Comment: Reactions to Irish tax ruling reveal divide between US & European perceptions

Apple Store in London’s Covent Garden

I expressed surprise on Monday that Tim Cook would write what I described as a ‘tone-deaf’ open letter on the Irish tax ruling, and it’s been fascinating to see the responses.

In particular, I think there’s a significant difference in perceptions of this issue between Americans and Europeans. This difference does, I think, explain why Cook made what seemed to me to be a strategic error.

My surprise was that he focused exclusively on arguing that Apple was obeying the law, doing nothing that other large companies don’t do – and the unfairness of the situation from Apple’s perspective. Many commentators on the piece echoed these arguments, and it’s clear that many Americans are puzzled by my description of the letter as tone-deaf, so I thought a little context would be helpful …

Someone once wrote that Europeans distrust corporations while Americans distrust governments, and I think there’s something to this.

The majority view expressed by Americans appears to be that it is unfair of the European Union to retrospectively demand more tax from a corporation. The majority view in Europe appears to be that it was unfair of Apple to pay as little as 0.005% tax on billions of dollars of European sales.

So Cook’s stance was arguably not tone-deaf from an American perspective, but I think it is from a European one. I’m not alone in thinking that: London’s Financial Times later ran a piece headlined Threat to Apple’s brand image more serious than bottom line hit.

While there are of course Europeans who would argue that companies are right to take every legal measure they can to minimize the amount of tax they pay, the prevailing public mood regarding corporate tax-avoidance is rather different in Europe.

Many European countries have seen quite dramatic cuts in public spending in response to the global financial crisis. A combination of falling tax revenues from poorly performing economies and a desire by governments to reduce deficits has seen some fairly savage cuts to public spending. At a time when salaries have been frozen and people are paying the same amount of tax but getting fewer public services in return, there is considerable anger at anyone or anything that is seen to be taking steps to avoid paying their dues.

A number of large corporations have already felt the European public’s wrath on this issue. Amazon, for example, based its European HQ in Luxembourg, and used very similar measures to Apple to funnel all its European sales through that country, where it paid a very low rate of tax. In 2014, Amazon UK paid just £11.9M ($15.6M) tax on sales of £5.3B ($7B). That led to a widespread campaign to boycott Amazon.

Amazon gave in, and ended the practice of booking all its sales through Luxembourg, and now pays tax on the profits made within each individual European country. (In fairness to the company, it operates on razor-thin margins, so its tax payments were always going to seem out of line with its revenue, but it is now paying taxes in line with its profits.)

It was a similar story with Starbucks back in 2012, when it was revealed that the company had paid no tax whatsoever in the UK for thirteen out of the fourteen years it had been operating in the country. Again, the tax-avoidance mechanism was similar to that used by Apple: it paid huge ‘royalty payments’ to the Netherlands, where it had, you guessed it, a special deal with the government to pay lower taxes. Again, this led to a customer boycott, and again Starbucks gave in and now pays taxes in the UK.

In 2015, Apple paid just £12.9M ($17M) in UK corporation tax on an estimated profit (not revenue) of £2B ($2.6B) from its 39 UK Apple Stores. That’s an effective tax rate of less than one percent.

So this is why I considered Cook’s letter tone-deaf. To American ears, his comments about a corporation being bullied by a governmental organization may have sounded absolutely fine. To European ears, however, it sounded like he was just giving excuses for the same kind of tax-avoidance that led to those boycotts and U-turns.

Now, personally, I don’t think there’s much danger of a boycott of Apple products: we’re all too addicted to those shiny toys. But bad PR is never a good idea. If people are buying from you grudgingly rather than willingly, sooner or later that fact is going to hit your bottom-line.

Cook has since claimed that the EC’s numbers are ‘false’ and ‘total political crap,’ stating that Apple actually paid $400M in tax to the Irish government in the same year the commission said it paid just 0.005% of its profits. Both numbers cannot be true, so we’ll need to wait for the full EC report to be published. In line with common practice, Apple will be given the opportunity to request redactions of commercially-sensitive information in the report prior to publication, so we don’t yet know how much information we’ll get to see.

But so far, at least, I do think Apple’s aggressive response to this is misjudged. If Apple said ‘well, we don’t think we’ve done anything wrong, but we’ve been asked to pay more tax so we will,’ it would all be forgotten within weeks. Instead, by appealing, Apple is going to keep this issue in the news for years to come. That’s why I still think the smart move – to keep European customers happy, at least – might be to reach a quiet settlement.

Photos: Apple; WallpaperFolder; Hufton & Crow