Mint – Blain’s Morning Porridge
There are death and taxes, but taxes are worse because at least death doesn’t happen to you every year.
Who would want to be the Irish Finance Minister? He’s learning the servant of many masters conundrum: how do you say no to Europe, turn down a €13.5bn tax windfall, keep sweet the multinationals whose investments have kept the nation afloat, while holding on to his job and the faith of voters after eight years of punishing austerity?
The Apple €13.5bn tax demand has been a long time brewing. Apple is merely the first big global name in the dock – the complexity and opaqueness of their tax affairs is hardly unique. The overall failure of the international authorities to address multinational tax is a regulatory failure at least as great as the banking crash of 2008.
Perhaps it would be best to unravel the different forces at work in this instance:
The Irish say they never gave Apple illegal state aid in the form of tax
Through a complex corporate structure Apple paid tax on Irish sales to the Irish tax authorities.
Ireland did not take responsibility for collecting tax on Apple’s sales elsewhere.
Apple apparently did not pay any taxes on non-Irish international sales.
Europe is telling the Irish it must now hit the company with a €13.5bn tax bill.
Give the European Union credit for a fair job identifying that Apple hasn’t paid tax. You could argue it’s the fault of every nation that accepted Apple’s structure for not collecting taxes. Surely, for instance, did not some genius in the Inland Revenue notice the very full Apple Shops in every UK shopping centre and the fact everyone has an iPhone?
However, the response of the EU at this time, kicking the hornet’s nest, is probably not terribly helpful.
Is Europe being fair and pragmatic? Is fining Apple just protectionism under another name? The Americans are going up the wall – accusing Europe of retroactive tax theft, stamping over agreements with sovereign governments, and picking on American companies. They hint Apple and VW look linked. But there is a whiff of distraction here, a hint of 19th century gunboat blustering to their noise.
The stink of sweaty palms and guilt is palpable. It's hardly been top secret that global multinationals have been striking sweetheart deals with the connivance of tax authorities for years.. It’s much easier for the Inland Revenue to go chase self-employed nurses, cabbies and nannies than it is to mix it with the tax lawyers of big business.
Apple can make a good case it hasn’t done anything illegal, but it hasn’t paid any tax on the bulk of its non-US earnings either. Who is to blame? The company or tax authorities for allowing such a situation? Morally, the company absolutely sucks. Legally, well, that’s a different matter.
Apple’s tax affairs are complex but hardly unique. Although I thought I was buying an iPad from the shop in Covent Garden, I was actually buying it from Apple Sales International – based in Dublin. Only a tiny fraction of ASI’s sales (attributed to Irish sales) were taxed. The EU’s report shows the rest were not.
Apple was apparently in compliance with Irish law. The profits Apple didn’t pay taxes on weren’t made selling iPhones in Ireland. The money was made across Europe from European consumers. By rights the whole of Europe is entitled to a return – but, the EU isn’t yet a single state with supranational tax authority. The EU is hinting they may reduce the fine if they get to spread the largesse around Europe – thus achieving back-door tax sovereignty.
What happens next? We have a potential game changer in global taxation – which may be a good thing, but also a sovereignty grab by the EU – which can only be a bad thing. By forcing Ireland to collect tax on behalf of other countries, Ireland loses its own sovereignty and becomes a mere facet of a corporate EU. I wonder if the Irish realise the EU is out to buy their sovereignty for €13.5bn? Compromise will compromise their independence. I don’t believe that’s something most Irish men and women actually want.
The question for markets is the potential damage the EU may trigger to global growth and recovery by going all-in and upsetting that cosy nod’n’wink relationship at this stage. Would not a more measured and considered solution to the farrago that is multinational taxation be better? Yes, yes scream the corporate lawyers. Of course they would. Reform is slowly happening… but too slow.
Bear in mind public opinion. In a year where the rising tide of protest votes triggered Brexit and may elect Trump, don’t discount how absolutely furious every taxpayer is going to feel as they learn how big business has been blithely avoiding taxes for years.
Whose fault is it we let multinationals set the tax agenda and get away with such nod and wink connivance? Sovereign competition to be attractive tax domiciles? America’s failure to solve tax inversions? Europe’s fumbling steps toward political union? They are many and varied.
No one is denying the taxation of multinational corporates across the globe is less than perfect. The EU says it is being transparent and has political agreement on tax. Does it? It has agreement as long as it doesn’t cost national jobs.
While it would be nice to tax multinationals till the pips squeak, there will always be countries willing to do sweetheart deals. Any industrialist will scream higher taxes will destroy their business. Any agreements on tax are going to be complex and require total transparency and co-operation. That means working with the US and not fighting them - as Europe seems determined to do. A trade war betwixt Europe and the US is not a good thing – but it’s likely to happen. The Chinese and Japanese must be laughing themselves silly.
I suppose this is the culmination of the trends of the last few decades. Governments are broke and can’t afford fiscal spending to stimulate lethargic economies. They are broke because they spent their citizens' money bailing out banks, and corporates aren’t paying taxes – which means the rich owner classes get richer and the poor get hit with higher cash demands and fewer services. It’s no wonder the masses are getting restless.
But…interest rates are zero, central banks hold the bulk of the debt. Write it off, start spending, rebuild economies. Press the Fiscal Button..
Out of time..
Head of Capital Markets/Alternative Assets