Imagine you live on a nice street with nice neighbors, but there’s a problem. Your teenage son recklessly speeds along the street, knocking down garbage cans and leaving skid marks on the well-kept lawns. The neighbors hold their tongues, expecting you to intervene and discipline the boy, at least insisting he obey the speed limits if not taking away his keys. But you’re unable to control him and finally, frustrated with your fecklessness, the neighbors take matters into their own hands and sic the authorities on him.
Do you thank them for taking the tough love parenting steps you should have already taken? Or do you castigate them for disciplining your darling, misunderstood boy?
If you’re the US Treasury and members of Congress from both parties, you do the latter.
I’m talking about Apple, Ireland, and the European Union, of course. The EU’s tax authorities are accusing Ireland of providing special tax breaks to subsidiaries of the US multinational tech company. Such alleged state subsidies are considered anti-competitive by the EU, which is thus demanding that Ireland claw back $14.5 billion in ten years’ worth of upaid taxes.
That’s a lot of overturned garbage cans. By allowing Apple to classify much of its profits booked abroad as “stateless”—Ed Kleinbard’s apt term for profits that are detached from where they’re earned and dispatched to where they’re untaxed—Ireland has, according the European Commission, “allowed the company to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.”
Perhaps surprisingly, given the extent to which the Obama administration has righteously denounced such extensive corporate tax avoidance (e.g., they’ve gone after corporate inversions as best they can without Congress), they’re not at all pleased by the EU’s move on Apple. As tax expert Steve Rosenthal interprets their thinking, “Apple may be a tax cheat, but Apple is our tax cheat.”
Perhaps they’re worried that if Ireland succeeds in squeezing some juice out of the Apple, there won’t be any left for our Treasury (in reality, this case will be tied up in courts for years, I predict; it’s a tough case as tax courts can be lenient on behaviors that were tolerated for years). Perhaps they’re worried that this will hurt the OECD’s coordinated efforts to harmonize advanced economies’ approach to blocking such “base erosion and profit shifting” by multinationals (the BEPS initiative).
But my sympathies lie with the neighbors on this one. We’ve done nothing to stop this egregious avoidance. So when I hear politicians like Sen. Orrin Hatch, who chairs the powerful Senate Finance Committee, complaining that “Any ruling that is inconsistent with international tax standards and harms American business abroad with retroactive measures is inherently unfair and encroaches on U.S. tax jurisdiction,” or Sen. Chuck Schumer berate the EU’s decision as a “cheap money grab,” I’m like: gimme a break.
The journalist Richard Rubin put not too fine a point on this mess: “[Our] current tax system encourages companies to find as low a foreign tax rate as possible, book as much profit as possible outside the U.S. and leave the money overseas. That is exactly what they’ve done…”
Tru dat. Companies that can do so book their income in the lowest-tax places and their deductible expenses in the highest-tax places. It’s mostly legal, but even when it’s not, our underfunded IRS is no match for their bevy of tax lawyers and, if we’re being honest, the politicians on their payrolls who preserve the status quo, while voting for budgets that further whack our tax collectors.
So here’s my message to the EU tax commissioners and their lawyers whom I hope will successfully prosecute this case: I apologize for the skid marks on your lawns and any other damage done by our reckless driver. We’ve not been able to stop him. Truth is, we haven’t even tried. So go get ‘em and good luck!