Tuesday, August 30, 2016

European Commission orders Apple to repay Ireland $14.5 billion in illegal tax benefits

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.

Mike Pence subsidizes offshorers

The Indianapolis Star reports (h/t Greg LeRoy) that the Indiana Economic Development Corporation (IEDC), which is headed by Governor/Vice-Presidential nominee Mike Pence, has given millions of dollars in incentives to companies that have subsequently offshored jobs to countries including China, Mexico, Taiwan, and Japan.

Not only that, but the 10 companies that outsourced the jobs sent more jobs abroad from Indiana, 3800, than their agreements with the IEDC required them to create, 1087. For this, the companies were initially awarded $24 million. Moreover, four of the 10 companies failed to reach their job commitments and were subject to clawbacks and termination of future payments under their agreements.

This is a startling mix of good practices and terrible practices. On the good side of the ledger, the state uses both performance-based incentives and clawbacks. Not only that, the cost per job is quite reasonable compared to most states, a mere 24,000,000/1087 = $22,079 per job.

The fly in the ointment is that Indiana does not measure job creation goals against a company's pre-existing state workforce, but against its workforce at the project site location only. Thus, Vera Bradley added about 30 jobs at its headquarters in the Fort Wayne area while laying off 250 at another Fort Wayne-area facility, and is considered to be in good standing on its incentives. How can I put this charitably? This is idiotic. As we can see, the ten companies ran rings around the IEDC and got $24 million for creating -2713 jobs.

It's not like other states aren't aware of this problem, so why isn't Indiana paying attention? According to one source quoted by the Star, among the states that prohibit what Indiana has allowed are immediate neighbors Ohio and Michigan, near neighbor Missouri, and also North and South Carolina.

To top it all off, IEDC does not make companies' job performance numbers public. (Banging my head on the table...) Thus, it is impossible to independently monitor the performance of subsidy awards. If not for the existence of federal trade adjustment assistance application data, the Star could not have done this study at all. Fortunately, the data were there, and we are treated to one more instance of the widespread underperformance of subsidy recipients.

And remember: Pence is the guy that Donald Trump chose as his running mate.