US tech majors work their way around EU attempts to tax them

Apattern is emerging in the war between the European Union’s anti-trust authorities and US tech companies. The changes that Google and Apple made after adverse rulings and large fines appear to be little but window-dressing, and left intact the problems the penalties were intended to solve.

In June 2017, the European Commission fined Google €2.4 billion (Dh10.27bn) for giving priority to its price comparison service, Google Shopping, over rival services in search results. The company put in place a remedy in September of that year: Google Shopping is supposed to bid like any other company.

Yet it’s almost always the only offering in the box.

In February, one of the original complainants, the trade group FairSearch, wrote an open letter to Competition Commissioner Margrethe Vestager asserting that the new set-up was no better than the one it was supposed to replace.

Google Shopping remains part of the search giant, even though it claims to maintain an arm’s-length arrangement, so Google incurs no real cost for the spots in the box while its competitors do.

So far, Ms Vestager’s office hasn’t directed Google to change anything, though. Instead, regulators are concentrating on other investigations against Google that could lead to more fines.

Apple has been similarly defiant, at least according to a recent report by Martin Brehm Cristensen and Emma Clancy for the European United Left–Nordic Green Left (GUE/NGL) faction in the European Parliament.

In August 2016, Ms Vestager told Ireland to claw back €13bn in back taxes owed by Apple. She argued that the company’s rrangement with Irish tax authorities was a form of illegal state aid. At the time, Apple paid no tax on the European earnings in the United States, either.

The company avoided the levies by spending most of its profits to pay for the use of its own intellectual property.

Ireland was in no hurry to recover the money, which it collected only under EU pressure – it has been helping Apple fight the ruling in the courts.

The GUE/NGL report provides some evidence that it has also helped the company establish a new tax structure that allows it to continue to pay very little tax.

The report picks up where Ms Vestager’s investigation left off in 2015.

That year, responding to US and EU efforts to curb its tax avoidance, Apple created a new European tax structure that it has never disclosed publicly but that can be inferred from data that became available in the November 2017 release of the so-called Paradise Papers, data leak detailing the use of offshore entities for tax purposes by rich individuals and some global companies, including Apple.

Here’s how the report describes the alleged new strategy: Apple transferred the intellectual property licence, which still consumes most of its European profit, onshore in Ireland, where it is now owned by its Apple Operations Europe (AOE) unit.

To make the purchase, AOE borrowed billions of dollars from another Apple subsidiary, which is probably based in the tax haven of Jersey. It is now making tax-deductible repayments from Ireland to Jersey with money received from another Ireland-based firm, Apple Distribution International (ADI).

This company executes the iPhone maker’s non-US sales and uses most of its revenue to AOE for the use of the intellectual property.

In addition, one of the Irish companies has a cost-sharing agreement with Apple in the US: it pays its parent company for research and development conducted in

US companies, such as Facebook, are confident about being able to move on without changing much

the US. For tax purposes, this is considered an investment in R&D in Ireland, creating credits for Apple.

Both with Google’s shopping comparison service and with Apple’s tax arrangements, it’s up to the courts to decide whether the US companies are entitled to operate as they do.

This isn’t, however, just a matter of who’s right, but also of relative power.

An activist EU official such as Ms Vestager can challenge the US giants’ practices and even make them pay fines (although they aren’t as painful as recent US fines and settlements have been to Volkswagen and BNP Paribas).

But the US companies will essentially steamroll ahead without serious changes to their behaviour. That’s a qualitative US advantage in its trade war against Europe that cannot be fixed with quid-pro-quo tariff hikes.

And it’s an incentive to other US companies, such as Facebook, which lately have had trouble with European legislators and regulators: they, too, are confident about being able to move on without changing much.