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August 30, 2016updated 21 Oct 2016 4:17pm

Tax Bills: Tax policy, Politics and Tech

How will the UK and big tech businesses react to the EC Ireland-Apple tax decision

By Sam

How will the European Commission ruling that Apple enjoyed illegal tax status in Ireland impact relationships between the EU and its members, between the members and international tech firms they seek to attract and between the tech firms and the countries which host them.

The issue of tax and tech slammed into the markets today when the EC said Apple owed $14.5bn in taxes to Ireland from its business practices going back ten years.

The EC has not imposed any fine. It has calculated that through its tax relationship with the Republic of Ireland Apple underpaid on tax owed on goods sold throughout the EU over a ten year period.

Ireland has said it has not offered any illegal tax status to Apple or its subsidiaries located in Ireland and it would appeal the ruling in the courts. The Irish Government said it profoundly disagrees with the EC ruling and that all of its tax behaviour “was founded on the strict application of the law.”

Tax and tech is hugely controversial.

Last year the UK Government reached a tax settlement with Alphabet, the parent company of Google, which saw it pay £130m in missed tax payments.

Since last summer when it was revealed just how little some tech firms were paying in UK tax, just how much multi-national online companies pay into the UK exchequer has come under increased scrutiny.  For example the question of how much tax Amazon and other cloud companies pay on revenue generated through goods sold in the UK is a hot political topic.

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Today’s ruling has seen that issue re-emerge with media outlets such as thesun covering the topic with an article asking what it means for the tax arrangements of Amazon and McDonalds.

The issues in this game are consistent: What’s a fair amount of tax for a firm to pay? How much does tax affect inward investment plans? What are its obligations that a company has to its host country? What are the host country’s priorities?

The Ireland/Apple case is unusual in that both Ireland and Apple have said they will appeal this ruling in the courts. Both see themselves as victims of an unjust ruling.

In a statement Apple said: "The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process. The commission’s case is not about how much Apple pays in taxes, it’s about which government collects the money. It will have a profound and harmful effect on investment and job creation in Europe. Apple follows the law and pays all of the taxes we owe wherever we operate. We will appeal and we are confident the decision will be overturned.”

Implications for the UK inward investment.

As CBR wrote after the Brexit vote, companies make long term investment decisions for  a wide variety of reasons. The attractiveness of the UK for foreign direct investment from large multi-national technology businesses remains strong.

Whether the type of retrospective action taken by the EC might push multi-national companies to consider the UK more favourably as a location for investment remains to be seen.  Any direct fall out, while probably not unlikely, will be difficult to map.

Proponents of Brexit are likely to see today’s ruling as a positive.

This is because in the long term the UK won’t have to answer directly to the European Commission.

However this will be balanced against a myriad of other factors. Already there is talk of the UK setting its own corporation tax rate, at a level lower than that in the rest of the EU. But if today’s ruling tells us anything it is that actions on tax rates tend to have reactions.

How countries treat foreign direct investors has always been a divisive issue and as today’s decision shows, even within a free trade area such as the European Economic Area, governed by a supranational bodies of the EU where countries are supposed not to behave in anti-competitive ways and seek unfair advantage over their fellow members, the stakes are so high that the players don’t hesitate to resort to the courts to protect their interests.

Attracting inward investment has always been politically sensitive.

The finely balanced political game of attracting big company inward investment without being seen to be offering unfair sweetheart deals on tax – which tend to annoy voters and create unfair competition for home grown companies – and creating new technology jobs and a digital economy is becoming more complex.

The inter-relationships to be considered go beyond the shores of the UK economy.

The old days of inward investment win and lose in the technology space were often based on creating plant and factories which meant companies and countries were locked in. The marriage of convenience had to have some longevity.

However the very agility and flexibility that many of today’s tech companies are offering mean capital and investment and therefore jobs and tax generation can move across borders much more quickly.

It would naive to believe that companies and countries won't contiue to seek advantages.

Politicians and technocrats need to make the rules clear and apply them consistently.

Companies need to behave appropriately and recognise that just as customers make markets and must come first, those customers seeking the best deal are also citizens which drive political policy and actions.

What today's actions have shown is that the debate on how much tax tech businesses pay in the UK is never far below the surface.  

 

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