Apple and state aid: end of the affair

Posted on September 2, 2016

24/11/1980 . Picture shows Martina Lyons at work at a test station for Disk Drives being watched by Mr. Gene Fitzgerald,T.D. and Steve Jobs Apple Vice Chairman at the new Apple Computer Ltd. plant at Hollyhill Cork , Irish Examiner staff picture . Reference number 244/050 244/50©Irish Examiner

Steve Jobs, Apple co-founder, left, and local MP Gene Fitzgerald at Apple’s Cork plant in 1980.

For the past couple of years a piece of TV footage from 1980 has been appearing with increasing regularity on Irish news bulletins. It shows Steve Jobs, the late co-founder of the technology giant Apple, sporting a beard and dressed casually as he explains some complicated computer wizardry to a baffled Irish government minister.

Jobs had arrived in the city of Cork on Ireland’s southern coast to open Apple’s first overseas manufacturing plant. At the time, Apple employed just 60 people in the city, while Ireland was mired in an economic trough that seemed to have lasted forever. So it is probable that neither Apple nor Ireland anticipated that this moment marked the beginning of an extraordinary love affair.

    Today, the Silicon Valley behemoth employs 6,000 people at that same plant; its presence in Cork is perhaps the ultimate symbol of Ireland’s transformation from an agrarian society to one of Europe’s most modern and vibrant economies. As Mary Shields, a former mayor of the city, once told the Financial Times: “Other countries would love to have Apple. But they are in Cork and we want to keep them here.”

    This week, the 36-year relationship between Apple and Ireland was shown to have a darker side. Margrethe Vestager, the EU competition commissioner, announced that Ireland had given the company illegal state aid dating back a quarter of a century in a “sweetheart” tax arrangement. After a three-year investigation into Apple’s convoluted Irish tax arrangements, the European Commission concluded that the iPhone maker owed €13bn in unpaid tax
    — and that Ireland, however reluctantly, must collect it.

    Ms Vestager’s verdict is the sharpest rebuke Ireland has received from Brussels since the country’s financial and banking collapse in 2008. If anything, her implication that there is something fake about certain types of corporate activity by multinationals based in Ireland may be even more serious. “What she was effectively saying is that Ireland is a tax haven,” says Dan O’Brien, chief economist at the Institute for International and European Affairs, a think-tank.

    ‘€13bn changes everything’

    Irish ministers and officials had been braced for months for a negative outcome to the commission’s Apple investigation. A verdict in the hundreds of millions of euros was confidently anticipated, which could be explained away as a one-off that was no longer happening; in any case, senior ministers insisted, the government intended to appeal whatever the outcome.

    Irish employment

    But the scale of the penalty levied on Apple — with its message that the world’s richest company and an EU member state have been in cahoots for years in tax avoidance on a grand scale — caught the government unprepared. It has transformed what should have been, at most, an embarrassment into an almost full-blown political crisis. As several politicians the FT spoke to this week commented, “€13bn changes everything”.

    Speaking yesterday, after the government overcame cabinet reservations and agreed to appeal the ruling, Michael Noonan, finance minister, was still furious with the commission, describing the finding as “bizarre and outrageous”.

    A national debate has now begun about whether Ireland should accept — or is even entitled to — a €13bn windfall that would fund the budget of the country’s creaking health service for a year. The public appears split between those who would welcome the money to make up for years of cuts to public expenditure and others who fear that companies like Apple will move elsewhere without a bit of give and take on all sides
    .



    Enda Kenny, the prime minister, remarked that Ireland finds itself in an “unprecedented” situation.

    Senior Irish officials insist the country has no choice but to challenge the commission finding in the courts. Otherwise, the credibility not just of Ireland’s tax laws but perhaps those of other EU countries will be in doubt in the eyes of foreign investors. Martin Shanahan, chief executive of IDA Ireland, the inward investment agency that helped to lure Apple to Ireland, says: “If the commission view were to prevail, we would no longer have consistency and certainty that companies need, and neither would any other European country.”

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    A long and expensive legal and political fight looms. An appeal could take up to five years, with the potential to sour relations between Dublin and Brussels for years to come.

    There is more at stake, however, than Ireland’s reputation with its EU allies and its US investor base. The commission finding calls into question the sustainability of the country’s economic development model. Although it dates back nearly 60 years, the system has focused since the early 1990s almost exclusively on attracting foreign direct investment. Companies setting up operations in Ireland get a flexible labour force, the English language and English law, access to the EU single market — and a corporate tax rate of 12.5 per cent, one of the lowest in the world.

    Dependency problem

    The result has been a flood of FDI, particularly from Silicon Valley tech groups and US pharmaceutical and healthcare companies. In addition to Apple, multinationals such as Microsoft, Intel and Pfizer have substantial Irish operations. Google and Facebook have their international headquarters in Dublin. The roughly 700 US companies operating in Ireland employ 140,000 people, often in high-paying jobs in research and development, sales, marketing, finance and design.

    “We are much more FDI-intensive than almost anywhere else and it is the reason Ireland is not a low-wage economy,” says Frank Barry, professor of international business and economic development at Trinity College Dublin.

    Only Singapore competes with Ireland as the world’s hottest destination, relative to its size, for FDI. Ninety per cent of exports from Ireland are by foreign companies; one result of that is a consistently high current account surplus. The presence of these big global companies is spurring the development of new domestic industries — especially Irish-owned tech start-ups.

    But there are downsides. Ireland has become highly dependent on foreign companies for corporate tax. According to a study of corporation tax receipts by Ireland’s National Treasury Management Agency, the 10 biggest companies paid 40 per cent of the total last year, up from an average of 23 per cent between 2008 and 2012. And the activities of some of these companies distort Irish economic data. Official figures in July showed the economy grew by nearly 30 per cent last year as multinationals moved intellectual property, patents and other assets to Ireland, often for tax-planning reasons.

    The dependency of the Irish economy on FDI has long been a subject of debate between the business lobby and elements of civil society and the leftwing of Irish politics. The Apple controversy looks certain to sharpen the terms in which it is conducted.

    “If you were designing the ideal economy, you wouldn’t make it so dependent on FDI,” says Joe Tynan, head of the Ireland tax practice at PwC, the professional services company. “But you have to look at where we started.”

    Apple CEO Tim Cook speaks during the Wall Street Journal Digital Live ( WSJDLive ) conference at the Montage hotline Laguna Beach, California...Apple CEO Tim Cook speaks during the Wall Street Journal Digital Live ( WSJDLive ) conference at the Montage hotline Laguna Beach, California October 19, 2015. REUTERS/Mike Blake©Reuters

    Tim Cook, Apple chief executive has described the EU judgment as ‘political crap’

    The IIEA’s Mr O’Brien says if the Apple ruling were to start a trend among foreign companies to leave Ireland, “it would make the property crash look like a temporary slump. We would see a permanent slump in our prosperity.”

    There is no agreement on when, precisely, Irish policymakers decided that FDI was the answer to the country’s deep structural economic problems — if they ever did. When the island of Ireland was partitioned nearly a century ago, its industrial base — such as it was — ended up in what became Northern Ireland, behind a fortified border. The economy of the newly independent republic was mostly agrarian, dependent on the UK for capital and exports, blighted by emigration, encased in protectionism and in long-term decline.

    A century of contraction

    In her recent book about the modernisation of the country
    , the historian Mary E Daly cites a 1957 report by the International Monetary Fund that observed the Irish economy “has been contracting for more than a hundred years”. It was also in 1957 that TK Whitaker, the senior civil servant in the Irish finance ministry, advised his newly appointed minister that if things did not change, the republic might as well rejoin the UK.

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    TV grab of RTÉ Paschal Sheehy's extended interview with Apple Chief Executive Tim Cook at the company's European headquarters in Cork.

    Dublin is caught in EU-US dispute over which it has little control

    An Irish industrial policy finally began to take shape in the 1960s; Pfizer was one of the first, setting up in Cork in 1969. After Ireland joined the then European Economic Community in 1973, the economy was exposed for the first time to free trade. As membership of the EU became a significant economic factor, the trickle grew into a river; after the IDA shifted its focus exclusively to FDI in 1994, it became a flood with the emergence of the digital revolution.

    Alongside EU membership, the trend accelerated the rapid modernisation of Ireland over the past 25 years. “EU membership and FDI are the two factors that enable Ireland to pay its way,” says Aidan Regan, a political scientist at University College Dublin.

    US companies
    insist they are not arriving simply for the tax breaks or to exploit so-called tax inversions. “The most important thing for us is that there is an unbelievable talent pool here, and it’s not just Irish, but multinational and multilingual,” says Des Power, a senior executive at the wearable technology group Fitbit, which opened its European headquarters in Dublin this week.

    The Apple tax controversy stems from particular arrangements between the company and the fiscal authorities. Yet it threatens now to taint Ireland’s wider FDI economy by association. Given the scale of that economy, however, the government arguably has no choice but to fight back aggressively against what it sees as over-reach by Brussels. Paschal Donohoe, the Irish spending minister, says the message out of Ireland is clear: “A united cabinet and a united government to defend our tax system and its essential role in job creation.” One wonders what Steve Jobs would think.

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