presumably resist populist agitation against the multinationals from small parties inside and outside the government. All the major parties in Ireland have supported the low-tax business strategy. They calculate that the country gains far more from attracting corporations, jobs, and ancillary services to Ireland by this policy than it loses in tax revenue. What business do Brussels and a minor Danish party politician have in overriding their judgment and using chicanery to do so? And what motive?

The possible motive most discussed has been that Ms. Vestager is on a crusade to save the EU from the technological dominance of U.S. corporations in Europe. In addition to her action against Apple she is also investigating the tax affairs of Starbucks and Amazon and again doing so under the rubric of “state aid.” Doubtless this motivation plays a part in the Commission’s thinking. But Ms. Vestager has launched investigations of Gazprom and Fiat too — she’s been a little slow on the egregious case of Volkswagen. Besides, Uncle Sam plays a tough corporate game too — the Obama administration virtually mugged British Petroleum over the Gulf oil spill with fines and multiplying penalties — and won’t be losing any major transatlantic corporate battles any time soon. Europe can’t afford to push a transatlantic tax war too far. What seems to be the real target of Ms. Vestager’s zeal is Europe itself.

Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way.

Though she is the commissioner in charge of competition within Europe, there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. But it is very adept at re-classifying its regulations so that they extend its powers. At the Maastricht Treaty conference, John Major got an opt-out for the U.K. from the “working time directive” under labor-market regulation, but the EU later reclassified it as a health-and-safety measure and imposed it under that heading. Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe.

Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.

Of course, European countries could move in the opposite direction if they chose. Instead of harmonizing all regulations in Brussels, member states could mutually accept each other’s regulations — and extend tax competition too — so that governments would compete freely against each other. As I wrote in a Wall Street Journal article shortly before Brexit:

Each member-state would put forward its own tax-and-regulation package to attract or retain investment and talented people. The changes would transform the EU from a cartel of governments into Thatcher’s market of governments.

And the price of those governments would fall — or at least not rise unrestrainedly.

Brexit has brought that world closer. When Ms. Vestager announced her imposition of a $13 billion tax charge on Apple in Ireland, the new British government under Theresa May responded that Apple might want to re-settle in the U.K. where in two years time the writ of Brussels will no longer run on taxes, state aid, or anything else. Earlier the Swedish government had “warned” Britain not to think of reducing its level of business taxation in response to the rumors that the treasury secretary is thinking of doing precisely that in his fall budgetary statement. And President Obama’s remarks at the G20 Summit to the effect that Britain would still be at the “back of the queue” for the U.S.-EU trade deal rather ignores the fact that it currently looks as if there won’t be a queue at all. Ministers in both France and Germany have recently declared the Transatlantic Trade and Investment Partnership dead, which is a slight exaggeration but a bad sign. Mrs. May is in the meantime holding talks with Australia and others on establishing separate trade deals — and the EU is asking London not to do so.

Only three months ago all the great and the good around the world were warning that Brexit might mean no companies and no private investors sending money into an isolated Britain. Today the same people are worried that a country that can set its own taxes, regulations, and trade preferences could end up as the cat that got all the cream. And companies looking for investment opportunities in nations where the governments don’t re-write the tax laws overnight will see London in a much more favorable light. 

Ms. Vestager, many thanks. You make a delightful catalyst.

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