By Joseph Horch,
International Business Writer
August 30, 2016 may become one of the most important dates in modern history.
The European Union has asked Ireland to recover 13 billion euros ($14.5 billion dollars) in unpaid taxes from tech giant Apple.
The decision, while expected, is the most controversial and most important ruling in the war on corporate tax avoidance.
For those that are not aware, corporate tax avoidance or inversion, put simply, is when a firm such as Apple, or individual establishes a headquarters or residence in a country with incredibly low taxes.
In the case of Apple, most of the firm’s profits were moved to a “head office” in Ireland allowing Apple to pay below 1 percent in taxes.
Apple has about $233 billion dollars in cash and is considered to be the richest company in the world.
Many have wondered how Apple was able to get away with such low taxes for so long: the answer lies in recent events in Irish history.
During the 1980s, Ireland faced a harsh recession, and its GDP fell to slightly over $25 billion dollars.
In an effort to attract foreign investment, the island nation passed a series of tax breaks, specifically in 1991 and 2007.
The tax cuts did as they were intended: companies moved to Ireland in search of exceptionally low taxes. The nation’s GDP increased and rose to its current level of slightly over $250 billion dollars.
However, these tax cuts were deemed a breach of the EU state-aid rules, which prevent member states from offering preferential treatment to firms.
The EU’s recent ruling on the subject is viewed as a part of the recent war on tax avoidance.
Europe has led the charge on aggressive tax avoidance and is looking into questionable structures set up by several multinational firms, most of whom are American. These include global brands like Starbucks and McDonald’s.
The White House has commented on these rulings, calling them “unfair” and accusing the EU of trying to turn itself into a “supranational tax authority.” The United States is upset because these rulings signal that Europe could lay claim to more than $2 trillion dollars of profits that American firms have amassed offshore.
Washington believes that only our federal government has the right to tax these profits.
Ireland is worried as well. The country fears that being forced to collect would undermine its successful economic model, allowing multinational firms to use the country as a base for Europe. Ireland appealed the ruling on September 2 along with Apple. CEO Tim Cook said that Apple is “confident that the Commission’s order will be reversed.”
Last year, the Stillman Exchange ran an article on corporate tax inversion (avoidance). We cited that since 1982 more than 50 U.S. companies have reincorporated in low-tax countries, like Ireland, and that since 2012 more than 20 have left the U.S. These numbers are not surprising being that America has the highest corporate tax among developed nations at a staggering 35 percent.
Over this last election cycle, Americans have heard proposals from both parties on how to fix the tax code, most notably from Vermont Senator Bernie Sanders. However, gridlock in Congress has prevented any such reforms from taking place.
On Thursday, September 8th, Senator Elizabeth Warren proposed new reforms to our tax code. To summarize her two main points, Mrs. Warren suggested that corporate taxes should contribute more to our federal revenue and that Congress should encourage investing in America to create more jobs by offering tax breaks to companies that create more jobs.
There have been international talks to curb tax avoidance.
At the recent G20 meeting, President Obama stressed that countries around the world should share the burden of holding companies accountable.
A version of this article appeared in the Tuesday, September 13th print edition.
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