Statehood and Apple pry

Governments are real targets in Apple's tax case

The European Commission's tax broadsides against Apple and Fiat have put European Union member states on notice. Preliminary findings from Brussels accuse the Irish government of hatching sweetheart deals for the iPhone maker, and suggest that Luxembourg may have done the same for carmaker Fiat. Too much of a good thing amounts to illegal state aid distorting competition, the Commission argues. Apple, Dublin and Luxembourg reject the allegations. Fiat has declined to comment. Whatever the outcome, other governments should now be warier of cosying up to big business through tax dumping.

Ireland's reward for cooperating with the Commission is the publication of its conversations with Apple's tax advisers in 1990 and 1991. The most troubling imply that Apple's tax advisers used the tech company's clout as an employer to secure a better deal. Dublin and Apple now have another month to make their case in full.

The secretive nature of tax deals makes comparisons tricky. The Apple tax adviser who admitted that there was "no scientific basis" for a proposed ceiling on attributable profit may have had an ulterior motive. But perhaps tax rates are often plucked from thin air. A 2010 sweetheart deal for Goldman Sachs in the UK was ruled last year by a local court procedurally flawed, but not illegal.

Apple could withstand the financial pain. The Commission could force it to pay back 10 years' worth of taxes to Ireland. That would be a maximum of 5 billion euros, Barclays estimates, and probably a fraction of that in reality - hardly a dent in the $37 billion Apple made in net profit last year.

The complexity of Apple's tax arrangements owes much to the United States tax system, which has a high 35 per cent nominal corporate tax rate, but allows companies to defer payment by holding profit in "offshore" subsidiaries. That pushes companies to engage in tax arbitrage acrobatics with intriguing names such as a "Double Irish with a Dutch Sandwich."

The lesson here is familiar: coordinating tax policies is necessary and is a matter for governments. Ireland, Luxembourg and the Netherlands are in the Commission's sights because they are low-tax jurisdictions. During Ireland's euro zone bailout, Germany and France called for the country's 12.5 per cent corporation tax to be raised. Ireland refused. Perhaps Brussels' latest investigation will push Dublin to reconsider.