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,
Uncommon Wisdom Daily