UK courting of tech firms with low-tax deals could upset Brexit talk

30th August 2016. Lewis Crofts & Matthew Holeshouse.

The UK government moved quickly today to court companies unsettled by the EU’s demand that Apple repay up to 13 billion euros in unpaid taxes to Ireland.

The gesture shows Britain keen to exploit the benefits of Brexit, but such a policy goes against the UK’s traditional support for EU policies in this area and would likely anger other European capitals at a time when goodwill for two years of talks is needed.

Today, the European Commission ruled that Apple had benefited from selective tax treatment in Ireland. It said a decade worth of low tax rates meant the Irish government had granted it favorable conditions compared to other companies. This is illegal under EU rules banning state subsidies.

The main fallout from the decision has been in Ireland and the US, where politicians have criticized the EU’s “novel” use of state aid law and claimed Brussels has upset the international tax order.

But the UK government has also seen an opportunity.

Number 10 and the Treasury said Britain is “open for business” and welcomed “any company wishing to invest in Britain and Britain’s workforce.”

The invitation to Apple and others follows indications the UK government could cut its corporate tax rate to make the economy more attractive at a time when the fallout of the Brexit vote is casting doubt over potential investments.

But this is a dangerous game for the UK to play.

Earlier this month, Sweden’s Prime Minister Stefan Loefven said a move to lower corporate tax rates would make discussions about the UK’s exit from the EU more difficult.

And today’s statements will only add to those concerns, angering traditional allies — such as Ireland — as well as large economies such as Germany and France, which have long decried the low corporate tax policies of some member states.

UK ministers meet tomorrow to flesh out options for Brexit and will need support in other EU capitals to have their demands met.

One Brexit model would see the UK outside of Europe’s single market and therefore outside of the jurisdiction of the state aid regime, which sees Brussels stop governments using public funds to prop up ailing companies.

In this scenario, Britain could entice companies with tax deals that Brussels couldn’t police.

But this runs against the long-standing policy of the UK government to support state aid rules, often using them to contest handouts by more profligate countries inside the bloc.

In the EU, the UK has often been a voice of skepticism when it comes to the intervention of government funds in private business. Indeed, when the EU launched probes into the tax dealings of multinationals, the coalition government at the time supported the move.

A post-Brexit UK would be free to create tax havens, court foreign carmakers and online distributors, or dose up companies on subsidies to create national champions large enough to compete with mega-corporations on the world stage.

But breaking with the EU regime, British companies would lose the ability to complain against their mainland competitors in, say, Belgium, France or Germany that might benefit from unfair support.

The UK won’t be able to pick and choose parts of the state aid regime it likes.

Any looser free-trade agreement between the UK and its European neighbors could also include provisions that would require Britain to guard against distortions with measures that are at least equivalent to those within the EU.

But, in the past, the commission has struggled to force such terms on other countries it has sealed trade deals with.

Theresa May’s government faces a clear choice: The country could stay outside the European regime and grant enticing tax rulings but forgo influence over the subsidies given to rivals on the mainland.

Or it could negotiate a closer relationship with the EU, benefiting from better trade terms but effectively continuing the existing regime.

	Eliot Gao