Wednesday 26 October 2016

EU needs better politics and less law if it is to prosper

Published 08/09/2016 | 02:30

‘The destruction of Detroit – Motown – owes much to the inducements offered to the car industry by other states in the south, alongside looser labour regulations’. Photo: Bloomberg
‘The destruction of Detroit – Motown – owes much to the inducements offered to the car industry by other states in the south, alongside looser labour regulations’. Photo: Bloomberg

AS they themselves would say, the Americans have skin in this game. Tens of billions of dollars worth of skin. But there may also be genuine puzzlement on the other side of the Atlantic about the ramifications of EU state aid rules in the wake of the Apple ruling.

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Delaware is a banking haven, Texas eschews income tax, California outlawed lead emissions and, because it was California, changed car technology worldwide. The idea that some federal agency would decide whether all of this is fair would seem utterly bizarre, quite apart from being unconstitutional.

Yet the effects of the American Way seem just as bizarre to Europeans, and more horrifying. The destruction of Detroit - Motown - owes much to the inducements offered to the car industry by other states in the south, alongside looser labour regulations, which broke the power of the trade unions.

Europe could not operate like that. Never mind Detroit: any shift of investment from one country to another is a source of great grievance.

Even cross-border shopping can become a political issue. Behind the mind-numbing detail and widespread confusion about the Apple judgement lies the fundamental question of how, in Europe, should the balance be struck?

The European Union would not survive US-style state freedom on taxation, grants and labour law - a point Ireland may have missed as its corporation tax regime became ever more distorted over the years. But the union may also not survive giving too much ground to the richer states' terror of poorer, cheaper, smaller ones eating their investment lunch. Anyone who doubts that possibility was not in Ireland last week.

It need not have been like that. The state aid rules at their simplest say governments must not give selective advantage to particular companies or sectors. That is quite a restriction, especially for sectors, but there is more.

In the Commission's definition, profits must be allocated within the different parts of a company in a way that reflects "economic realities." That is a very big restriction indeed. It is the one which the US may find most difficult to swallow, and it is the one on which the Apple appeal is likely to turn.

That however, is a tax arrangement, not a competitive stitch-up.

If it is held to be a stand-alone restriction, separate from distortions to trade, national tax sovereignty will in effect have been struck down, not by political decision or treaty vote, but by legal interpretation.

The precedents are already there. As it surveys its handiwork, the Commission might like to ponder the connections between Brexit and rulings such as the one preventing the Scottish government introducing minimum pricing for alcohol.

In summary, the European Court of Justice (itself a dangerously misleading name) held that minimum pricing restricts trade and distorts competition. There is no arguing with that, but the implication is that EU law is being broken even if the purpose is not to confer advantage on one company over another but to promote the public good.

The only way out, the court agreed, is if the Scottish courts decided that alternative measures, such as increased taxation, would be less effective. You will notice that there is no role for the Scottish government or parliament in this. It is entirely a legal matter.

That sort of thing is likely to do for the European Union in the end, even with pro-European Scots and Europhile Irish.

One does not suppose for a moment that the intention of either Commission or court was to promote the interests of international business over the health of citizens, but that is how it looks, and was bound to look. Commissioner Vestager did no one any favours, herself included, by openly conflating state aid rules with measures to reduce tax avoidance.

It must be admitted that, on the face of it, the Apple tax arrangements could not be more different from Scottish drink prices. The case is big enough, and economically important enough, to justify Commission investigation but it ought to be simple in principle, even if horrendous in detail.

Did the arrangements benefit Apple over other companies, did they distort trade, competition and economic realities? If they did, they broke the law. If they didn't, they didn't.

Competitive benefits can indeed include lower taxes. The ruling says the arrangement allowed Apple pay less tax than other companies. That is the key - not how much tax, but equal treatment.

But the Commissioner said more than that. "It is a question of taxes being paid in the European jurisdiction on profits being made or at least recorded here.

"It is - I think quite obviously - a European matter, and a matter for EU state aid rules because it has to do with European issues."

That seems anything but obvious - or even coherent -but the Irish government has already started to fight on her chosen battleground, which could be a mistake. The 12.5pc tax rate should have nothing to do with the competition directorate, and Ireland should refuse to mention it.

Ireland's interest lies, not in the money, but in restricting the application of competition law to its core purposes and fighting unnecessary mission creep of the kind seen in the Scottish case.

Ireland carelessly lost the sympathy of poorer EU states long ago, but must try to make allies of them in pressing the case that there competition between states for mobile investment is desirable, and it is a matter for governments as to how much there should be.

Without such competition - not all of through taxation - the less advanced, less productive states will not catch up - although it is also an EU objective that they should. Rich countries may well desire the objective, but reject the means.

The real failure is with governments. The real failure is with governments. It is for the European Council of heads of government to take political decisions on dealing with tax avoidance and tax competition, and for each country to argue in pursuit of its own interests. It is for the Commission to propose how this can be done in practice.

If governments cannot agree, the status quo applies and the Commission should not attempt to advance it.

Not least of the ironies and issues is that governments have been side-lining the Commission; responding to crises by making things up as they go along without reference to EU laws or niceties, and nearly always getting it wrong.

One cannot be surprised if Brussels then flexes its muscles where it can but, if this is the way things are going, the EU begins to look like a place where one would be reluctant to do business or even, perhaps, to reside.

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