Taking a bite out of Apple is not so easy for Europe

Alan Philps explains why American tech giants have an unassailable lead in the world

The European Commission ruled this week that Apple owes €13 billion (Dh53bh) in back taxes to the Irish government. Daniel Leal-Olivas / AFP

Imagine you are the president or prime minister of a midsized country. Who would you rather make space for in your diary – the United States ambassador, or a top executive of one the American tech giants, Apple, Microsoft, Google (now renamed Alphabet) or Amazon? The tech lords, obviously.

The US is a country in relative decline, with a seemingly broken political system and an annual government deficit of $438 billion (Dh1.6tn) last year. Apple has a huge pile of cash – $216 billion. And although based in the US, it does not have to do what the authorities say. It refused to give the FBI the means to unlock the iPhone of a terrorist who killed 14 people in California last year, on the grounds that this was a “civil liberties issue”. But Apple is a commercial company, so it should be understood that all its decisions are commercially based.

The global power and reach of America’s over-mighty corporate citizens is hardly new. In its latest strategic review, the British Foreign Office noted that it was getting harder for travelling British ministers to gain access to top politicians, while all doors were instantly opened for anyone from the tech sphere.

This issue has burst into the open with a bust-up between the European Union and Apple over its non-payment of taxes on the profits it generates in Europe. In the US, companies pay as much as 35 per cent tax on profits. In Europe, the profits from sales of iPhones and other Apple products are channelled through Ireland, where they are effectively taxed at 0.005 per cent.

The European Commission ruled this week that Apple owes €13 billion (Dh53bh) in back taxes to the Irish government, which it accuses of giving Apple an illegal “sweetheart deal” not available to other companies. Under this arrangement, profits from sales in Europe, the Middle East, Africa and India are allocated to a “head office” that exists only on paper, so in effect they are not taxed.

The Irish government is split on how to respond to the ruling: its business strategy relies on low taxes to attract multinationals and this would be ruined if it accepted the proposed windfall.

There is much that is hypocritical and illogical in this dispute. It is red meat to tax lawyers, who will no doubt be fighting over Apple’s tax dues for many years. It will encourage other European countries to grab some of tax revenue from sales in their territory. Most bizarrely, Ireland’s tax deal with Apple dates from 1991, so it is logical to ask why it is being challenged now, and by what right the ruling is retroactive.

The why now question is simple to answer: public anger in Europe over non-payment of corporate taxes by the world's wealthiest corporations at a time when wages are stagnating. In a typical reaction, The Sun, a British tabloid, headlined the Apple tax story: "Rotten to the core."

Less frequently mentioned is the fact that Europe has produced no world-beating tech companies to rival the Americans. The European Union feels colonised by American tech companies, which show little concern for European concerns about privacy or the need to curb hate speech. A proposed US-EU free-trade zone, under negotiation for three years, now seems likely to collapse over European concerns that it will not offer protection for workers from US-based multinationals.

The face of what used to be known as the “ugly American” has come to look more like an American corporate logo. Starbucks has now been forced by public pressure from the “tax justice” movement to pay more tax in Europe.

As America’s hard power begins to decline, its global influence now increasingly lies in the “soft power” wielded by its major corporations. But in a digital world, the consequences of this power are actually not so “soft”. The effect of Silicon Valley’s disruption of traditional jobs is bitterly felt all over the world.

Take the ride-hailing app Uber, the subject of protests by taxi drivers in many European countries which has now suspended services in Abu Dhabi amid concerns that it is infringing regulations. While the service is undoubtedly cheap, it does not employ any salaried staff in its core business – cab driving. This slicing and dicing of jobs is unlikely to provide secure employment.

Henry Ford, who developed the assembly-line technique of mass production, ensured that his workers could afford to buy his products. Today’s digital economy is great at cutting costs but the benefits tend to go to a minority of geeks and financiers.

With the prospect of self-driving cabs and lorries, and the consequent loss of jobs, it is not surprising that there is a rising sense of angst about the future of work for the low-skilled – and soon for the middle classes.

For the tech optimists, these concerns are just an attempt to turn the clock back. Tax is a key concern for any company operating in a globalised world, and if the Irish deal is ruled out, accountants will think of other arrangements to shelter their profits. If Europeans do not like Apple, they can just stop buying iPhones. If Google is too intrusive, they can invent their own search engine. And progress is unstoppable – the invention of the motor car did not lead to starvation among the carriage makers. They found other jobs.

But the digital age is different. When Karl Benz invented the motor car, this did not stop anyone with engineering skills from making rivals. But with social media, the first mover advantage is undeniable: Facebook locks its customer in, ideally for life. The social network is not unchallengeable, but it is very hard to unseat it.

For that reason, the US tech giants, with their vast domestic market, ready access to finance and ability to attract the brightest brains from around the world, have an unassailable lead. However hard the Europeans try to cut them down to size, they are still the new masters of the universe.

Alan Philps is a commentator on global affairs

On Twitter @aphilps