How the EU turned on Ireland’s low-tax project

First, the good news. The Irish government is about to receive a €13 billion windfall in the form of back taxes from tech giant Apple, after the European Court of Justice (ECJ) ruled against the company. That should pay for a good few social homes in a country that has an even bigger housing crisis than Britain’s. It could even go some way to providing universal free public healthcare (at the moment most adults have to pay something, even at public hospitals).

Now the bad news. Ireland doesn’t actually want to receive the money any more than Apple wants to pay it. It has spent millions of euros fighting the European Commission (EC), which initiated the case. Ireland’s fear is that while a windfall might help its coffers in the short term, it will lose out in the long term if it is not allowed to attract businesses by offering them low tax rates.

But hang on, isn’t corporate taxation, like personal income tax, supposed to be a matter for EU member states, not Brussels? Not according to the EC, which decided in 2016 that the low tax rate paid by Apple in Ireland, where it has its European HQ, amounts to unfair competition. The EU argues that the arrangement between the Irish government and Apple – which it claims involves an effective tax rate of less than 1 per cent – was not on offer to all companies, and therefore amounts to a sweetheart deal: illegal state aid, in other words.

Given the billions of euros doled out every year in aid by the EC to farmers and other favoured sectors, it is hard not to laugh at this outbreak of high moral principle. An initial ruling by the ECJ in 2020 did in fact reject the Commission’s argument. The EC also lost a similar case involving Amazon and Luxembourg. But now it has been victorious against Apple.

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Not to miss out on enjoying the moment, the EC’s competition chief Margrethe Vestager described it as a victory for ‘tax justice’. That tells you all you need to know about this case. It is not a one-off dispute but a battle in a longer war against low corporate taxation. Following this, the EC can be expected only to flex its muscles even further.

And not just the EC, either. There is a wider war being waged against what some people see as excessively low corporate taxation – and Ireland’s corporation tax regime is well in their sights. Ireland has already raised the rate of corporation tax for large firms from 12.5 to 15 per cent, on the back of a push by the OECD for members to adopt a minimum corporation tax rate of 15 per cent.

One of the main drivers of that was US President Joe Biden, who has decided that he does not like the idea of tax revenues draining away to other countries. In his State of the Union address in March, Biden spoke of his intention to raise minimum US corporation tax from 15 per cent to 21 per cent, with US-headquartered companies forced to make up the difference to the US taxman if any of their operations were taxed at a rate lower than 21 per cent.

True, it doesn’t help a government if companies which operate on its soil are diverting profits to jurisdictions with lower tax rates. But the war against low corporate tax rates does raise a significant moral issue: why should some countries which have been successful at managing their public finances be forced to jack up tax rates just to please other less competent countries? There is a very good reason why Ireland feels it can happily get by without the €13 billion which will shortly be coming its way. This year, it is expected to have a budget surplus of €8.6 billion – something Rachel Reeves can only dream of. Ireland is the living embodiment of the Laffer curve, set in the peat bog. It has shown that low tax rates can stimulate business and increase tax revenues.

No one can say that Ireland has put low tax rates for the wealthy corporations and the rich above public services. While, as previously acknowledged, Ireland has a less-developed public health system, it has not shirked on infrastructure investment. And unlike many EU states, it is supporting itself with its tax revenues. It is many years since it was a net consumer of EU funds.

Why isn’t Britain seeking to emulate Ireland and seizing advantage of the EU’s efforts to crack down on low rates of corporation tax? Brexit was going to give us the opportunity to become ‘Singapore on Thames’. Yet our post-Brexit government seemed keener than ever to strangle the economy. Boris Johnson did briefly toy with the policy of reducing corporation tax from 19 per cent to 17 per cent – yet ended up setting it on a path back to 25 per cent.

No party has shown much interest in lowering the rate since. The emergency Covid grants and loans were used as an excuse for a rebound in corporation tax rates. Some of the aid was justified, but a good deal of it was over-generous, helping to prop up businesses which were already facing oblivion. Ironically, the pandemic year of 2020 had the fewest corporate insolvencies in three decades, as the creative destruction of capitalism was put on hold. Britain would have been far better off keeping low corporation tax rates.

With the EU now circling Ireland’s low tax environment, the opportunity for Britain is obvious: slash corporation tax rates and watch as global corporations divert their profits towards us. But if it failed to happen under the Conservatives, it is surely even less likely to happen under Labour.

The EU now sees itself as the world leader in tech regulation, from the General Data Protection Regulation to the new AI Act. Some of these rules may be justified, but it is hard not to detect distinctly sour grapes. The EU can’t match America’s spirit of invention, so instead it will drag it down. Will Britain dare to be different?