EconoMatters, Future of Globalization, Richter Scale

Apple et al.: European Commission as the Last Defender of Public Interest

Apple, Google, Facebook et al.’s prolonged tax cheating further hollows out the already shaky support for globalization.

(Credit: ABC Photo - Shutterstock.com)

Takeaways


  • U.S. politicians turn into crybabies whenever Brussels talks about getting tough with U.S.-based firms.
  • European Commission’s regulatory actions against U.S. firms are considered as an act of “lèse majesté.”
  • Ordinary citizens, who cannot escape fair taxation with shadowy moves feel disempowered.
  • Corporations’ ability to “manage” tax domicile directly undermines public support for globalization.
  • Globalization now looks like a scam conducted by the high and mighty.
  • European Commission is the most relevant defender of fair and equitable globalization.

Whenever Brussels makes noises about getting tough with large U.S.-based firms, top U.S. politicians, business executives and commentators tend to fall into a reflexive response pattern: They turn into crybabies.

They immediately criticize the European Commission as an overbearing bureaucracy, hostile to innovation (and the United States per se), creating uncertainty, pursuing backward-oriented industrial policy, undermining investment in the EU and acting in an unfair manner.

Jack Lew’s unbecoming role

U.S. Treasury Secretary Jack Lew’s latest complaints after Apple was hit with a 13 billion euro fine by the Commission neatly fit into that pattern.

This article first appeared in Fortune Magazine

From a European perspective, one could be forgiven for thinking that the real cause for this stereotypical reaction pattern is that any regulatory actions by the European Commission that affect U.S. interests are considered more or less as an act of “lèse majesté” – an insult to the king – by U.S. political and business interests.

The underlying suggestion is that a faithful and grateful European “ally” would not engage in any actions that may have a negative bearing on U.S. corporate interests.

Self-serving Ideology rules

The related assumption is that, since markets are “free,” any government action whatsoever is unwelcome because it not only restrains freedom, but also economic growth and therefore jobs.

In view of that ready-made analysis, let’s look at the basic set of facts that shapes the political economy across the Atlantic:

First, U.S. corporations do engage in business policies that have anti-competitive effects. Callously gaming the tax system adds to a corporation’s bottom line and strengthens its competitive position, to the point of depressing the business fortunes of other, non-U.S. firms in the field.

Note as well that the European Commission unquestionably also goes after European corporations engaging in similar activities and imposes hefty fines on them. Witness, for example, the EU probe about illegal subsidies provided to electricity suppliers.)

Second, the U.S. political process has been effectively captured by U.S. corporations at all levels. This manifests itself both via the cancer of campaign finance as well as troublesome hiring trends.

For example, former key officials of the Obama Administration have already taken quite a number of senior management positions with Silicon Valley firms. More are to follow.

Undermining globalization

Given those two realities, the question is whether anybody in political power in the United States will stand up to these corporations or let them have free rein.

Unfortunately, that is largely a purely rhetorical question. Since the latter option is usually the one that is chosen, this may be good for these corporations’ future profit prospects.

In the absence of government actions against abusive and unfair business practices, there also is significant collateral damage: Ordinary citizens, who cannot escape fair taxation with “nifty” (read: very shadowy) moves, will find themselves at the short end of the stick.

They feel increasingly disempowered and doubtful about continuing on the globalization path. Declining support in opinion polls provides ample evidence of that.

Citizens around the globe have the feeling that large corporations collaborate with politicians at great liberty in order to create loopholes that give these firms special privileges.

U.S. multinationals systematically pick on the weak

This is especially noticeable on matters of taxation. Multinationals employ armies of lawyers and accountants to circumvent if not the letter of the tax law, then at least its spirit.

Consider the latest developments in Brussels in that very context. Apple has long feared that the EU authorities’ investigations of the firm’s special tax deal with Ireland may be found to be unlawful and that this would trigger a hefty penalty.

It is these corporations’ ability to “manage” their tax domicile that directly undermines public support for globalization.

On the one hand, these firms benefit from having a global playing field. On the other hand, they hollow out public authorities’ ability at the national level to govern this process.

To the public at large, this increasingly makes globalization look like a scam conducted on behalf of the high and mighty – those who have got it made anyway.

This is what happens when corporations basically get to choose to pay taxes in a different jurisdiction from where they actually earned them.

Add to that the fact that the outlandish salaries of top corporate executives (who are the chief instigators of these practices) keep rising – and the public’s frustration is not just fully comprehensible. It is also totally legitimate.

Never mind that U.S. corporations, when active in Europe, like to prey upon the “little guys” – such as Ireland and Luxemburg.

Those countries, with their small economies, are by and large as eager to please corporate interests as the U.S. Congress in Washington itself.

The last defender of equitable globalization

All this leads to one clear-cut conclusion: The European Commission, for all its self-evident faults and shortcomings, is the last bastion standing in the way of the unabashed corporatization of all public interests. (No small irony given the heavy criticism it receives for being far removed from the interests of the voting public.)

It is, in effect, the only powerful international body that stands in the way of these firms having a free roam of all lands.

That also makes the European Commission in Brussels the most relevant defender of managing globalization in a fair and equitable manner – the price for maintaining public support for its continued expansion.

It is high time that all those voices who have a long-term interest in globalization not unraveling (with U.S. businesses ranking very prominent among them) recalibrate their thinking about Brussels in this regard. Europe’s regulators are not the enemy, in the long-term view.

Unfortunately, in the real world, the reaction pattern of U.S. government officials like Jack Lew and of major U.S. corporations points into the opposite direction.

They are laboring hard to turn Brussels into another Washington. However, the continued effort to hollow out the public’s interest and serve narrow corporate interests is bound to backfire.

Citizens are increasingly on edge almost everywhere.

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About Stephan Richter

Stephan Richter, from Berlin, is the publisher and editor-in-chief of The Globalist. [Berlin/Germany]

Responses to “Apple et al.: European Commission as the Last Defender of Public Interest”

Archived Comments.

  1. On September 5, 2016 at 2:22 pm ubott responded with... #

    Describing U.S. critics of the EU’s Apple decision as “crybabies” is a sad reflection of our times where spirited debates have been replaced by using derogatory terminology in efforts to discredit the views of the opposite side.

    Let’s see, whether we can rise above that:

    1) The tax agreement between Apple and the Republic of Ireland was a legally enforceable agreement between two entities, one a sovereign nation and the other a multinational corporation.
    2) The decision by the EU is based on politics and not the law. The Commission is entitled to make political decisions, such as prohibiting bilateral tax agreements between its sovereign member countries and private corporations. However, it steps out-of-bounds when it makes legal decisions that are retroactively applied. The Commission is entitled to punish its member states (if they are so inclined to permit such sanctions), but it is greatly misguided when it attempts to punish the legal counterparty of an agreement that was legally binding to the member state and that counterparty.
    3) Tax havens and tax avoidance are indeed despicable. In order to shut them down, political decisions are necessary. Undermining the trust in the rule of law by making such political decisions in violation of commonly agreed legal standards (such as the sanctity of contract), however, does not serve anybody, least of all those who oppose corporate tax avoidance.
    4) There is no U.S. corporate conspiracy to undermine European companies. U.S. companies are exploiting any tax loopholes they can find, just as European companies do. It is up to the authorities in EU and the U.S. to close those loopholes. Retroactively changing the rules of the game does NOT qualify as closing loopholes, however.
    5) The State of Delaware is indeed a major tax haven in the United States (reference to the author’s previous article on this subject). In Delaware the number of incorporated companies exceed the number of Delaware residents. There is a major difference, however, between Ireland and Delaware, for example. Incorporating a company in Delaware helps to avoid or contain state tax liabilities that a U.S. corporation may have to another U.S. state. It does NOT alter, however, the federal income tax liability that the company has to the U.S. government (35%). Incorporating a U.S. company in Ireland or other EU tax havens, however, does exactly that. Equally, European companies that incorporate in Ireland may avoid their own national taxes. The lack of fiscal union in the EU makes this a major problem (there are no EU federal corporate taxes). This hurts both tax collectors in the EU and the U.S. alike.
    6) Tax competition is harmful to globalization. A race for the bottom leaves average taxpayers holding the bag. Political inertia in both the EU and the U.S. makes this an intractable political problem. Net-net, there is no benefit to state taxpayers in the U.S. if one state offers a better “state tax” deal to corporations than a neighboring state, even if this does not affect the federal tax liability of the respective corporation. Equally, there is no benefit to societies across the globe to compete with each other on corporate taxation. The need for corporate tax harmonization is much more pressing in the EU than in the U.S., however, because the EU lacks a federal corporate tax.

    These are the issues we should be discussing rather than diminishing ourselves by pointing fingers. Always remember, by pointing a finger, three point back at you.