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A Tax Tangle for the Treasury

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European commissioner for competition Margrethe Vestager holds a press conference on the EU decision to set out a template for recovering unpaid taxes and preventing tax avoidance by multinationals at the European Commission in Brussels on October 21, 2015. Photograph by Emmanuel Dunand — AFP/Getty Images

The Treasury Department went on the attack against the European Commission yesterday, trying to stop it hitting Apple Inc. and other U.S. companies with big back-tax claims. In a rare and strongly-worded warning, it said that the Commission’s antitrust department risked unraveling international agreements on taxation and becoming a “supranational tax authority.”

The roots of the problem lie in the EU’s failure, or rather its member states’ refusal, over decades to centralise tax policy. That has encouraged states such as Luxembourg and Ireland to offer sweetheart deals on tax to companies on an ad hoc basis. In a never-ending power struggle between the federalists in Brussels and the governments across Europe, the Commission is now trying to stamp out such practices. U.S. companies such as Apple, Starbucks and Amazon, as the Treasury warned, are the collateral damage.

Yet neither Mr. Lew, nor Messrs. Cook, Bezos et al. should protest too much. When you claim that the ultimate value of your product is in your intellectual property rights, conveniently domiciled in an offshore tax jurisdiction, rather than in the actual capabilities of your hardware in the hands of a consumer onshore, or the actual taste of your coffee in the mouth of that consumer, you are being less than wholly truthful. Whatever the wrong-headedness of the Eurocrats, the companies concerned have brought at least some of their current troubles on themselves.

 

 

U.S. administrations throughout the years have urged the EU to become a more complete federation, and the chance of that happening may actually have improved now that the U.K.–always a brake on such designs–is leaving. The flip side of that is that Europe remains Europe, and such progress will always be piecemeal and uneven. Yes, the Treasury is right to fear complications in the short term from the Commission’s ruling. It may, however, still prove to be a step towards a more sensible international tax structure in the future.