Irish government caught in a trap between Apple, the EU, and its own citizens

Following a European Commission ruling that Ireland must recover $14.5 billion in taxes from Apple, the country’s government finds itself confronting a politically agonizing decision about whether to appeal.

Immediately after the EC made its decision public, Ireland’s finance minister made a snap statement saying his government would appeal. But since then, it’s become increasingly clear that doing so would be politically unpopular with Irish citizens, which has forced the government to postpone a final decision until today.

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As Irish ministers huddle today to reach consensus, the current government finds itself boxed in on three sides with no easy way out.

There’s the European Union, whose members have long resented Ireland’s aggressive tax discounts to lure business; citizens who have been living under strict austerity measures following an EU bailout of the country several years ago; and Apple, whose CEO Tim Cook has made it clear that he expects the Irish government to “do the right thing” and appeal alongside his company.

To understand how Ireland got here, one has to go back almost 25 years, when the country was one of the poorest in Western Europe. The government began adopting aggressive policies that included low taxation rates and subsidies for corporations to attract jobs.

This proved alluring to tech companies seeking a low-tax perch from which to compete in European markets — companies like Microsoft, Dell, and Apple.

While Cook noted that Apple has had a presence in Ireland since the early 1980s, the company submitted structures lowering its tax rates that were approved by Ireland in 1991. That agreement was renewed in 2007.

Cook has insisted that Apple received no special treatment and that the same tax arrangements were available to any company. The EC contends that in approving them, Ireland gave Apple unfair tax status that allowed it to shave its tax rate on most international income down to .005 percent at one point.

The EC isn’t alone in making this finding. Indeed, the EC investigation sprang from an earlier one by Congress that made similar findings in 2013 when it said Apple had paid little or no taxes on about $74 billion in revenue over four years.

“What may not be so well known is that Apple also has a highly developed tax avoidance system — a system through which it has amassed more than $100 billion in offshore cash in a tax haven,” Sen. Carl Levin said in a 2013 Congressional hearing. “Sending valuable intellectual property rights offshore together with the profits that follow those rights is at the heart of Apple’s tax avoidance strategy.”

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Cook testified at those hearings, and then, as now, insisted Apple pays its fair share and follows the letter of the law.

Which brings us back to Ireland.

For many years, Ireland’s industrial policy worked beautifully, as the so-called Celtic Tiger roared with job creation and soaring income. But in 2008, the banking and real estate crisis hit Ireland harder than most EU nations, leading to the need of a massive bailout.

Even as this was under consideration, EU nations vented their frustration that Ireland had essentially turned itself into a low-tax haven that had lured jobs and taxes away from other European countries.

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Eventually, a bailout was arranged, and today, Ireland still holds more than $200 billion in debt from that bailout. To service payments to this debt, Ireland has had to tighten its budget, cutting funding for infrastructure, schools, and other services, which has led to mounting frustration among citizens.

The question heard this week is a seemingly simple one: Why would the Irish government turn down $14.5 billion in tax money from Apple that could ease some of that pain?

The answer, of course, would be: Apple. The company employs 6,000 people in Ireland. And Cook claims it is the largest taxpayer in Ireland, accounting for $1 out of every $15 in corporate taxes collected.

What’s more, Ireland is still counting on its low 12.5 percent tax rate to lure investment and keep its economy moving, a strategy that remains controversial. The latest complaint has to do with so-called “inversion” deals. A foreign company acquires an Irish company and then sets it up in its new “official headquarters,” thereby establishing its tax status in Ireland.

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This practise led President Obama to call on Congress last year to close inversion loopholes —  after drug maker Pfizer said it was going to acquire Allergan and move its HQ from New York to Ireland. That deal was eventually scrapped, but the practice continues to irritate EU member states and U.S. officials.

The $14.5 billion ruling is an attempt by other European countries to discourage these types of favorable tax deals Ireland offers by labeling then “uncompetitive.”

This leaves the Irish ministers wedged into a trap of their own making, having to choose a path out whose only guarantee is that it will infuriate someone.