By now it is well-known that EU commissioner for competition, Margrethe Vestager, a leftist politician since the age of 21 with zero private sector experience, has imposed a stunning $14.5 billion fine on Apple for allegedly receiving state aid from Ireland. Apple, and the potential beneficiary of this large sum of money, Ireland, have blasted the EU verdict as illegal and threatened to appeal. Separately, the United States government has attacked the decision as discriminatory to U.S. companies and accused the EU in a recent US Treasury paper of “targeting US companies disproportionately.” To the west of the Atlantic divide, opinion seemed to see the reason for this inordinate fine in European bias against the US tech giants due to envy. Indeed, a recent column in the Wall Street Journal convincingly demonstrated the huge discrepancy in high tech achievement between the two sides. 7 of the top 10 tech giants are U.S., while only 3 of the top 20 are European (SAP, Ericsson and Nokia). Moreover, the US behemoths of Apple, Google, Microsoft, Facebook and Amazon all have market valuations of more than $350 billion each, while the European heavyweights barely tip the scales at $50 billion each. The usual explanations for this dramatic discrepancy, such as the American propensity for risk-taking and/or the European lack of an entrepreneurial culture, are traditionally adduced and they do make sense up to a point.
But, by and large, the alleged anti-American bias factor of the Eurocrats fails to convince for a number of reasons. The U.S. has been known to be quite biased itself on occasion. The Wall Street Journal’s Holman Jenkins, for instance, has compared the huge $19.4 billion fine imposed on Volkswagen for its diesel shenanigans, in which nobody died, to the relatively small $900 million fine of General Motors for a defect that killed 124 people. Nor is the U.S. a slouch when it comes to showering subsidies to attract foreign investment. Recent studies show that American states and municipalities have lately been spending $50 to $70 billion in incentives per annum to attract foreign companies. Last but most, the main reason American multinationals are looking to exploit foreign loopholes and stash cash outside of the US jurisdiction, is because the U.S. corporate tax code is as business unfriendly as they come. With the highest top rate of 35% among developed countries and a claim on the worldwide earnings of US-based corporations, the US taxman is certainly no friend of business.
So, the real reason for Vestager’s assault on Apple must be sought elsewhere and that elsewhere is not difficult to find. It lies in the huge divide between the high-tax, high welfare benefits of Western Europe and the low-tax, low welfare benefits of Eastern Europe. Corporate rates in the West are generally above 30% (Germany – 33%, France – 33.3%, Belgium – 33.99%, Italy – 31.4%), while those among Eastern European EU members range from 10% to 20% (Bulgaria – 10%, Lithuania – 15%, Latvia – 15%, Romania – 16%, Slovenia – 17%, Poland – 19%, Hungary – 10 to 19%, Estonia – 20%, Croatia – 20%). Thus, the perennial desire of the Western Europeans to “harmonize” corporate taxes across the EU, which generally means bringing the low Eastern European rates to those of Western Europe. To that effect, the attack on Ireland’s incentives given to Apple and other tech giants has more to do with the very low Irish corporate rate of 12.5% than the ostensible state aid it has provided. Tax rates, according to EU charter documents are exclusively left to national jurisdictions and therefore the European Commission has no business interfering in Dublin affairs. Aware of that, the Commission has charged Ireland with interfering with competition – a very dubious charge given that low corporate rates are the epitome of a competitive regime.
Examples of the Brussels drive, controlled as it is by Western Europe, to harmonize taxes are not difficult to find. As early as the introduction of the euro, Brussels mandarins argued that “the single market depends on a harmonized approach to taxation.” More recently, Chancellor Merkel of Germany and President Sarkozy of France proposed a “standard corporate tax rate” for all of the EU in 2011. These efforts were pursued at the organizational level as well and just before the Brexit vote, the EU instituted an Economic and Monetary Affairs Committee which opined in June of 2016 that “Economic and monetary union must be achieved through a harmonization of European taxation.” These rather heavy-handed efforts have not escaped the attention of Eastern Europeans and free market proponents everywhere to whom the Apple case is nothing less than an “aggressive supranational assault on the sovereignty of smaller EU members.” Eastern Europeans are also well-aware of the business benefits that accrue to them from low corporate rates – from attracting automobile plants to high tech outsourcing. A case in point is the poorest member of the European Union – Bulgaria. With its extremely low corporate tax rate of 10%, Bulgaria has been able to develop a very lucrative software and IT industry, attracting the likes of Microsoft, H&P, Amis, IBM, WMware, SAP, Johnson Controls etc. With 30,000 programmers in 2016, the industry pays wages three times higher than the average for the country, generates over $1 billion in exports and is growing at 10% per year. None of this would have been possible if Bulgaria’s tax was that of Germany or France. Unfortunately, EU bureaucrats like Mrs. Vestager do not appear to understand that. They are playing with fire.
By Alex Alexiev