Closed for Business? Why Europe's Apple Tax Demand Sets a Troubling Precedent

Margrethe Vestager
European Commissioner Margrethe Vestager during a news conference on Ireland's tax dealings with Apple, European Commission, Brussels, Belgium, August 30. Eric Vidal/Reuters

Tax policy is typically complex and even confounding. That is not the case with the European Commission's state aid decision demanding that Apple pays over €13 billion ($14.5 billion), essentially undoing legal agreements with a sovereign country that were negotiated over a decade ago.

The implication of the Commission's decision is clear: it challenges longstanding law, upends member states' tax policies, and has sent policymakers on both sides of the Atlantic scrambling to adjust.

Like many global companies, technology firms entered into tax agreements years ago with European governments. These agreements were designed in part as incentives for companies to invest in certain markets. Upsetting longstanding member state policies to spur growth and investment within their borders, the EC's competition authority has designated itself the arbiter of whether these same national governments formed "unfair" arrangements with various global companies under EU "state aid" rules.

As we now know, the Commission has called foul, declaring that several such agreements provide unfair advantages to individual companies. But instead of just ending the practice, it is demanding that governments levy retroactive tax bills in response, and has invited other governments to scramble to claim their piece of the settlement.

The EC appears to ground its decision in principles of fairness. However, there is nothing fair about retroactively changing the rules of the game and potentially leaving U.S. taxpayers with the bill as companies claim foreign tax credits against these payments.

That is why in February, U.S. Treasury Secretary Jack Lew sent a pointed letter to EC President Jean-Claude Juncker outlining a series of concerns about the impact of the state aid decisions on long-standing global tax policy and practice. And, just last week, the U.S. Treasury Department followed its earlier efforts, publishing a paper persuasively attacking the Commission's legal arguments.

Further, many European leaders also recognize these decisions depart from prior EU case law and Commission decisions, and long-established norms of the international tax system.

Ireland, which is most impacted by the decision, reiterated its intent to appeal it, thus saying "no, thank you" to €13 billion. And, following a series of decisions levying back payments on companies operating in Belgium, Belgian Prime Minister Charles Michel expressed concerns about the impact on the business environment, saying: "It's important that a company can, in the coming ten to 15 years, count on a stable, secure framework."

These leaders recognize that while the cash inflow may be appealing, the Commission's approach is not the way to spur new opportunities for growth, job creation, and long-term prosperity.

The EC's approach risks undermining a budding global consensus over tax policy and creating regulatory dissonance across the continent. For companies, it calls into question the established rules of the road and creates significant business uncertainty. For member state governments, it undermines their competence over tax policy and ability to attract investment, as the agreements they validly negotiate can become undermined in the global marketplace.

This critique of the current Commission's approach is not a call to do nothing. Like it or not, we live and work in a global economy and there is nearly unanimous agreement that we must modernize cross-border rules to allow jurisdictions to appropriately tax economic behavior. In fact, it was this shared concern that led to the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) process, which is designed to shine a light on global tax practices and rationalize arcane policies that have become entrenched across jurisdictions for decades. Every major economy in the world—including several key EU member states—participated in the BEPS process, and the actions of the EC will undermine the project in its infancy.

We now live in an interconnected world that needs interconnected policy responses. The Commission's approach to this set of issues fails to provide such a response, departing from a longstanding tradition of multilateral cooperation on tax policy—and, in the process, threatens innovation, investment, and growth, both across the Atlantic and in Europe itself.

Dean Garfield is president and CEO of Information Technology Industry Council, a Washington-based global trade group representing over 60 of the world's leading technology companies.