When EU competition chief Margrethe Vestager asked her colleagues in the Commission to approve her recommendation to order Ireland to recover some €13 billion in back taxes from Apple, few if any asked questions.
Media speculation had been mounting about a looming decision in the Apple case, in which she would effectively accuse the company of deliberately misrepresenting where it makes its profits in order to pay only a minimal amount of taxes. But commissioners and chiefs of staff interviewed by POLITICO say they viewed Vestager’s work as so “watertight, “bulletproof” or “by-the-book” that they didn’t need to know the details.
It was only after she had secured their signatures and announced the decision on live television the last Tuesday in August that many of her colleagues were informed of her reasoning. Later that day, she filled them in as they rode a bus to a brainstorming retreat on the Belgian coast. And they were just fine with that.
Even the commissioner from Ireland, Phil Hogan, had skipped on the offer of a pre-briefing on Sunday, August 28, two days before the decision was announced.
Vestager’s announcement — and the acquiescence of her colleagues — is the clearest example so far of the “deeply political Commission” promised by European Commission President Jean-Claude Juncker.
Vestager used the power of her office to deliver political change that taxpaying, television-watching, Brussels-phobic Europeans could understand and support.
In a single decision, Vestager seized the world’s attention, upended a country’s business model, riled a global corporate giant, and created a diplomatic incident with the European Union’s chief ally, the United States.
Vestager’s predecessors have long been accused of acting as the judge, jury and executioner in high-stakes competition cases. In her media savvy handling of the Apple tax case, the 48-year-old Dane added another role to her portfolio: Brussels’ most prominent television star.
A signature achievement
The teamwork and trust that enabled Vestager’s decision was a stark contrast to the political brick wall her predecessor Joaquín Almunia had run into in 2014 as he tried settle a long-running antitrust case against one of Apple’s rivals, Google.
Almunia was slapped down by his Commission colleagues after a bruising internal debate in September 2014 and forced to withdraw a much smaller recommendation: a settlement requiring changes to the way Google presented its search results to avoid disadvantaging its competitors.
In that case, both Almunia and Google had made two fatal mistakes: They forgot about politics and allowed their dispute to drag on. The settlement that should have been Almunia’s signature achievement was instead smashed against Europe’s political rocks with just weeks left in his mandate.
Apple CEO Tim Cook | Chip Somodevilla/Getty Images
Vestager, it seemed, had decided that she was not going to make the same mistake. Her office has long had unrivaled enforcement powers. She added to them what her colleagues describe as unparalleled communication skills and political judgment.
Jean-Claude Juncker may talk about a more political Commission, working through stiff drinks and dinner with members of the European Parliament. Vestager used the power of her office to deliver political change that taxpaying, television-watching, Brussels-phobic Europeans could understand and support.
Apple on a plate
In her fight against what she describes as free riders in the corporate tax system, Vestager insists she wasn’t looking to punish a particular company.
Apple was not her target, legally speaking: that was the Irish government. She was looking for a case that would stop the culture of rampant tax avoidance in Europe in its tracks. The world’s biggest company was merely the collateral damage.
Indeed, Vestager’s case against Apple might never have been launched if not for a hearing that took place in the United States.
In 2011, Almunia had set up a Tax Planning Practices Taskforce and charged it with exploring the possibility of using competition law to enforce tax compliance by major companies.
So when, in May 2013, a group of U.S. senators held televised hearings in which they pushed Apple executives to explain the company’s tax practices, officials on the taskforce were quick to take note.
“Brussels moves slowly, it’s complicated, and the officials here have a 20- or 30-year horizon about how they see their careers” — Former minister turned lobbyist
In sworn testimony, Apple executives described an opaque — and in the eyes of officials on the task force back in Brussels, highly suspicious — arrangement of fiscal practices. Apple’s tax chief Philip Bullock said that the company did not “have a tax residence.” Its CEO Tim Cook said he didn’t know the “legal definition” of where Apple’s subsidiaries were managed and controlled, though it booked many of its profits in Ireland.
“Most reasonable people would agree” that Ireland was a tax haven for Apple, was how John McCain, the former Republican presidential candidate, summed up the proceedings.
For officials in the Commission, it was as if Apple had been handed to them on a plate. With its massive profits and legal presence in Ireland, the company was a ripe target for a tax investigation. Apple “would have gotten away with it if it hadn’t been for those Senate hearings,” said one Commission competition official.
Within three weeks of the testimony, on June 12, 2013, the Commission had written the Irish government requesting information about Apple’s tax arrangements.
Competitive tax rates
For Ireland, Vestager’s investigation was about more than a single company or the taxes it did or did not contribute to the country’s coffers. Small and lacking in natural resources, Ireland had built its economy by offering multinational companies two attractive proposals: a workforce of skilled English speakers and a minimum of tax hassle.
And so while the Irish government cooperated with the EU’s investigation, it also was looking for ways to shore up the legal case for its tax arrangements with Apple and other multinationals.
Vestager was not swayed during her meeting with Tim Cook | Thierry Monasse/DPA via Zuma Press
In 2014, Ireland sent top lawyers to The General Court of the European Court of Justice to make oral arguments in a state aid case that had implications for the Apple deal. Spanish bank Santander was among several companies appealing a Commission decision that it had benefited from selective tax treatment in Spain.
Ireland took the side of Santander, and on November 7, 2014, the court backed the bank, using the same reasoning the Irish government now uses to defend its arrangement with Apple: that a similar deal was theoretically available to any competitor who asked for it.
Missing the mark
Apple was less quick to work up a defense. Technically, the company was a third party in the Commission’s tax investigation, and so its executives found it hard to get a foot in the Commission’s door to explain its position.
Apple scooped up a respected Commission expert on technology competition, Per Hellström, who had worked on the Google case that shipwrecked Almunia. Mostly the company kept its engagement with the investigation low-key. When Lisa Jackson, vice president of environment, policy and social initiatives, visited to Brussels to open the city’s first and only Apple store in 2015, meeting with the EU competition enforcers was not part of her agenda.
The company paid for advice from global legal and lobbying firms, including Freshfields Bruckhaus Deringer and FleishmanHillard, but overall it had few deep relationships and little state aid expertise to call on, according to Brussels-based state aid specialists.
“Brussels moves slowly, it’s complicated, and the officials here have a 20- or 30-year horizon about how they see their careers,” said one former minister turned lobbyist. “It takes time to understand and for relationships to mature.”
Apple’s internal culture, says a former longtime employee, is “very silo-ed, everything on a need to know basis, and you never need to know.” Instead of encouraging employees to see problems on the horizon and work across teams to address them, employees were taught to focus on “circles of influence,” an approach that “basically trains everyone to only focus on their own, always very narrow, remit; to not try and get involved with or seek to understand other areas.”
CEO Tim Cook did not plead the company’s case with Brussels until January 2016, two-and-a-half years after the probe was launched. When he did, his arguments missed their mark.
Vestager was well into the second half of her investigation, and she was unlikely to be swayed by the platitudes and buzzwords Cook came prepared to deliver. Nor did Cook advance his cause when he spent a one-on-one meeting interrupting and talking over her, according to those briefed on the encounter. Apple declined at the time to comment about the meeting.
Apple denies it did anything wrong, and accuses Vestager of misrepresenting how much it pays in taxes. “We were among the largest taxpayers in the country if not the largest taxpayer,” Luca Maestri, senior vice president and chief financial officer, told reporters on the day of the announcement.
Cook’s playbook was familiar to the Commission’s competition officials. Other American tech giants had hinted they would take their business elsewhere if they weren’t provided tax or regulatory exceptions. “There is a culture that [suggests that] unless you give in to the blackmail they will invest somewhere else,” said one official. But there was usually little cost to calling the bluff.
In 2005, Ireland had requested approval to provide Intel with state aid, arguing that the company had threatened to leave. Warned in advance by Commission officials that its proposal would likely be rejected, Ireland withdrew the request. Intel stayed.
A new line of thinking
Vestager maintained a calm public demeanor throughout 2015, but the sheer complexity of the Apple case was a source of stress, according to officials in her department.
On arrival in Brussels in 2014, the Danish commissioner had said she hoped to quickly resolve the investigation. Her confidence was based on a promise by the tax taskforce that the case would be ready by summer 2015. But when a decision on the Apple probe didn’t materialize by September 2015, many wondered if it was set to fizzle.
In October 2015, parallel probes into complex tax arrangements by Starbucks and Fiat ended disappointingly, when Vestager ordered just €20 to €30 million be recovered from the companies by the Dutch and Luxembourgish governments.
The Apple decision had been delayed for another reason: The Commission was pursuing a new line of investigation that would reshape the case.
The original charge sheet had focused on how Ireland had allegedly allowed Apple to charge non-market prices as it moved goods and services between different parts of its empire (a system known as “transfer pricing,” used by many large companies).
The same charges had been used in the Fiat and Starbucks cases. Some in the commission were disappointed by the result and worried that the same line of inquiry could cause the biggest prize of all to slip away.
In between morning jogs, chilly swims in the sea, and debates with her kids about what they’d prepare for dinner, the EU’s antitrust chief was triple-checking details of the biggest decision of her political career.
An early clue about the new line of inquiry emerged in the fine print of Apple’s 2015 annual report, which indicated the huge scale of the cash and other assets the company held offshore: $187 billion. To investigators in the Commission, that implied a deferred tax liability of tens of billions of dollars.
Vestager was faced with a choice: try to pin Apple down in a gray zone — transfer pricing — that had not paid off with Starbucks and Fiat, or break entirely new ground by focusing on the shifting of sales profits. And as the tax taskforce discovered more about how Apple allocated its profits around Europe, there seemed to be a limitless amount of profit-shifting they could chase.
EU competition officials were concerned about their ability to grapple with the complexity of Apple’s tax arrangements, but also thrilled at the size of the potential illegal behavior they were discovering. They say they were under orders from Vestager to test and re-test every facet of the case for legal soundness.
The Commission suspected that Apple was booking nearly all of its profits to a subsidiary that existed only on paper, and only for the purpose of avoiding tax. In one example offered by the Commission as it announced the decision, Apple’s Irish company recorded profits of around €16 billion in 2011, of which only about €50 million was considered taxable in Ireland. The Commission says Apple paid an even lower rate in the years after 2011.
If this practice could be proven to be illegal, it would reveal the last 25 years of Apple’s corporate history in Ireland to be a sham.
The change in focus caused consternation in those sitting across the table from Vestager. The Irish government complained that the goalposts had been moved and asked for a resubmission of the decision to open the case, with new charges that they could respond to.
The U.S. tried a different tack. In February 2016, U.S. Secretary of the Treasury Jack Lew urged Vestager to consider ditching the probe altogether, on the basis that her unilateral action would disrupt international tax reform efforts. The Commission stuck to its guns.
Summer reading
By summer, Vestager was ready to act. In the second week of July, Vestager told Ireland’s Finance Minister Michael Noonan and the U.S.’s Lew to expect a decision in September or October. When Vestager set out for the Danish coast for her summer holidays she packed a paperback copy of “The Reader on the 6.27.” But the novel, by French writer Jean-Paul Didierlaurent, would not be her most compelling summer reading.
In between morning jogs, chilly swims in the sea, and debates with her kids about what they’d prepare for dinner, the EU’s antitrust chief was triple-checking details of the biggest decision of her political career.
For Vestager and her team, the remaining challenge was maximizing the impact of the Apple decision. That required three things: genuine surprise at the timing and scale of the financial clawback, the ability to minimize any potential political backlash, and a clear news day to drive the message home.
Tim Cook did not plead the company’s case with Brussels until January 2016 | Josh Edelson/AFP via Getty Images
The EU had been wounded by the vote by Britons to exit the Union. Vestager’s colleagues were also getting frustrated at Juncker’s leadership of the Commission. They had been shocked by POLITICO’s revelations that Juncker spent only half his days at his Brussels office or traveling for work.
And some had been deeply disturbed by his decision to appoint a former rival, Michel Barnier, as the Commission’s Brexit negotiator without consulting them. The EU was in bad need of a political victory, and the Apple case offered Vestager the ability to deliver.
The €13 billion figure was the right start: certain to provide shock value. Vestager had also made careful efforts throughout 2015 and 2016 not to raise expectations about the scale of the financial punishment she would recommend.
Political timing
The governments of the U.S. and Ireland — tipped off by a call Vestager placed to Noonan — were on alert in the final week of August that something was finally about to happen in the case. But Vestager was careful not to reveal the details of the decision. There was mention only that the number would be large compared to the earlier rulings against Starbucks and Fiat, according to those briefed on the call.
The decision on timing — which many in Brussels credited to Martin Selmayr, Juncker’s powerful chief-of-staff, but which several officials said was also made by Vestager herself — was calculated to generate the least internal resistance and largest amount of publicity. “She’s a very media-savvy commissioner,” said an official from the directorate-general for competition. “If you want impact you don’t do it late June or July or December, you do it when it’s not competing with other stuff.”
With most commissioners just returning from their holidays, an August 30 decision meant little chance of the sort of backlash Almunia faced in 2014 over his Google recommendation gaining momentum.
The timing also preemptively neutered accusations that Vestager was cutting across Juncker’s State of the Union speech on September 14, or a summit of EU leaders in Bratislava two days later. It also took the case off of the agenda of the Commission’s annual end-of-summer retreat on the Belgian coast.
Most importantly, it allowed the EU to score a PR coup on its first full day back at work after the summer.
On the morning of August 30, Vestager entered the private lift that takes commissioners from their offices at the top of the organizations headquarters into its bowels. As she navigated the maze-like corridors of the lower levels toward the Commission’s packed press room, the emailed news of the €13-billion bombshell ricocheted around the world.
The strobe of flashlights greeted Vestager as she strode across the stage. In the audience, two Commission spokespeople turned to each other and hugged and one exclaimed. “It’s a great day, huh?”