Italian premier Matteo Renzi had last month the dubious privilege of hosting the EU’s first major post-Brexit summit. Welcoming French president Francois Hollande and German chancellor Angela Merkel onto the Giuseppe Garibaldi aircraft carrier, Renzi tried to strike a note both conciliatory and visionary: ‘We respect the choice made by the citizens of Britain but we want to write a future chapter. Europe after Brexit will relaunch the powerful ideals of unity and peace, freedom and dreams.’

The EU is, however, not all spaced-out transcendental vagueness. When it comes to tax, the EU (and, more particularly, the European Commission) can get extremely specific, as Apple discovered to its considerable cost, just a couple of weeks after the maritime summit.

In a landmark decision, the Commission has decided to penalise Apple a staggering €13bn (£11.1bn) for its longstanding ‘sweetheart’ tax deal with Ireland.

The deal, agreed by Ireland in order to attract high tech inward investment, has seen Apple pay a vastly reduced rate of corporation tax in Ireland (the exact numbers are disputed but estimates are as low as 3%); Apple will now be expected to ‘correct’ the position right back to 2003.

An enormous windfall may be coming its way, but the Irish government is surprisingly uneasy about getting its hands on the Apple dividend. Ireland has used competitive taxation with its 12.5% corporation tax rate as a primary means of making itself attractive to foreign investors. As for many a lottery winner before them, these euro billions could prove the country’s undoing.

Public discussion

Tim Cook, Apple’s outraged CEO, got to the heart of what worries Ireland in his response to the ruling: ‘There are other possibilities too, but I think it's clear that there is a desire to harmonise tax rates across the EU. Doing it this way doesn't seem like the right approach to me. There should be a public discussion about it.’

In order to come to its decision, the Commission has had to interpret the agreement as being one of de facto state aid for a particular company, rather than being a regular tax arrangement (which, being a matter for member states, the Commission would have no power to regulate). The implication, as the astonished Cook made clear, is that there is no longer legal certainty about tax decisions taken by sovereign national governments in the EU.

If Silicon Valley was bewildered by the UK’s vote to Brexit (as has been reported), it may be a little clearer now.

Cook was right to focus on tax harmonisation on being a likely driver for the Commission’s ruling; for the Commission, the existence of widely diverging tax rates across the EU is an affront to its mission of securing ‘ever closer union’ in Europe, as such variations create what the arch-centralizers term ‘competitive distortion’ in the single market.

The worry for the Irish – and all smaller, economically liberal EU member states – is that without the possibility of this ‘distortion’, their comparative disadvantages – relative to, say, Germany, or France - will be permanently locked in. The worry for everybody else in the EU is that by applying retroactive judgments like these, the Commission toxifies the investment environment across the whole EU.   

Single European VAT Return

Just in respect of VAT (from which Brussels generates direct revenue, and about which it has far more say), the commission has, in the last three years, launched plans for a single European VAT return and a single VAT Area for the EU. The 28 member states tend to push back against these schemes, but the direction of travel is clear. 

If the Commission can get involved, it will. Just a month after the Brexit vote, it released an economic brief called The French VAT System and Revenue Efficiency.

The document is essentially a telling off for France about its various reduced VAT rates for culturally sensitive sectors. If this seems a strange time to be scolding the French for doing favours for its restaurant trade (opinion polls show France to be far more anti-EU than the UK), worse is the lack of transparency about beneficiaries of the proposed reforms. At no point, for example, is it mentioned that VAT contributes to the Commission’s ‘own resources’. Indeed, the brief’s most revealing and blackly humorous line is in the legal notice that serves as an introduction: ‘This paper exists in English only’.

Jean-Claude Juncker, the Commission’s president, said in his recent State of the Union speech on 14 September that the EU faces an ‘existential crisis’ in the wake of Brexit.

With the right-wing, anti-EU AFD party polling higher numbers in Germany’s at recent local elections than Angela Merkel’s CDU and East European member states in open revolt about the federalists’ ‘condescending, uppity, and frustrated’ style of policy making, he is surely right.

About the author

Nick Hallam is managing director of Accordance