What is the fuzz between the European Union, the Irish government and the iPhone maker Apple? Taxes.

At the end of August 2016 the EU Commission said that Apple received €13 billion in tax breaks from the Irish government. The commissioners called this illegal and urged Ireland to collect the taxes retroactively.

Gerard Casey, Professor Emeritus of University College Dublin, says that this confrontation goes against a governement that is very pro EU.

The relationship between Ireland and the EU is complex. I mean ideologically — and in many ways — especially the Irish political elite is committed to the EU.

But the Irish government explained that it disagrees profoundly with the Commission’s analysis. Ireland did not give favorable tax treatment to Apple.

To understand the bigger picture we need to take a step back.

Luck of the Irish

Sam Bowman, Executive Director of the Adam Smith Institute explains that there are a few key ingredients to Ireland’s economy — a combination of geographical, linguistic, and political factors, that benefited the the green island.

We had the lucky combination of being quite low tax, English-speaking, geographically close to Europe and America, and obviously part of the European Union. And that is what really what drove the first half of the Celtic Tiger boom. The second half is a property bubble which didn’t turn out so well in the end.

After the financial crisis in 2008 put Ireland in a difficult economic situation, the country attempted to attract investors to create jobs. To achieve this the government lowered corporate tax rates.

Sam Bowman says that this policy is really popular.

What’s different about Irish people to many other and people in Europe is that Irish people really attribute growth to low taxes. Irish people really really like having low corporation tax and they’re very worried for that might change. And almost everywhere else people for one reason or another will resent 
low corporation tax rates.

The European Union holds a different view and promotes a harmonized corporate tax rate amongst its members. Both positions are at odds with each other.

Steve Davies, Head of Education at the Instute of Economic Affairs, outlines what the Irish position looks like.

Corporation tax in Ireland is one of the lowest in the EU. Historically, for quite a long time it’s been fifteen percent. But just recently we reduced it to 12,5%. This makes it one of the lowest anywhere in the world in fact. It’s a major attractor for business.

However the EU is accusing the Irish government of not even imposing these low taxes on Apple. The reason could be different tax concepts.

Who watches the watchmen?

Sam Bowman explains the position that is shared by Apple and the IRisch government:

The general convention globally is that you tax the profit where it’s made. Most of Apple’s actual profit, most of the value is actually being created in America. That’s where the designs are done, that’s where the intellectual property is being created. Even though of course the manufacturing is being done here, it’s not manufacturing that makes Apple special. It’s the design.

But apart from the legal issue whether Apple needs to pay the taxes or not, remains a more fundamental question. Do higher corporate tax rates make sense economically?

Sam Bowman does not think so:

Corporations don’t pay tax. Their customers pay tax, their shareholders pay tax, or their workers pay tax. And and none of those things are very good. Worst of all — in fact — is shareholders paying tax. Because it means fewer people invest, you get less saving and you get less growth overall. And less investment means less growth.

Steve Davies worries about the EU plans.

The main problem Ireland faces is pressure from other EU members for the EU to impose a uniform minimum rate of corporation tax which would be a major blow to the Irish economy.

What’s an economy to do?

But do forms of Taxation exist that are less harmful to economic growth?

Sam Bowman:

VAT is probably one of the least bad taxes. And there are so many exemptions to that, that if we removed some of those and made the VAT a more neutral tax. Then we’d be able to raise a lot more revenue from that and cut these really Anti-investment Anti-growth taxes like 
corporation tax.

The EU approach of proposing unified solutions for diverse problems has been met by many member states with increasingly open resistance. Will this trend continued and what does this mean for the future?

Gerard Casey believes that the differences within the EU will lead to its end in the near future.

If current political trends continue in the way in which they have in the last year — spectacularly in Britain under Brexit, and recently now in America under Trump, and the political movements I think associated with that, plus what we now see in Poland, and perhaps even in France, and who knows what’s going to happen in Italy and Greece — I would… if I were a betting man I would put money on the breakup of the EU anywhere between 10 to 20 years down the road. With what consequences? Who knows?

Indeed it appears like the European Union is at a crossroads. These developments seem to support the Irish cause. As the situation unfolds between Apple, Ireland, and the EU, the outcome is still unclear.