Monday 16 September 2019

Political stability at risk over looming 'profit tax' decision

A storm is coming that has the potential to bring down the Government and propel Ireland into the headlines, writes Dan O'Brien

WOMAN ON A MISSION: Finance Minister Michael Noonan talks to EU Competition Commissioner Margrethe Vestager, who is investigating whether Apple’s tax dealings in this country breached state aid rules. Photo: AP Photo/Geert Vanden Wijngaert
WOMAN ON A MISSION: Finance Minister Michael Noonan talks to EU Competition Commissioner Margrethe Vestager, who is investigating whether Apple’s tax dealings in this country breached state aid rules. Photo: AP Photo/Geert Vanden Wijngaert
Dan O'Brien

Dan O'Brien

How would the Independent All-iance and Fianna Fail react if Michael Noonan were to reject a windfall cash payment to the Exchequer of €1bn? If such a scenario sounds pie in the sky, it isn't.

The much-delayed outcome of an investigation by the European Commission into tech giant Apple's tax arrangements in Ireland is, by most accounts, complete. If, as seems likely, the commission finds that the Irish State allowed Apple pay less tax than it deems the company should have paid, the implications will be enormous and multiple.

The most immediate effect will be on domestic politics. The position of the last government was that no special deal had ever been done with Apple and that there was no case to answer. The previous government said that it would challenge any adverse finding against Ireland made by the commission in the European Union Court of Justice.

Since his reappointment as finance minister, Michael Noonan has reiterated that position. Speaking in the Dail on May 17, he said: "Ireland is entitled to challenge this decision in the European Courts. As the Government have already indicated, we will take that course of action, if necessary, to continue to vigorously defend the Irish position."

Given that an Independent Alliance spokesperson told this column last Friday that the grouping had adopted no position on the matter, it seems that Mr Noonan may be taking his partners in government for granted. Given that some of his partners are not unknown for their playing to the gallery, there seems to be a good chance that they will oppose the turning down of free money from a corporate behemoth at a time of chronic austerity fatigue.

And there could be a lot of money involved. Challenging Brussels in the European courts would involve turning down a payment in back taxes that has been estimated by one of the world's biggest investment banks, JP Morgan, to be as high as €19bn. Although most other estimates are far lower, turning down hundreds of millions or even billions of euro would not be a politically popular move. For a government that is as indebted as the Irish Government, it would surely be seen by some as downright bizarre.

But there are pros and cons to taking a legal challenge. The Government's position, or more correctly the Fine Gael position, has two main planks.

First, such a finding would gravely undermine Ireland's claim not to be a tax haven. Not only would any finding of preferential treatment result in major reputational damage, but it would give other countries more ammunition to battle for a change in this country in the corporation-tax regime.

The second plank is that it could make Ireland a less appealing place to invest in. Companies could stay away on the basis that they too might suffer similar investigations and findings, or, in an era of "corporate social responsibility", they may conclude that they don't want to invest in a country that has been found guilty of facilitating tax-dodging (for what it's worth, I am not entirely convinced by these arguments, but for an economy that is as uniquely dependent on foreign direct investment as Ireland is, anything that puts inward investment at risk has to be taken seriously).

Read more: EU probe 'to rule against' Ireland over Apple taxes

Read more: End of probe nigh as Apple could be hit for back taxes of billions of euro

There is also a case against challenging such a finding. That case is both political and budgetary.

If the amounts were much larger than similar recent cases against companies in Luxembourg and the Netherlands, involving relatively small back tax payments of €20m and €30m, then one could argue that it would be better to simply take the cash - it could offset whatever costs might be incurred in reputational damage and the loss of attractiveness as a place to invest.

The political case is closely linked to the budgetary case. The bigger the amount in any finding against Ireland and Apple, the greater the political pressure will be to accept the cash that would flow from the ruling.

That political pressure is likely to be exerted first around the cabinet table. And if the Independent Alliance were to move against Fine Gael on the matter, would Fianna Fail allow itself to be put in the position of opposing a windfall of potentially multiple billions? Governments have fallen over lesser matters.

So how likely is the commission to find against Ireland and Apple? To answer that, some background is needed.

The EU has always had perfectly sensible rules designed to limit the handing over of taxpayers' money to private companies by governments. Among other things, these rules are an important means of stopping companies from playing governments off against each other when they are making decisions about where to locate their activities. Few people disagree in principle that limiting state aid to companies, and ensuring that when it happens it is justifiable and transparent, is a very good thing for taxpayers and for fair competition, both within countries and among them.

Until recently, these long-standing rules against state aid to private companies focused mostly on grants and other subsidies. But more recently the commission, which is tasked with policing the rules, has been looking at corporation tax arrangements. It has done so because giving a company preferential tax treatment can amount to a state aid.

But this has been altogether more controversial than traditional subsidy-busting as it involves the commission evaluating the accounts of companies and making a judgement on whether declared revenues, costs and ultimately profits are in order. As accounting is as much art as science, and as sprawling multinationals have very complicated accounts, there is enormous scope for disagreement on any judgement that is made in this regard.

This was in evidence more clearly than ever last week when the US treasury Department, American's finance ministry, took the unusual step of publishing a 25-page White Paper on Brussels's approach to profit-tax arrangements as a state aid. It was little short of scathing, accusing the commission of, among other things, poaching American tax revenues and inciting governments around the world to squeeze American companies.

Last week's development is the culmination of an escalating transatlantic clash that is probably the most serious, in economics-related issues at least, that has ever taken place between the EU and the US.

It has got so bad that the American side is saying openly that Brussels is proactively biased against US companies while the European side is accusing Washington of doing the bidding of companies that have made campaign contributions to the Democratic Party.

Ireland never has an interest in strained EU-US relations. When, as an EU member, it is firmly on the US side, things are particularly uncomfortable. They are about to get a lot more uncomfortable.

The publication of the US treasury document and unsubtle hints out of Washington that European firms in America could be hit by retaliatory measures if an adverse finding is made against Apple point to two things - that the Apple decision is about to be announced and that the commission will find against the company and Ireland.

The conclusion that Ireland will be found to have breached state-aid rules is supported by the fact that the commission has recently found against three other countries and companies in broadly similar cases (all three countries - Belgium, Luxembourg and the Netherlands - have taken legal challenges).

Yet another reason to believe that Brussels will find against Ireland is the position of the European Commissioner in charge of all issues related to fair competition.

Since taking on the role in November 2014, Margrethe Vestager, a former deputy prime minister of Denmark, has been a woman on a mission. In her foreword to the latest annual report of the Directorate General for Competition, which she leads, Vestager gives top billing to her investigations into tax as a state aid. You will hear a lot more about her in the days and weeks ahead. Watch this space closely.

Twitter: @danobrien20

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