Apple Gets an EU Shakedown

There’s an expression I heard once during my college days that said, “The best always take the heat.”

I can’t remember what, precisely, that expression referred to back then, but it certainly applies in numerous ways to all sorts of things.

Take, for example, today’s ruling by the European Union’s (EU) executive arm, the European Commission (EC), ordering what is arguably the best company in the world to retroactively pay some $14.5 billion in back taxes and interest.

Yes, you read that right, “retroactively,” because the EU wants personal technology giant Apple (AAPL) to repay 13 billion euros ($14.5 billion) in back taxes and interest to the Irish government as part of a crackdown into EU member nations’ “special tax treatments” for multinational companies.

The EU calls it a “crackdown,” but I just call it what it is … a shakedown of the best for being successful.

At the heart of this issue is what amounts to a “disagreement” between the European Commission and Ireland. The EC says that the special tax deal Ireland negotiated with Apple amounts to illegal state aid under the EU rules.

This is a prime example of the EU coming in and telling a member nation what to do. It’s also a prime reason why UK voters opted out of the EU via the Brexit vote.

***

In today’s statement announcing the decision, the European Commissioner in charge, Margrethe Vestager, said:

“Member States cannot give tax benefits to selected companies — this is illegal under EU state aid rules. The Commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.”

Now, I am not doubting the numbers here in terms of the low effective tax rate paid by Apple. I also am not denying that if Apple pays such a low rate while other multinationals pay a much higher rate, then that is the opposite of a so-called “level playing field” in terms of tax treatment.

The thing that seems outrageous here is that Apple negotiated a deal with the Irish government, and in good faith. The Irish government basically offered Apple a deal they couldn’t refuse, and so the deal was made.

Now, years after the fact, the EC says the deal is no good, and wants to punish Apple for it.

That is not okay.

What this looks like to me is the EU going through its member-nation dealings, figuring out where the money is, and then targeting that money — despite legitimate, legal deals made by the respective governments with these companies.

And, Apple is not the only one.

According to a report in today’s Wall Street Journal, the European Commission’s tax probe has already targeted many big-name multinationals, including Anheuser-Busch InBev (BUD), Amazon.com (AMZN), Fiat Chrysler (FCA), McDonalds (MCD) and Starbucks (SBUX).

This targeting of the best also is occurring in specific countries. As the WSJ article also points out:

Companies also face increasing enforcement efforts at a national level. Tax authorities in Spain and France have raided Google’s offices. French authorities have demanded more than €1 billion in back taxes and fines.

While Alphabet (GOOGL) says it pays all the tax it owes, that claim has never stopped a tax collector from poking around and/or conducting a raid if they decide to do so.

Now for Apple, a bill of $14.5 billion isn’t a material cost that’s going to hurt the company’s bottom line. Last year, the company brought in revenue of some $233.7 billion, so this fee is just a drop in the proverbial bucket.

Still, the immorality of this situation, as I see it, is that an outside authority — a “Big Brother”-like authority claiming sovereignty over Ireland can just decide to make Apple pay, even though Apple completely followed the rules of the game.

To its credit, the Irish government is appealing the EC decision. And, much to my surprise, even the U.S. Treasury Department gets credit here for being on the right side.

Last week, Treasury released a white paper addressing the EU on what was then a likely overreach. In the paper, Treasury basically accuses the EU of executing a power grab and unfairly targeting American companies:

“The U.S. Treasury Department continues to consider potential responses should the Commission continue its present course. A strongly preferred and mutually beneficial outcome would be a return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU Member States.”

Well, the EU ignored that warning with its statement today.

The bottom line here is that where the money is, you’re likely to find Europe’s tax collectors trying to find ways around the law in order to get more money from the “best,” i.e. the most successful multi-national companies.

Now we’ll see if the U.S., Ireland and other sovereign nations are willing to fight the EU’s corporate shakedown.

***

If you’d like to weigh in on any of the issues we cover in the Afternoon Edition, please don’t hesitate to do so. Let me know what you think by leaving me a comment on our website or by sending me an e-mail.

***

Stocks trended lower Tuesday, as a decline in oil prices helped weigh down equities. Volume was very light, as many traders remain on summer vacation in what is the unofficial final week of summer.

Elsewhere in the news …

• Oreo cookie maker Mondelez (MDLZ) has ended discussions of a possible merger with Hershey (HSY). The combined entity would have created a global powerhouse selling some of the world’s best known chocolates and snacks. HSY shares sunk nearly 11% in Tuesday trade.

• S&P Global Fixed Income Research reports 79 U.S. companies defaulted on corporate debt from 6/30/15 to 6/30/16. Of those 79 companies, 45 companies — or 57% — come from the energy and natural resource industries.

• The Congressional Budget Office reports our national debt, which is $19.5 trillion today, is projected to reach $28.2 trillion as of the end of fiscal year 2026.

• The world lost comedic genius, actor and film star Gene Wilder. The star of Willy Wonka & The Chocolate Factory and a number of other classic films, died at age 83 due to complications from Alzheimer’s Disease.

Good luck and happy investing,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

Your thoughts on “Apple Gets an EU Shakedown”

  1. I’ll assume that all you say about Apple and the EC is true – but what you did not mention is the fact that Apple doesn’t do any actual business (make anything) in Ireland. What Apple does do is funnel income from its operations in other countries to its Ireland “Office.” And thereby gains hugely favorable tax treatment. Like paying virtually no income tax. Apple is not the only corporation that does this either. So EC actions aside, what is really needed is a corporate tax reform regimene that disallows tax dodging by international corporations to the detriment of everyone else. I won’t be holding my breath until this grossly unfair state of affairs is rectified.

  2. I agree with your comments that, although the original deal may not have been made on a level playing field, it is wrong for the EU to come in with retroactive taxation in any amount. They can try to re-negotiate future deals after expiration of current ones, but that is as far as they should be able to exert their influence over member nations. This is also another reason we should stay far away from deals like the TPP, which strip us of much of our sovereignty.

    But this brings into play another reaction the EU may not have planned on and which may happen to their detriment. The EU is unwittingly playing into Donald Trump’s plans for repatriation of the approximate $2 trillion in overseas corporate profits. Rather than see excessive amounts of back-taxes by the EU, many of these corporations may very well take Trump up on his offer of severely reduced taxes for repatriated profits (pending his upcoming election, that is).

    Beyond that, they may also consider moving overseas “headquarters” back to the US in reaction to the other part of his plan for reduced corporate tax rates. This may turn out to be less expensive overall than the penalties and future unknown costs of remaining in the EU’s crosshairs.

  3. I agree with the main point in Brad’s article regarding the EU’s shakedown of Apple. The Eu behavior is a bit shocking but not surprising. Legal agreements must be honored in order for free trade to function as intended.
    I encourage the respective governments of Ireland and the US to stand behind Apple and refuse to honor or cooperate with the EU.

  4. ‘The best always take the heat’.There is another expression that indicates if something appears to be too good to be true then it probably is’nt true. If Apple really believed an arrangement to pay 1% tax, or less, was realistic then it’s CFO should be held accountable for the current situation. The Irish parliament was clearly happy to look the other way.

    I can see no reason to criticize the ruling on moral grounds. The deal is either legal or illegal. If it is legal then an appeal should confirm the legality.

  5. A lot of hypocrisy in this article. The biggest hypocrite of all is Timmy Cook, who calls for increased taxes on Americans, supports the monster Hillary Clinton, then makes a sweetheart tax deal with Ireland. Another hypocrite is the US, which is whining about the treatment of one of their biggest corporate backers (Cook also supports Obama) while also whining about the fact that corporations won’t bring money back to the US because of draconian US tax laws. Hopefully this tax grab will hasten the end of the dictatorial European “Union” and convince Americans to oppose and end all trans-national trade “deals”, aka NAFTA, GATT, TPP, etc.

  6. All the UK papers think it’s disgraceful that these large, mostly US companies are paying such derisory amounts of tax. I believe ve Facebook paid around $6000. The whole artificial tax set ups where money is shifted from one country to another needs to be amended. It’s giving capitalism a very bad name. Why should Joe Bloggs the cleaner pay his 30% tax when Facebook pays a fraction of that.

  7. 2. The US plays a similar game whenever it fails to perform due diligence until a situation gets to a point where it elicits a certain level of outrage, then the regulators step in and levy huge financial penalties to fatten government coffers and reward those who take the action. Witness how long it took for them to go after Toyota, how much money was eventually collected, and the number of deaths there were in the meantime from runaway cars.

  8. A couple of thoughts.

    1. The first non-European country that decides to pull its services or products from that market will put their status into proper perapective.

  9. The Treasury department is on Apple’s side, because Apple will eventually adjust its US tax returns by any additional tax it has to pay. Because Apple’s sourced Irish revenue remains the same, the adjustment to its foreign tax credits will have the effect of reducing Apple’s US taxes by the identical amount it pays to Ireland. The US taxpayer will end up paying the 14 billion because Apple will get a US tax refund for the same amount. I am supprised no one is mentioning this. This is a direct attack on the US Treasury by the EU.

  10. If the Commission is successful in this attempt to “holdup” Apple and Ireland, it seems this could turn into a major breach in the EU organization that will only accelerate its demise. Such irresponsible action can only lead to a stampede of nations rushing to exit the EU to protect their sovereignty.

    The EU was created on November 1, 1993 and Ireland entered into the deal with Apple in October of 1980. How does the EC assert any “standing” to interfere with Ireland’s sovereignty to negotiate financial arrangements with any business or country, especially when the arrangements were entered into years earlier.

    This will be a very interesting situation to watch. I hope the citizens of the EU countries don’t suffer to brutally from the fallout of such senseless absurdity.

  11. So you are surprised that the EU is “shaking down” Ireland? And why do you think so many US companies do business overseas instead of the US…because they are tired of the US “shaking them down”. I don’t really blame the EU, the whole thing sounds like a sham to avoid taxes. That being said, my personal opinion is that corporations should not pay taxes; individuals should pay taxes (including the compensation or profits they get from the corporations). If Hillary gets in, you will start seeing shakedowns like never before.

  12. There are no heroes! The U.S. is one of only two countries (the other being Eritria) to tax their citizens on income earned outside the country. Governments should stop any pretense of legitimacy and simply take what they want from corporations and individuals.

  13. Thank you Brad . And you always seem to find the right words. Immorality and shakedown is exactly what it is. Thanks again. Hans in Montreal

  14. EU thinks they need to confiscate more money for broke member states to keep funding big government. Unfortunately for them, this will not help with their stagnate economies or runaway debt. Perhaps incenting private companies instead of driving them out of your markets would be a better solution.

  15. Based on the info available Apple has been recording the bulk of profits to the ‘Head Office’ Which it turns out has no Offices or staff just a shadow operation to commit Tax fraud, If you or I tried this maneuver we would already be in Jail. What you are calling a retroactive tax is merely a correction in the Fraudulent accounting practices. Samsung, Google and HTC to name a few pay taxes on corporate profits and have to compete with the criminal enterprise called Apple. The best part is that while paying an effective rate of 2-3% they have been claiming a tax rate of 25% on their books. This is no oversite it is ‘Willful Fraud’ a scheme to avoid taxes, this is what Al Capone when to prison for. Glad to see you defending the likes of the Biggest Criminals of our times.

  16. As a British national, I believe you have laid out the case exactly as I see it.
    It seems to me that the current focus is on the size of the bill. But as a local news website editor said “The fundamental question is ‘who really runs the world, governments, or giant corporations?'”
    I believe that this will run until the train “hits the buffers”.
    Interesting that this has come to light so soon after the VW scandal?

  17. A deal is a deal regarding AAPL and Ireland but thats one reason the UK wanted out,big bad brother,Ireland should have done its homework for a better deal

  18. Hi Brad:

    I was at Microsoft in 2000

    In 2000 the whole tech industry and government piled on Microsoft and extracted penalties and fines for tactics which by todays standards are tame. They berated the company and extracted fines and penalties that were unwarranted. The whole engine was funded by special interest groups working on behalf of Microsoft competitors. Their success then resulted in EU fines as well. All under the “Monopoly” banner.

    Well you reap what you sow.

    Companies like Google and Apple with huge dominant market position use many tactics to drive shareholder value. I will not reflect on those tactics here. Suffice it to say that the companies that benefitted from the use the government as a competitive tool in 2000 now find themselves in the cross hairs of regulators.

    From my perspective I watched and personally experienced substantive financial loss due to these tactics. I feel little to no sympathy for any company that is now experiencing a similar fate. All the tech companies that had a hand in opening the Pandora’s box of government regulation based on “abuse” of their market strength. I.e. “their ability to negotiate great deals” – well –they made their bed – now they can sleep in it.

Comments are closed.