A Tax Perversity

You may believe that all corporate tax disputes are alike. After all, a dispute generally begins when a firm calculates its liability. Then it forwards a tax payment to a government treasury office.

So what usually happens next? The treasury office assesses the underlying calculation, determines the payment to be insufficient, and demands more money. The company then disputes the assessment and files an appeal in tax court.

That’s not an unusual scenario, is it? But sometimes scenarios do vary. Earlier today, for instance, Apple filed an appeal with European authorities over a tax liability that a government treasury office refuses to collect.

Huh? A treasury office that refuses to comply with its own government authority? How is that possible? Although it’s an incongruous situation, it starts to make sense when one realizes that the government entity hearing Apple’s appeal is different than the government entity that is refusing collection.

You see, the European Union is hearing an appeal about a tax payment that it ordered to be paid to the government of Ireland. Although the Emerald Isle is a member of the European Union, it maintains its own treasury office, independent of the Union. That relationship sets the stage for conflicts of interest between the two government entities.

In this situation, the Irish have been accused of establishing a tax haven for global firms that wish to do business within the European Union. By offering American, Asian, and other firms a foothold in the Union at a lower corporate tax rate than is offered by other E.U. nations, the Irish attract many global business offices and thus broaden their economy.

This puts the European Union in the uncomfortable position of having to level the playing field between its member nations by insisting that each nation maintain comparable levels of corporate taxation. Last year, E.U. regulators found that Ireland was under-taxing Apple, and ordered the Irish to collect over $15 billion in back taxes.

$15 billion, of course, is a major sum for any nation. And for a small country like Ireland, it’s a stupendous windfall. Yet, in order to defend its right to establish such tax arrangements with other global firms, the Irish government has joined forces with Apple to fight the Union’s tax determination.

Win or lose, it certainly is a strange sight for a relatively small government to wage a vigorous battle to avoid collecting billions of dollars in taxes, isn’t it? Indeed, the situation illustrates the perverse incentives that are at play within the Union.

Regardless of the merits of the European Union’s case, one cannot help but wonder whether its tax policy is a bit misguided. After all, every nation in Europe may benefit if the E.U. spends a little less time prosecuting its own member nations for failing to collect taxes, and a little more time trying to eliminate the contradictions that generate such perverse incentives to begin with.