Today the European Commission slapped down tax avoiding Apple and low-road economic developer Ireland with a $14.5 billion state aid repayment order. Yes, you read that right: Apple has to pay Ireland €13 billion in back taxes, plus interest, covering the years 2003-2014. According to the Commission's order, Apple's effective tax rate in Ireland ranged from 1% in 2003 to 0.005% in 2014, far below Ireland's statutory 12.5% corporate income tax rate.
This could not have happened to two more deserving parties. Apple, of course, constantly whines about taxes and is a pioneer in creating the most arcane tax avoidance strategies imaginable, such as the establishment of subsidiaries it claims are taxable *nowhere*.
Ireland has for over 50 years followed a low-road economic development strategy based on low taxes and high investment subsidies. When I interviewed numerous government officials there in 2009, almost all of them (literally, just one exception) were convinced that the country's economic success in the "Celtic Tiger" era (approximately 1990-2007) was due to its low-tax strategy. This argument overlooked the fact that the first 30 years of the strategy's use saw no gain whatsoever on EU average income, i.e., Ireland grew no faster than the average of the first 15 EU Member States (or EU-15, for short). It was only when Ireland used "higher road" strategies -- free high school, building new technological universities, social partnership, and a large infusion of EU-funded infrastructure -- that the country really began to take off.
While it is no surprise that Ireland and Apple reacted angrily to today's decision and will appeal the case to the Court of Justice of the European Union, the reaction of the U.S. Treasury is more puzzling. Basically, as John Judis explains at Talking Points Memo, the United States is defending Apple as a national champion that the Europeans shouldn't be charging additional taxes. Instead, Judis argues, the United States should be cheering on the EU pressure on tax avoidance and apply more of its own.
Critics of the decision argue that the Commission's Directorate-General of Competition has no expertise in tax cases. However, as one of the commenters there pointed out, this is properly a state aid (subsidy) case. Indeed, DG-Competition has been tackling fiscal aid cases such as this for 20 years. It was a previous DG-Competition investigation that in 1998 ruled Ireland's 10% tax rate to be not just a subsidy, but an operating subsidy, i.e., not based on investment but ongoing operations. The Commission really does know what it's doing here.
As a result, Ireland is now under pressure to abandon its well-known tolerance of murky tax arrangements, and Apple is finding itself at risk for aggressively creating tax avoidance gambits. It's a great day for honest taxpayers.