EU State Aid Cash Grab Threatens Rule of Law and Investment

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Posted by Natalie De Vincenzi on Thursday, September 22nd, 2016, 10:00 AM PERMALINK

The recent European “illegal state aid” ruling threatens to upend business certainty and existing international tax rules, and reduce business investment. The ruling, which forces Apple to retroactively pay Ireland $14.5 billion plus interest also shortchanges the American people and threatens the prospects for tax reform.

European Commissioner for Competition Margarethe Vestager has justified this decisions as a way to stop “cozy” relationships and break “unfair competition.”  Clearly though, this is a case of money hungry EU bureaucrats clawing back more revenue after the fact.

The ruling has  caused universal condemnation from American business leaders, Congressional Republicans and Democrats, and the Treasury Department who have all raised concerns that the EU investigations will set a precedent allowing international bodies to override the sovereignty of individual countries.

Both Apple and Ireland have announced that they will appeal this decision and both claim they did nothing wrong. In fact, there are no accusations that the arrangement constituted tax dodging, but rather than not enough tax was paid.

This ruling and those to come threaten to set a precedent for the European Union to take aim at other U.S. companies doing business abroad and leaves them vulnerable to having the same treatment. The EU is set to continue its investigations into American businesses like Amazon and McDonalds, which could open the door to similar action from other countries and international bodies:

“Absent reversal, other countries outside the EU will interpret the decision as acceptable governmental behavior and will put all companies with cross-border investments –including EU-headquartered companies – at risk of having their assets expropriated by foreign governments seeking extra revenue or seeking to punish a successful foreign competitor.”

This is far from hypothetical and is already happening. Officials from EU member countries are already eyeing their “fair share” of the $14.5 billion and just last week Japan ordered Apple to pay $118 million in back-taxes.

Not only do these developments impact business certainty and rule of law, the rulings come at the expense of U.S. taxpayers. Money that is stolen from American businesses under the guise of illegal state aid is no longer available to be brought back to the U.S. economy to be reinvested in jobs and the economy.

As noted by Senate Finance Chairman Orrin Hatch (R-Utah) these investigations illustrate why the U.S. desperately needs pro-growth tax reform. American Companies are already struggling to compete because we have the highest corporate tax rate in the developed world – 39 percent, compared to the average in the developed world which is just 25 percent. In addition, our tax code subjects our businesses to double taxation – once when it is earned overseas and once when it is brought back to the U.S.

This system of double taxation – which is used by just six of 34 developed countries – has resulted in more than $2 trillion in after tax U.S. income being stranded overseas. This is just one consequence of the out-of-date tax code, and it should be fixed in pro-growth tax reform.

When this happens, lawmakers should repatriate double taxed income at a rate of just over 5 percent, which when done in the 2000s resulted in $320 billion returning to the country that was reinvested in the economy, in higher wages, and in federal revenues. Now, with more than two trillion stranded overseas, the time is ripe for another round of repatriation that can finance pro-growth tax reform.

EU officials have shown they are aggressively targeting US businesses through state aid investigations.  These efforts should signal that the U.S. desperately needs tax reform so that American businesses can once again compete in the global economy and not be at the will of bureaucrats from other countries.

Photo Credit: Theophilos Papadopoulos

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