US and EU should examine their own domestic tax distortions

THE European Union's (EU) judgment against Apple Inc signals a new chapter in the tax wars that have been raging since the 2008 global financial crisis.

Revenue-starved Western governments have been looking for new sources that they can tax. They have become critical of countries with low taxes. Last year, the EU published a list of what it termed "tax havens". These include, inter alia, Andorra, Liechtenstein, Guernsey, Monaco, Hong Kong, Bermuda, British Virgin Islands, Cayman Islands, Panama and US Virgin Islands. The EU also proposed a series of reform measures to end sweetheart tax deals following investigations into arrangements between EU countries and big firms including Amazon, Apple and Starbucks. For instance, it was noted that the tiny European state of Luxembourg saved some of the world's largest corporations - including Apple, Ikea and Pepsi - billions of dollars in taxes.

Now the EU competition enforcer has ordered the Irish government to collect about 13 billion euros (S$19.7 billion) from Apple in back taxes for the last 10 years. Dublin's rules on taxable profits from Apple Sales International and Apple Operations Europe are illegal, it has decided. Apple's compact with Ireland enabled the company to pay almost no taxes; all profits from these two subsidiaries in that country were shifted to a head office with "no employees, no premises, no real activities", as the EU statement put it. The profits allocated to the so-called head office were not subject to tax in any country. More importantly, the EU has determined that this violated specific provisions of Irish tax laws.