This morning I heard an interesting radio report on the European Commission's long-standing, practically unconditional support of one of Europe's worst tax avoidance schemes. In light of the Ireland-Apple "state aid" case, it would be bad enough if this merely involved the European Commission as an institution. Large organizations rarely manage to be consistent. But this is a lot worse: the very same commissioner who wants Apple to pay approximately 13 billion euros in additional taxes, Danish socialist-populist Margrethe Vestager, has given her blessings to the extension of the infamous Madeira tax avoidance scheme until 2027. The aforementioned radio report quotes her spokesman, Ricardo Cardoso, as saying that "the free trade zone is a job engine for the Madeira region and the Commission is presently not aware of any indication that the related structure is not compliant with [EU state aid] rules." That statement is absolutely ridiculous and I'll debunk it further below.
While my primary focus is and remains on patent policy issues, particularly reasonable patent remedies (mostly, but not exclusively, in connection with standard-essential patents), I do take an interest in other issues of concern to my industry, especially competition policy. There was a time when working on EU affairs was an exciting opportunity for me, but I've always viewed the EU's attempts to promote innovation as pathetic, sometimes self-contradictory (with respect to open source, for example), and in some cases downright laughable. What has me concerned now is that the EU has gone from merely failing to have a positive impact on European innovation to causing serious damage, such as by creating legal uncertainty that threatens to dissuade more and more companies from investing here.
There is no way that what Mrs. Vestager is doing against Apple and other U.S. companies (I also disagree with parts of the positions taken by the Commission in the Google investigation) is going to make Europe's own economy any more innovative or competitive. But that may not be the objective. It could be that this is just about anti-American, anti-corporate populism, and it may be driven at least in part by a desire to demonstrate strength while the EU is dealing with enormous centrifugal forces especially in this election year in several key countries.
When the EU Commission handed down its decision against Apple, it stated explicitly that Ireland's 12.5% corporate tax rate is not at issue. Instead, the Commission has made up a "state aid" case when, in reality, the whole issue, for the most part, comes down to Irish tax law not recognizing the arm's-length principle (I support that principle but on 130 pages the Commission's Directorate-General for Competition wasn't able to show that Ireland recognizes it) and the practical effects of different international tax regimes ("global deferred" system in the U.S. versus immediate taxation of global income in Europe).
Instead of blaming Apple for simply playing by the rules, I'm against Ireland's 12.5% rate because it's an abuse of the EU Single Market: it's not the result of fair tax competition but simply arbitrage at the expense of other countries whose taxpayers have to pay for the infrastructure in 99% of the Single Market. If the Commission proposed a change of Single Market rules so as to eliminate this distortion of fair tax competition, I would totally support it. But instead of focusing on the gap between Ireland's abusive 12.5% rate and a more normal corporate tax rate in the 30% range, the Commission is desperately and unconvincingly arguing that Apple unfairly paid less than 12.5%. In other words, instead of tackling two thirds of the problem (the difference betweeen roughly 30% and 12.5%), the Commission is crying foul over whatever may or may not have happened in the bottom third (i.e., whatever the difference may be between 12.5% and what Apple paid).
The EU may very well be the only club in the world that does not have rules in place to get rid of a member if need be. Any sports club, any automotive club, any stamp collectors or pigeon breeders' club can do it. If a member somehow abused the rules, a majority of members could vote to exclude the misbehaving one--and most of the time it will be enough to just threaten with it. But the EU has a bad design that has gotten worse over the years due to grossly incompetent and unbelievably irresponsible "leaders" pursuing the idea of an ever-closer union. Since Brexit, the tide has turned, except that some people in Brussels don't want to face that fact yet.
Ireland's 12.5% corporate tax rate is still high if you compare it to the tax rates that apply to the so-called International Business Centre of Madeira (IBCM) on the namesake, remote Atlantic island belonging to Portugal. According to its own representations, it offers a reduced corporate tax rate of 5% (five percent!), and this official question by a far-left Member of the European Parliament refers to tax rates "vary[ing] between 1[%] and 5%".
The investigative reporters at Bayerischer Rundfunk ("Bavarian Broadcasting") just don't buy the European Commission's claim that the Madeira tax haven is just part of a regional development initiative designed to attract foreign investment on that remote Portuguese island. Instead, it plays a role in tax minimization schemes employeed by such individuals as
- former FIFA secretary-general Jerome Valcke,
- someone who was close to Muammar Gaddafi,
soccer player Javier Mascherano (who was convicted of tax evasion in Spain),
another famous soccer player, Xabi Alonso, who is being investigated by Spanish authorities, and
a German rock band, Böhse Onkelz, that assigned all of its trademark rights to a Madeira-based entity.
Furthermore, companies such as Chevron, its Italian competitor eni, Pepsi and Russian aluminum maker Rusal have set up legal entities there.
Approximately 1,600 legal entities benefit from the rockbottom tax rates of this special deal between Madeira and the European Commission. If this were a regional development program, the objective would have to be to create employment. But the EU is lying about the true purpose. All those Madeira-based low-tax entities combined have created only 2,721 jobs according to official statistics (year 2014), which would be a pretty meager number in and of itself but even overstates the actual effect on jobs since a closer look reveals that many individuals formally hold jobs in several such companies at the time, with each job being counted once even if one person holds, as they found in one case, 300 jobs. If this fact is properly taken into account, the whole Madeira scheme has not had any noteworthy effect on employment.
Time and time again, over the course of 30 years and in one or more cases under Ms. Vestager's auspices, the EU Commission has approved the extension of Madeira's tax regime and has declared it as a category "of aid compatible with the internal market"--now even until 2027.
The Commission's decision against Apple is weak; the Commission's inconsistency is also on display in connection with the Monte dei Paschi di Siena bank bailout; but the Commission's handling of the Madeira scheme, as compared to the fabricated "state aid" allegations in the case relating to Apple's Irish taxes, is more than inconsistent. It's hypocritical beyond belief.
Bavarian Broadcasting quotes a German Member of the European Parliament, Markus Ferber, whose regional party is part of Merkel's government coalition, as saying that the EU can only enjoy credibility vis-à-vis Panama, Singapore or the Bahamas (or Switzerland) if it has its own house in order. Therefore, Mr. Ferber finds it incomprehensible that the European Commission has been tolerating the Madeira scheme so far, despite being alerted to the problem that it constitutes. I agree with Mr. Ferber up to this point, but he forgot to mention the Ireland-Apple case and the praise he heaped a few months ago on Ms. Vestager.
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