Tag Archives: European Union

A Tax Perversity

You may believe that all corporate tax disputes are alike. After all, a dispute generally begins when a firm calculates its liability. Then it forwards a tax payment to a government treasury office.

So what usually happens next? The treasury office assesses the underlying calculation, determines the payment to be insufficient, and demands more money. The company then disputes the assessment and files an appeal in tax court.

That’s not an unusual scenario, is it? But sometimes scenarios do vary. Earlier today, for instance, Apple filed an appeal with European authorities over a tax liability that a government treasury office refuses to collect.

Huh? A treasury office that refuses to comply with its own government authority? How is that possible? Although it’s an incongruous situation, it starts to make sense when one realizes that the government entity hearing Apple’s appeal is different than the government entity that is refusing collection.

You see, the European Union is hearing an appeal about a tax payment that it ordered to be paid to the government of Ireland. Although the Emerald Isle is a member of the European Union, it maintains its own treasury office, independent of the Union. That relationship sets the stage for conflicts of interest between the two government entities.

In this situation, the Irish have been accused of establishing a tax haven for global firms that wish to do business within the European Union. By offering American, Asian, and other firms a foothold in the Union at a lower corporate tax rate than is offered by other E.U. nations, the Irish attract many global business offices and thus broaden their economy.

This puts the European Union in the uncomfortable position of having to level the playing field between its member nations by insisting that each nation maintain comparable levels of corporate taxation. Last year, E.U. regulators found that Ireland was under-taxing Apple, and ordered the Irish to collect over $15 billion in back taxes.

$15 billion, of course, is a major sum for any nation. And for a small country like Ireland, it’s a stupendous windfall. Yet, in order to defend its right to establish such tax arrangements with other global firms, the Irish government has joined forces with Apple to fight the Union’s tax determination.

Win or lose, it certainly is a strange sight for a relatively small government to wage a vigorous battle to avoid collecting billions of dollars in taxes, isn’t it? Indeed, the situation illustrates the perverse incentives that are at play within the Union.

Regardless of the merits of the European Union’s case, one cannot help but wonder whether its tax policy is a bit misguided. After all, every nation in Europe may benefit if the E.U. spends a little less time prosecuting its own member nations for failing to collect taxes, and a little more time trying to eliminate the contradictions that generate such perverse incentives to begin with.

A Valuation Nightmare

Did you notice the news story that shook the foundations of our global economy last week? Although it didn’t receive much attention in the popular press, one doesn’t need to possess a PhD in Accounting or Finance to appreciate the potential threat that now confronts us.

You see, for the first time in the history of European finance, private corporations issued bonds with negative interest rates. Specifically, the corporations Sanofi and Henkel announced that they will charge investors to borrow money from them.

Although European government entities have issued securities with negative interest rates, never before have private corporations done so. Presumably, investors are now so nervous about the future of the European Union that they are willing to accept such terms from Sanofi and Henkel.

Why did this event shake the foundations of our economy? Because our global financial system is predicated on the assumption that it is worthwhile to invest for the future. Under normal circumstances, when a borrower pays interest to a lender, the interest payment represents an acknowledgment that the borrower is investing the principal in a project that is generating future value.

So what happens when interest rates turn negative? In essence, investors are incentivized to spend all of their money immediately, or to store their money in their proverbial mattresses, rather than investing in the private sector. And the calculation known as Net Present Value (NPV), which relies on positive interest rates to discount future payments to their current values, fails to function.

Furthermore, if we no can longer estimate the present value of future cash flows, many tangible and intangible assets will no longer possess calculable values. Commercial landlords, for instance, will no longer be able to estimate the values of their properties on the basis of their future rent receipts. And banks will no longer be able to estimate the values of their loans on the basis of their future repayments.

In other words, we’d experience a valuation nightmare. So why did the Sanofi and Henkel announcements garner so little public concern? Perhaps it’s because the financial press is assuming that their negative interest rates will prove to be isolated incidents.

If other private corporations start to issue debt at negative interest rates, though, there’s no question that we’ll start to hear about it. After all, if the practice of investing for the future is no longer perceived to be a generator of value, it’s difficult to envision how our economy will ever grow.

Brexit: A Generational Divide

You’ve undoubtedly already heard the hubbub about Great Britain’s shocking decision to leave the European Union. But did you notice the stunning generational divide that underlies the voting results?

An overwhelming three quarters of all voters aged 18 to 24 desired to remain in Europe. And a clear majority of voters aged 25 to 49 did so as well. But older voters favored the opposing position, with almost two thirds of senior citizens preferring to leave, and a clear majority of voters aged 50 to 64 also opting to depart.

Former United States Secretary of Defense Donald Rumsfeld once derisively referred to the established Western European nations as “Old Europe,” while praising the emerging nations of the East as “New Europe.” Apparently, the Brexit vote revealed a similar split between the citizens of “Old Britain” and “New Britain.”

Why does this cleavage matter? Because global history is full of ostensibly irreversible cultural attitudes that were washed aside by a deluge of generational change.

Consider the issue of gay marriage in the United States, for instance. In 1996, a Democratic President signed the Defense of Marriage Act (DOMA) into law. That act defined marriage as the union of a man and a woman, and explicitly gave every state the right to refuse to recognize gay marriages. And yet, for its time, it was considered a relatively moderate law because it implicitly permitted individual states to sanction such unions.

Just twenty years later, though, gay marriage was recognized by Supreme Court as a fundamental human right. Why the change? Younger generations, advancing into adulthood, overwhelmingly supported the progressive position.

Indeed, gay marriage proponents ultimately prevailed by convincing the younger generations of the wisdom of their position, and then by simply waiting for those generations to come of age. So what lesson may their experience convey to the disappointed young Britons who wish to remain in the European Union?

To put it simply: time is on your side. Be patient, and recognize that the inevitable generational tide is flowing in your direction.