Unedited Transcript

Pedro da Costa: Hi, I'm Pedro da Costa, Editorial Fellow here at the Peterson Institute for International Economics. I'm joined by Jacob Kirkegaard and Gary Hufbauer, both Senior Fellows here to talk about the Apple and Ireland tax affair.

So, my question to you Jacob is, is the EU unfairly targeting Apple in this particular instance or this a case where Apple and Ireland really did kind of cut a backdoor deal that undermined EU regulations?

Jacob Kirkegaard: Well, I mean, we'll have to see what the European Court of Justice says. But certainly the Commission alleges and has ruled but in their opinion, the Irish government caught a special so-called selective tax ruling deal for Apple that basically allowed it to pay no tax at all on all the non-Irish revenue that the company had in the EU. And thereby bestowing an illegal State Aid benefit through these preferential tax arrangements to the company and that's illegal. And that's why they have now been asked to repay potentially all the up to $14 billion.

Pedro da Costa: Sure. And Gary, the US government has to express some discontent with this ruling almost as if Apple were kind of a national champion. Do you think is there any nationalistic overtone to this ruling? Is this the EU going after an American firm rather than one of its own?

Gary Hufbauer: Well, there's that, but more importantly, it's a huge power grab by the Commission and it's also obviously a huge money grab by the Commission not for itself but to get money from Apple and back into Ireland, which has a little or no precedent in European law.

Now, this will finally get to the European Court Of Justice and they can of course decide just like the Supreme Court decides in this country whether this is appropriate or not, but it really contravenes a past practice. And what's happening in Europe or in the Commission is that the Competition Commissioner, the Competition Commissioner, not the Tax Commissioner, the Competition Commissioner is using this sub-European law called State Aids to say that this practice that Ireland was following with respect to Apple was a State Aid that is a subsidy to Apple.

And, using that power, trying to override Irish tax law, Irish tax practice and substantially extended power over tax practices right throughout Europe if this is upheld.

Pedro da Costa: But Jacob, surely, I think Ireland has become famous for being the kind of tax even within Europe and within the Eurozone, it's helped boost its economy, but I guess in the interest of harmonization and a greater integration, is Ireland really undercutting its partners by doing this?

Jacob Kirkegaard: Well, I mean, to an extent, I think that it's also important to recognize that Ireland isn't the only European member state that has been targeted by the Commission. Luxemburg, Belgium, the Netherlands, there are others. So, this isn't just solely an Irish issue.

But I mean fundamentally, Ireland I guess has a choice here because you're right. They had used historically their status as a low-tax jurisdiction to attract foreign investment and they basically got to--usually, we have had the opinion that they've done it through this low 12.5% headline tax rate.

But seemingly, as the Commission has made clear by--and actually as the congressional subcommittee on taxation made clear here in Washington a couple years ago what Ireland has actually been doing is to use these tax rulings to basically allow companies to be paying much, much less tax than even the 12.5%.

So, they basically got to decide. Is 12.5% going to be enough to be an attractive jurisdiction for foreign companies to locate it or do they need to rely on these tax rulings to go even lower? I think that the last route will be very difficult for them because the European rules on this are changing in terms of transparency first and foremost on these issues.

But, I certainly would agree with Gary that this is in many ways, the European Commission's power play vis-à-vis the member states. It's not really a sort of a play against the United States. It's really the Commission trying to get more legal powers to be able to dictate what is usually something that only member states or formerly member states' jurisdiction, which is tax laws. But the European Commission wants a piece of that.

Pedro da Costa: And do you guys see this is a one-off case or are there other companies with perhaps a similar tax profile that could be candid, it's for similar types of actions?

Gary Hufbauer: Oh, sure. I mean, if the Commission prevails, that's a big if. And as Jacob said, they had a lot of cases in Spain, Belgium, Luxemburg, they're all going forward to the European Court of Justice to decide the powers of the Competition Commissioner against the member states.

But if the Commission prevails, then no member state decision as to the territorial reach of its tax law as to deductions as to tax credits will be safe. At this point, the Commission could go after anything. If you're familiar with tax law, you know that there are all sorts of differences between companies, between types of organization in this country whether you're attached to organization or a corporation makes a big difference, the same in Europe. The country where you're taxed and this country makes a difference whether you're taxed in Nevada, which does not have an income tax or your tax in California, which does and on and on.

Well, all these differences arguably creating advantage to somebody who are disadvantaged to somebody else, and all of them could be attacked by the Competition Commissioner in the fullness of time, obviously not right away, in the fullness of time if allowed to go forward.

So, any foreign company or any company, which was thinking it could rely on a tax ruling and rulings are given to companies to provide legal certainty is to how the member state tax authorities will tax them in the future would not have that legal certainty. You've got this Damoclean sword hanging over your head.

And, where does it all end? I think to go back to what you said earlier, Pedro, a term that is -- which I really object to, tax haven. That's quite pejorative. And what that implies is that all firms should have high taxes. Well, the fact that all firms have high taxes today is one reason why we have a global slump today. And, low taxes would be better.

So, Ireland should be thought of as pointing the way, not somehow evading its responsibility. That's a big difference in outlook.

Pedro da Costa: So, along those same lines, I wanted to ask Jacob finally perhaps to end it in a positive note. I know you're a big proponent of corporate tax reform. Is there a chance that if Europe does push hard on that front that it might force the US in turn to finally gain the consensus that it's been missing for so long? There's a lot of talk about reforming the corporate tax system from both sides of the aisle but not enough political momentum. Could that be a potential benefit of a perhaps tighter EU rules?

Jacob Kirkegaard: Well, I mean, if you assume that this is ultimately upheld, which will be two to three years from now and thereby that Apple pays up to $14 billion in taxes in Ireland or in other European jurisdictions, well then obviously, Apple can get a tax deduction against those payments on its US tax bill.

So, in that sense, the concerns of the US Treasury are well founded particularly of course because Apple is a firm who's the vast majority of the value added in that firm. The reason that it's so profitable is the activities that take place in California. So obviously, they should be paying the extent that there should be--a tax should be here in the United States.

So, if you lose the prospects of being able to get a one-off windfall if you like by US corporate repatriation of these--not just Apple but very sizable sums of money that is currently held essentially on tax overseas, you lose a potential way to pay for such a comprehensive tax reform. And that obviously potentially could be helping to spur congressional action.

You could also have the opposite of course happening so that--at Congress rather than passing a common sense US corporate tax reform or for that matter engage more fully in a multilateral approach with this--either with the OECD where one is currently ongoing on transfer pricing or perhaps striking at bilateral deal with the EU on this matter that it basically gets aggressive and tries to explicitly target European -- they got a trade war on this type thing. So you could have I think both things happen but it's a potential. Who knows?

Pedro da Costa: Thank you so much guys. We'll leave it there.