No one can accuse Europe’s competition authorities of lacking innovative thinking.
With their move against Apple and Ireland on Tuesday, the EU’s antitrust chief, Margrethe Vestager, and the head of her state-aid team, Gert-Jan Koopman, have started a revolution in tax law in Europe. But the political implications of the European Commission’s decision to force the Irish government to claw back €13 billion (plus interest) in illegal subsidies to Apple extend far beyond taxation.
By resorting to the Commission’s sweeping executive powers on competition to address matters normally resolved at national level, Vestager and her team have implicitly acknowledged the EU’s political divisions and impotence across a range of European economic issues.
And as the back-slapping and grinning of Commission spokespeople and competition officials before Tuesday’s announcement made clear, the decision has also given Eurocrats a rare chance to relive their glory days as global agenda-setters.
The euphoria could be short-lived. The sheer scale of the Commission’s move sours the EU’s relationship with the U.S. government. Washington issued an unprecedented 26-page paper denouncing the action before it was even taken, and then slammed the decision itself as “unfair” immediately afterward.
Senior officials in the Commission’s Berlaymont headquarters are already fretting about “U.S. over-reaction” to the decision, which could also cloud the future of separate bilateral initiatives like the struggling TTIP agreement.
Filling a political vacuum
The Apple decision is not just a headline-grabbing move by the Commission’s feared competition department to hunt out and recover what it considers market-distorting government subsidies to industry. It also reveals the extent of Vestager’s radical strategic vision, and the breadth of its positive and negative effects.
Vestager has demonstrated from her first weeks in office the desire to use, creatively if necessary, the full extent of her sweeping powers as competition commissioner. Whether it is adding a probe of the Russian state-industrial complex on top of sanctions against Moscow, or stepping in to shape copyright law as other Commission departments fight interminable turf wars, Vestager has cast herself as a policymaker of last resort.
In seeking to rewrite the policy playbook where others fail or where division rules, she is acting less like a traditional Eurocrat and more like U.S. President Barack Obama, who has used presidential executive orders to bypass the partisan-gridlocked U.S. Congress.
The decision in [the Apple case] demands the recovery of more illegal state aid by one government than the Commission has sought from all EU governments over the past five years combined.
The Apple probe was first launched — not by Vestager but by her predecessor Joaquín Almunia — as part of an effort to reform the EU tax base among the ashes of the financial crisis that began in 2008.
European governments needed to repair state finances, and looked to clamp down on tax avoidance as part of the solution. With the EU treaties requiring unanimity for any EU-wide tax law reform those efforts have progressed slowly. Competition officials saw their chance to step in and act, according to two officials present at the beginning of the probes, who spoke to POLITICO on the condition of anonymity.
Eight years later the biggest potential prize of all is within reach.
But that prize isn’t Apple, nor is it the Irish state — even though the decision in their case demands the recovery of more illegal state aid by one government than the Commission has sought from all EU governments over the past five years combined.
The goal, to use Vestager’s language from Tuesday, is to bring “stateless companies” to heel. The winners of the prize include smaller rivals in the marketplace and the Commission itself, which desperately needs to demonstrate a better connection with voters.
Multinational politics
Vestager’s pursuit of Ireland and Apple comes at a time when much of Europe is in popular revolt against the sort of elites who avoid taxes; many of whom happen to also use Apple’s luxury tech products.
It also specifically aimed at multinationals such as Fiat, Starbucks, McDonald’s and Amazon that are able to shift revenue around effectively, rather than national companies. These American giants are an easier mark to address populist anger.
Neena Gill, a center-left MEP from the U.K., said she often hears frustration from small business owners about the ability of big corporations to avoid taxes. “They have very strict tax requirements and think it is unfair that multinationals get all these sweeteners,” she said.
In France, with presidential elections coming up in May 2017, political winds are blowing against U.S. multinational firms, and in favor of tough treatment for perceived tax evaders, no matter what body is doing the sanctioning.
The Socialist mayor of Paris, Anne Hidalgo, lashed out against Amazon when it opened its “Prime” delivery service earlier this year, and Finance Minister Michel Sapin warned Google that it would face a bigger tax bill in France than it did in Britain.
“If I got a tax bill for just 0.005 percent [of her income] I would maybe take a second look and ask if it was right” — Margrethe Vestager
Even in the U.S., where the government was quick to stick up for Apple, not everyone was so critical of the EU move. A spokesman for the Service Employees International Union called the decision “an entirely legitimate way to address aggressive tax avoidance strategies by multinational companies.”
Vestager, meanwhile, had the sharp, crowd-pleasing and confidently delivered soundbites ready. “If I got a tax bill for just 0.005 percent [of her income] I would maybe take a second look and ask if it was right,” she told a packed press conference Tuesday. It was a message aimed straight at the front page, not the business page.
Apple has promised to fight the decision, saying it has complied with tax law. Its chief executive, Tim Cook, called the decision “an effort to rewrite Apple’s history” and said the company is “the largest taxpayer in Ireland.”
An EU morale boost
For EU officials struggling through a year of bad news — from the migration crisis to terror attacks to Brexit — the Apple announcement represented what they clearly felt was a victory for Brussels.
“Confidence in Europe is at a record low and this is the kind of tough line needed to win trust back” — Sven Giegold, German MEP
The Commission’s chief spokesman Margaritis Schinas could barely contain his satisfied smile at a press briefing following the announcement. “I have the feeling this was a memorable moment for the Juncker Commission,” he said.
Other European politicians also said the tax probes offer a rare example of EU policy that connects with citizens. “Confidence in Europe is at a record low and this is the kind of tough line needed to win trust back,” said Sven Giegold, a German MEP from the Greens.
The fact that it offered a chance to go mano-a-mano with Washington also pleased many European politicians.
“It is good that the European Commission did not give in to recent intimidation attempts by U.S. authorities,” said Markus Ferber, a senior German European People’s Party MEP, referring to the Treasury Department’s broadsides against the probe. “State-aid rulings should be solely based on evidence.”
But other senior EU economic officials insisted there is no anti-U.S. mood in the Commission. They said they had verified that the decision was both unbiased and in line with existing EU law before signing off on it, out of fear that overstretch could jeopardize the fledgling TTIP deal or affect the 2016 U.S. presidential election.
EU Competition Commissioner Margrethe Vestager in Brussels | John Thys/AFP via Getty Images
Vestager also rejected those claims, pointing out that the EU has not changed any of its laws, and has not issued any penalty against Apple. “This is not a penalty,” she told reporters Tuesday. “It is unpaid taxes to be paid.”
Taxing issue
Pushing companies to pay more tax is also seen as a way to boost European competitiveness without the kind of painful economic reforms EU governments have been notorious for avoiding, such as liberalizing service markets and professions.
Instead of pushing its own economies up, the Commission has sought to bring competitors back down, so that European companies can compete on a level playing field.
Giegold described the decision in the language of fairness. “Apple pays no taxes in Europe and of course Spotify has to pay,” he said. “How should Europe build up tech companies if U.S. companies do not pay tax?”
Self-described tax justice campaigners lauded the decision as an opening for countries around the world to pursue companies using methods such as Apple’s to avoid tax.
“It is highly likely that affected countries, of which the EU commissioner explicitly mentioned European, African and Middle Eastern nations, but also India, are now in a position to challenge the legal fiction whereby sales in all of those countries were contractually routed through Irish legal entities,” said Moran Harari and Markus Meinzer of the Tax Justice Network.
But campaigners were also realistic about how far the EU could really go in pursuing such tax deals around the world if action has to be taken by competition authorities and not through reform of tax laws, which is far more complicated politically.
“These rulings have a limited deterrent effect,” said Elena Gaita of Transparency International EU. “The Commission cannot investigate every dubious deal and corporations know this. We could avoid relying on the Commission and the resulting transatlantic tax squabbles by making companies’ financial information public.”
German MEP Burkhard Balz, spokesman on tax issues for the European People’s Party in the European Parliament, backed the Commission’s decision but said he did not accept it as a replacement for wider implementation of corporate tax reforms currently under debate among national governments.
Carsten Schneider, deputy head of the Social Democrats’ faction in the German parliament, said the decision is a warning shot “directed not just at Ireland but also at countries like the Netherlands or Luxembourg, that we, as their EU partners, will no longer accept their dumping tax policy.”
In Paris, after the rejoicing behind closed doors, there was concern that the European Commission’s Apple crackdown could take the steam out of France’s crusade to harmonize tax reporting rules across the bloc.
Current and former DG Competition officials concede there are limits to Vestager’s approach. They said using the state aid rules can only deal with the worst cases of selective application of tax rules, and will not fix the underlying problem of aggressive tax competition in Europe.
One thing is certain: This is not the last battle in Europe’s tax wars.
“The commissioner issued what seemed to be an open invitation to tax authorities both in the EU and outside it, to re-examine Apple’s tax filings,” said Ken Almand, head of Transfer Pricing at RSM, a U.K.-based tax firm. “Not only has Apple made it clear that it would appeal any adverse decision, but the Commission is still investigating 1,000 other rulings.”
As for Apple, it has relied on the argument that “Apple follows the law and pays all of the taxes we owe wherever we operate.” It now owes another €13 billion plus interest.
Nicholas Vinocur in Paris and Janosch Delcker in Berlin contributed to this article.