In The Wake of Apple/Ireland Tax Issue, A Look at European Union Corporate Tax Rates

Sep 03, 2016 • By • 138 Views

Last month, the European Commission handed down a hefty $14.5 billion (€13 billion) tax bill to Apple, Inc. The maker of the popular iPhone and iPad devices now owes Ireland back taxes dating from 2003 to 2014. This is in response to what the European Commission claims is Ireland gave to Apple over the course of those years, something the European Commission states in its press release as "illegal state aid".

The European Commission claims that Ireland gave Apple selective treatment in order to attract the company to set up shop in the country. The investigation into the alleged sweetheart deal identified the fact that Apple's tax on its European profits fell from 1% in 2003 to .005% in 2011. The investigation, however, relates more specifically to two tax deals Ireland and Apple hashed out in 1991 and 2007 that appear to go against the European Union’s tax policies. In fact, on corporate tax policies, the EU’s main policy is simplified in the following statement:

“The EU also pays particular attention to fair company taxation. Loopholes between different countries' tax systems allow certain companies to engage in 'aggressive tax planning', to minimize their tax bills. Close coordination and information sharing between tax administrations aim to prevent this.

EU governments should also ensure their corporate tax regimes are open and fair, and not designed in a way which might unfairly lure firms away from other EU countries, or otherwise erode the tax base there. To this end, they have signed up to a code of conduct pledging not to do this.”

Given this particular EU policy applies to all EU member states, it should come as no surprise that Ireland and Apple did not come under fire sooner. Some observers note that Apple’s punishment is unfair, given that the European Union did not develop its current non-competition for corporate tax rates until 2003. That being the case, however, would explain why the European Commission only conducted its investigation starting at that point, given the fact that Ireland was giving Apple a special tax rate since for many years prior.

Apple and Ireland working together to appealing the ruling. Both hold the belief that the lower tax rates help the country by providing jobs that would otherwise not exist. And indeed, since Apple employs around 6,000, it is considered a major employer in the country. Yet many Irish citizens do not see this as a worthy enough reason for Apple to avoid tax payments. A poll in the Irish online site The Journal shows a noticeable majority (58%) who believe that Apple should pay back the $14.5 billion the European Commission says the company owes.

Apple is not the only company coming under the EU’s taxation microscope. Many other large U.S.-based companies have been accused of using Ireland as a sort of tax loophole to avoid paying high European Union tax rates. That list includes names such Google, Starbucks, Amazon, Gap and Microsoft.

Ireland’s incentive to provide lower tax rates is easy to understand. A 2015 study from the Tax Foundation found that lowering tax rates would lead to a rise in both a country's GDP and a number of available jobs. Given the many different tax rates across Europe and Ireland history of struggling economically, the lower corporate tax rates it provides have overall been a boon to the small country, at least initially.

European Union Corporate Tax Rates

Given the renewed interest in how much taxes companies pay in different countries, here is a look at corporate tax rates across Europe, alongside the GDP of those countries and their unemployment and inflation rates.

Sheet 4

What we can see in general is that corporate tax rates, GDP, unemployment and inflation rates are vastly different across the European Union, despite any efforts to stabilize and equalize the various economies. Corporate tax rates, in particular, vary widely, ranging from 10% in Bulgaria to 35% in Malta. The varying unemployment rates and GDP also seem to indicate that simply possessing a lower corporate tax rate does not guarantee that a country will find more economic growth. This is highlighted by Bulgaria, which has a high unemployment rate, low GDP, and notable deflation, while Ireland has a similar corporate tax rate, a similar unemployment rate, but a noticeably better GDP and inflation rate.

Sheet 3

What we can see as well is that there does appear to be a positive correlation between higher corporate tax rates and higher per capita GDP. Interestingly, there also appears to be a positive correlation in EU member states between higher corporate tax rates and higher unemployment rates.

Comparing countries based on their corporate tax rates, GDP and unemployment rate is, of course, difficult to do. While this is more likely possible with European Union member states who share a large number of fiscal, social and economic policies, as well as a shared currency, most countries in the world have vastly different internal factors affecting their growth rates. We can look at Venezuela as a good example of this. Its corporate tax rate is similar to that found in the U.S. Yet many other factors have resulted in a lower GDP, lower GDP growth rate, higher unemployment and, most recently, an explosion in its inflation rate.

However, the fact that a lower corporate tax rate can attract international business is both common knowledge and commonly practiced among many countries in the developing world. Asian nations, in particular, have been using lower corporate tax rates to spur growth. Notable among these are Hong Kong, Singapore, Taiwan and the United Arab Emirates (which has no corporate tax rate at all).

The recent Apple ruling may point to further pains for the European Union. In the wake of the ruling, several media outlets are reporting on the potential of an Irish exit similar to what occurred with The United Kingdom. Some economic observers point to the EU’s tax policies as a directly responsible for Brexit. To date, over a dozen other European Union countries have had high-ranking political figures and organizations make notable calls for a split from the Union.

Sources:

http://europa.eu/rapid/press-release_IP-16-2923_en.htm

http://www.businessinsider.com/how-apple-managed-to-get-its-tax-deal-in-ireland-in-1991-2016-8?r=UK&IR=T

https://europa.eu/european-union/topics/taxation_en

http://ec.europa.eu/taxation_customs/taxation/company_tax/harmful_tax_practices/index_en.htm

http://ec.europa.eu/taxation_customs/business/company-tax/conferences-other-events/eu-corporate-tax-reform-progress-new-challenges_en

http://www.thedailybeast.com/articles/2016/08/30/apple-must-pay-ireland-13-billion-in-unpaid-taxes.html

http://www.newyorker.com/business/currency/how-apple-helped-create-irelands-economies-real-and-fantastical

http://fortune.com/2016/03/11/apple-google-taxes-eu/

http://taxfoundation.org/article/economic-effects-adopting-corporate-tax-rates-oecd-uk-and-canada

http://qz.com/730030/irelands-26-growth-is-more-paper-tiger-than-celtic-tiger/

http://www.cnbc.com/2016/08/31/apples-eu-tax-ruling-has-sparked-talk-of-an-ir-exit.html

https://www.washingtonpost.com/news/worldviews/wp/2016/08/30/how-the-e-u-s-ruling-on-apple-explains-why-brexit-happened/

http://indy100.independent.co.uk/article/a-map-of-other-countries-that-could-leave-the-european-union--W12HE2mpVZ

About the Author

Samuel Cook Samuel Cook

Samuel Cook is a former teacher and current freelance writer. He writes for a wide variety of websites, covering diverse topics in...