This is an update to our earlier post about Brexit. My hope is that it isn’t as underwhelming as Brexit turned out to be.
Here is what we know about Brexit so far:
The UK isn’t deporting anyone, the UK is still strong economically and can take pride in their success during the Olympics in Rio.
However, the tone and significance of Brexit is changing. It doesn’t get top billing anymore. On the BBC’s main UK website, a glance at their top stories this week and last include favorite villains Sarah Palin and Donald Trump who are now joined by Olympic idiot Ryan Lochte. Hillary Clinton gets fair coverage but she isn’t as exciting as the others. The BBC also has stories about a Filipino Female Drug-Lord Assassin in an ongoing brutal drug war as well as lighter stories that showcase why we Yanks should be glad someone is thinking about the evolution of our common language. (After all it is English, not American)
But there is one story that covers so much ground it is hard to capture and discuss all of the ramifications: The EU charging Apple with $14.5 Billion in back taxes.
At stake is not only future investment in the EU by US-based corporations, but also national sovereignty. It is a battle of economic and political culture being played out across the Atlantic in Ireland and Brussels. Rory Cellan-Jones, a BBC Technology correspondent, highlights many of the issues (including Rule of Law, something near and dear to me) in a short but direct article titled “EU takes on Apple, Ireland and the United States.”
The broader issue is how, when and where these multi-national companies pay taxes? Most employees of these firms pay an income tax to the country where they work, but what about the profits from the products and services they produce? Are they taxed in the country they were earned, and then again in the home country? (In this situation rates can approach 50-60%, no wonder US-based corporations don’t repatriate the profits). What is fair and who determines this? These are issues that need to be addressed by all parties involved.
What is clear is that tax shaming and aggressive tax avoidance techniques are lose-lose propositions for everyone. The governments may win short term money for their treasury, but in the process will damage their relationships with corporations and potentially cost long-term jobs. The corporations lose because they are forced on the back heel and have to defend against following legal tax techniques and don’t look like corporate citizens.
Apple and Tim Cook make a very strong argument which can be read here: http://www.apple.com/ie/customer-letter/
Ireland seems to understand this and even is siding with Apple against the European Commission (from bbc.co.uk):
“I disagree profoundly with the Commission,” said Ireland’s finance minister, Michael Noonan, in a statement.
“The decision leaves me with no choice but to seek cabinet approval to appeal. This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation.”
As I mentioned before, rule of law is very important and if Apple (and many other corporations) are legally minimizing taxes, then revisiting the tax laws and rules should be of importance to the tax collectors, not one-off decisions followed up with sound bites.
Apple (AAPL) is currently in our Global Brands portfolio and this story will have wide reaching implications for many of our other names in the portfolio.