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Poisoned Apple

Martin O’Malloney

“Is Ireland still a member of the EU?” This rather startling question appears on the Irish government news website www.merrionstreet.ie. The answer offered is curiously half-hearted. We are told that Ireland is “very much part of the EU team”, that our ministers “remain actively engaged with their European counterparts” and the EU is “the foundation for much of the social progress we have made”. This is somewhat reminiscent of the declarations of football clubs in the days before they sack their manager, or of star players about to demand a transfer. The text finishes by saying that economically we have done well out of the EU and that

We value our access to the single market and the benefits our exporters derive from EU trade agreements with other countries.
More broadly, we value being part of a Union with other like-minded democracies which share our values and interests.

In other words we’re regular attenders because we find it useful but we don’t see ourselves ever being up on the altar.

Seeing such a stark question on an official website is certainly surprising, but it is right to take nothing for granted at present. Europeans who do not follow Irish affairs (in other words nearly all of them) are inclined to assume that Ireland will be less committed to staying on as a member now that our big neighbour and trading partner is leaving. Brexit is causing uncertainty, not only for our relations with the UK and the North, but also with the rest of the EU.

No one should doubt the sadly now departed Ronan Fanning when he said that “the Brexit crisis represents incomparably the greatest challenge for Irish foreign policy since the second World War”, even if that was a time when the very survival of the state was at risk. Ultimately our independence was preserved, but we ended up paying a big price for American and British displeasure at our policy of neutrality. Ireland was excluded from Marshall aid and left in isolation, which was one of the reasons that our economy stagnated in the postwar period while the rest of western Europe boomed.  In times of real crisis there is less patience for the particular needs of small countries and we would do well to be aware of the difficulties Brexit is creating not just for Ireland but for the European project as a whole. President Trump predicts and hopes that other member states will follow the British lead: success for Marine Le Pen in the French presidential election would be a far deadlier blow to Europe than Brexit.

Ireland’s version of Marshall aid came from the EU rather than the US. Thanks to an alignment of structural funds and CAP payments, in the 1990s we became much the biggest per capita beneficiaries of EU spending. At the peak point in 1997, the difference between the Irish contribution to the union budget and the spend in Ireland by Brussels came to more than €700 per head, which was 75 per cent more than the Greeks were receiving, almost three times more than the Portuguese and five times more than the Spanish. This largesse was one of the factors which helped to make Ireland’s economy the fastest-growing in Europe from the mid-1990s until the crash in 2008.

The EU has been good for Ireland in many other ways, not the least of which has been our improved relationship with the UK. Participation in multilateral European institutions on an equal footing has helped both countries to create a similar relationship in our bilateral dealings, but there is a question whether this will continue in the wake of Brexit. Ireland and the UK joined simultaneously in 1973, and now some Anglosphere commentators are saying that Ireland has no choice but to follow the UK and leave Europe too. For the time being this proposition is not accepted by most in Ireland, but the harder the version of Brexit to emerge, and it seems the British government has already decided it will be hard, the greater the potential cost to Ireland of staying in. The Department of Finance estimates that hard Brexit will reduce Irish exports to the UK by 30 per cent within five years and GDP by 3.5 per cent from where it would have been.

Meanwhile our relationship with the EU has considerably changed since the days of milk and honey when we could run with the southern European countries when it came to benefiting from regional, social and cohesion funds and with the northern Europeans when it came to making the most of the CAP. Ireland is still reasonably treated where budgetary matters are concerned but we are no longer one of the poorer member states, nor even a particularly small one. Because of the enlargement from fifteen to twenty-eight members and our own population growth we have gone from being the second smallest after Luxembourg to having eight countries with populations smaller than ours and another three with similar numbers. Our economy is also larger than at least ten other countries, so the days are gone when others were happy to help little Ireland without having to think too much about the cost, and they are gone not only for us but for other member states too.

The larger membership also makes it harder for member states to establish effective lines of communication with the Commission, even if Irish diplomacy skills are well regarded in Brussels. Our last presidency in 2012 was a notable success, just as several previous ones had been. Commission officials were delighted, for example, with the work done by Simon Coveney and colleagues to close out a difficult round of CAP reform and it was openly said that only two or three other member states could have done the same job. Irish officials working in the Commission are generally appreciated for their flexible approach and collegial spirit and many have been in senior positions. From 2000 until 2015 the highest post in the Commission civil service was held by Irish officials, giving Ireland an unusual advantage. Without wishing to suggest that secretaries-general David O’Sullivan or Catherine Day ever did anything improper, it is easy to imagine they were a familiar voice at the end of a phone if ministers or senior officials in Dublin needed an explanation of how a particular procedure operated or a suggestion of where to find good advice.

Perhaps high level access over such a long period spoiled the Irish administration, because the Apple case has exposed a communication gap between the Commission and the Department of Finance.  Whatever the rights and wrongs of the considerable issues involved, our government was expecting a different outcome from the one announced by competition commissioner Margrethe Vestager that Ireland should recover €13.1 billion plus interest from Apple. Unlike some outside commentators who correctly predicted this outcome, Department of Finance sources were suggesting during last summer that the amount would not go beyond a few hundred million, and that the decision could even go in Ireland’s favour. On August 29th, The Irish Times was still reporting that the Commission decision, expected “in the coming days”, would require the Revenue Commissioners to raise a tax assessment on Apple “expected to amount to hundreds of millions of euro”. The decision was in fact announced the following day and was at the top end of even the highest estimates. The Irish Times then reported that “there is now considerable annoyance [in Dublin] with the European Commission … ” This tone of surprised indignation was hard to understand since under the procedures for state aid investigations the Commission is supposed to “ensure that the Member State concerned is kept fully and regularly informed of the progress and outcome”, and indeed Minister of Finance Michael Noonan had met Commissioner Vestager in mid-July to discuss the case.

Perhaps more will be heard on these matters when the appeals of the Commission decision by the Irish government and Apple are heard in the European Court. Meanwhile another potential procedural issue for the Commission is that the report at the end of the preliminary phase of the investigation is supposed to set out the issues to be examined in the formal investigation phase. The decision and accompanying final report should then confirm or deny the suspicions outlined in the preliminary report. In the Apple case a comparison of the preliminary report and the decision at the end of the formal investigation suggests the focus of the inquiry may have shifted, on some interpretations at least.

The preliminary report in 2014 questioned the levels of tax charged on Apple’s operations in Ireland and how they were arrived at. It found that the Revenue Commissioners should have followed an objective method, a so called arm’s length approach, using as far as possible market-based costs and revenues, to determine how much tax Apple should pay. Instead, according to the Commission inspectors, the amount paid by Apple had been “reverse-engineered”; in other words Apple and the Revenue Commissioners had first agreed what would be a reasonable amount to pay and then derived a formula to justify the selected figure. This amounted to favourable treatment of Apple vis à vis other corporate taxpayers in Ireland and thus distorted competition.

The decision at the end of the inquiry puts the emphasis on profit-shifting, which is arguably a different – and far bigger – issue than the appropriate level of tax on Apple’s operations in Ireland. The greater concern now is about what happened to the profits not attributed to the Irish part of the operation rather than to those which were. The tax treatment of the Irish branch was not queried in the press release announcing the decision, which said that it “was subject to the normal Irish corporation tax”.

If the European Court decides that the Commission strayed too far from the issues raised in the preliminary report, it could throw out the Apple decision on procedural grounds, and the inquiry would have to start again with a restated set of preliminary findings. Given that the period for which money can be recovered is limited to the ten years running up to the launch date of the investigation, a new start date would reduce the arrears that could be recovered from Apple.

There are technical reasons at least therefore why the Irish government ‑ and Apple ‑ might hope their appeals could succeed, even partially, but any victory might be pyrrhic if the present line is maintained. Relations with the Commission are in a poor state, with Michael Noonan describing the Apple decision as “bizarre and outrageous” and Enda Kenny saying in the Dáil debate on September 7th that “the picture of Ireland painted by the Commission … could not be more damaging or further from the truth. This is not a Commission finding that stands by a small country that has played by the rules.” Fianna Fáil has taken a similar line and Micheál Martin has said the decision is part of a series of attacks on the rights of small countries like Ireland to frame their own taxation policies. These points of view were not put to commissioner Vestager as bluntly as this when she agreed to attend the meeting on January 31st of the Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach (to give it its full title), although the welcome she received from some members was unmistakably chilly. 

But claims that the Commission is picking on little Ireland fail to take into account that Apple is the richest company in the world, with funds reckoned to be worth more than $240 billion held offshore pending eventual repatriation to the US. Washington is waiting for the opportunity to take its share of this bounty and is disputing Europe’s right to dip into it. The other companies potentially involved in this struggle are also mainly from the US, and they too will receive the backing of their government in any dispute with the Commission. Far from picking on small countries, the Commission is taking on the most powerful adversaries it could possibly choose.

More importantly, the government and Fianna Fáil have omitted to acknowledge or make any concession to the rising anger and public demand throughout Europe for greater fairness in taxation matters. Revelations in the US Congress and the UK about the pitiful amounts multinational companies have been paying, the Panama papers, Luxleaks and many other scandals have coincided with a squeeze on public resources in almost every country. Inequality is growing and a small minority are taking an unacceptably large share of wealth at everyone else’s expense. Capital crosses borders but tax authorities do not, and one of the few hopes for redressing the balance is through international cooperation. If the EU is to survive as a credible entity it needs to do more for ordinary citizens and corporate taxation is an issue it must take on.

Public opinion, probably even in Ireland, is with the Commission in this regard, but not our government it seems. The closest Michael Noonan has come to making any concession to the Commission position was in early February, five months after the announcement of the decision, when he said he was not seeking to defend Apple taking advantage of mismatches in the tax laws of different countries to minimise its tax payments, but he went on to say that the missing tax was due in the US and not in Ireland, or even Europe. Not only did our government attack the Commission for getting the Apple decision wrong and exceeding its powers, the Department of Finance press release on August 30th went on to cite US criticisms of the Commission:

The US Treasury has raised very important concerns in its recent White Paper on the European Commission’s State aid investigations.  The US Treasury has stated that: “The Commission’s new approach is inconsistent with international norms and undermines the International tax system”.

Ireland is right to appeal the Apple decision because the Commission approach needs to be tested in court regarding both the technical aspects of the case and the larger question of what exactly are its powers in this domain. The court will also have to decide whether and to what extent the principles of legal certainty and proportionality should be applied. Another reason for appealing is to salvage what we can of the country’s reputation for straight dealing. Those who say Ireland should accept the decision and pocket the €13bn are forgetting that Apple is lodging its own appeal and no windfall money could prudently be spent until the European court has had its say. Therefore there is nothing to lose by appealing the decision. On the other hand it should be done without unnecessarily antagonising Brussels and siding in public with its adversaries; member states contest Commission decisions in the courts every day without causing a rupture in relations.

Brexit will impact more on Ireland than any other remaining member state, but Brussels will be managing the process, and we are going to need steady support from the Commission and the other members to ensure that our most vital interests are not ignored. So far our diplomacy has been effective in this regard but we need to maintain the effort for at least the two years to come of Article 50 negotiations and probably well beyond that. Meanwhile our relationships with the UK and the North, and the US too will also need extra attention because the configuration of the Anglosphere and of the UK itself is going to evolve.

Membership of the EU has given Ireland the chance to flourish, and the christian/social democrat ethos that arguably still characterises Europe is more compatible with our values and approach than the increasingly volatile neoliberalism of our Atlantic neighbours. The path we took in World War II was lonely and the decisions made had consequences which carried on for many years after. By defying public opinion on one of the most significant issues of the day and opposing the legitimacy of the Commission’s efforts to ensure international corporations pay their fair share of tax, we would risk enduring a similar fate again, but this time it would be of our own making.

1/2/2017

Martin O’Malloney works in Brussels

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