tag:theconversation.com,2011:/ca/topics/state-aid-30800/articlesState aid – The Conversation2024-01-19T16:54:17Ztag:theconversation.com,2011:article/2214642024-01-19T16:54:17Z2024-01-19T16:54:17ZGermany’s economy must be fixed – here are three top priorities<p>The <a href="https://www.ft.com/content/792a1a09-701c-4c9d-aa77-0d9575d5bda9">latest figures</a> on German gross domestic product (GDP) are far from reassuring. Output was 0.3% lower in 2023 than the year before, turning Germany into the worst-performing large economy in the world.</p>
<p>By comparison, the International Monetary Fund (IMF)‘s <a href="https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD">latest calculations</a> show the US economy growing 2.1% in 2023 and China 5%. The European Union as a whole achieved 0.7%, dragged down by Germany, its largest contributor. </p>
<p>Germany has been hit hard by the rise in energy costs, especially having relied almost entirely on cheap Russian energy until Russia’s invasion of Ukraine in 2022. Sizeable inflationary pressures have put pressure on German companies’ production processes, which are optimised for efficiency.</p>
<p>Rising interest rates have made it harder for German companies to secure financing, as well as increasing their operating costs and weakening domestic and foreign demand. </p>
<p>And China has slowed down and also started to invest in self-sufficiency, reducing its dependence on foreign technology and the import of foreign products and services. This is clearly a problem for German companies that have <a href="https://www.nytimes.com/2023/07/06/world/europe/germany-china-business-economy.html">relied massively</a> on the Chinese market over the past two decades.</p>
<p><a href="https://www.unido.org/news/germany-worlds-leading-manufacturer-according-unidos-cip-index">According to</a> the UNIDO Competitive Industrial Performance (CIP) Index, Germany remains the world’s leading manufacturer, having maintained the top rank since 2001. Yet China has entirely filled the gap over the past years, as illustrated below. </p>
<p><strong>German vs Chinese manufacturing</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart comparing German and Chinese manufacturing" src="https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/570323/original/file-20240119-25-vrg2ix.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The UNIDO index measures countries’ capacity to produce/export manufactured goods, technological progress and global influence on manufacturing.</span>
</figcaption>
</figure>
<p>The results of the <a href="https://www.imd.org/centers/wcc/world-competitiveness-center/rankings/world-competitiveness-ranking/">IMD World Competitiveness Ranking</a> confirm that Germany has been losing ground among top economies. Ranked 15th overall in 2022, it dropped seven positions in 2023, deteriorating across all the dimensions considered in the ranking: economic performance, business efficiency, government efficiency and infrastructure.</p>
<p>So what can be done for Germany, at a time of huge geopolitical friction and with many countries <a href="https://www.fdiintelligence.com/content/news/industrial-policies-are-mostly-motivated-by-protectionism-not-geopolitics-83358">adopting industrial policies</a> to distort and limit trade to protect local industries? Three strategic priorities stand out:</p>
<h2>1. Diversify, diversify, diversify</h2>
<p>Germany must fix its over-reliance on China as its biggest trading partner. <a href="https://www.reuters.com/markets/china-remains-germanys-main-trading-partner-seventh-year-2023-02-08/">China has been</a> Germany’s most important trading partner since 2015, and trade between the two countries rose to a record level in 2022. </p>
<p>Berlin has recognised its excessive dependence on China for some time, but manufacturing footprints take time to change, and it can’t be done without a fallout in terms of economic performance.</p>
<p>Take Volkswagen. <a href="https://www.cnbc.com/2023/11/17/volkswagen-nissan-and-hyundai-on-track-for-worst-china-sales-in-years.html">It remains</a> a major player in China with around 3 million vehicles sold a year, but it was selling over 4 million units as recently as 2018. This is because China’s swift transition to electric cars has benefited local players like BYD. </p>
<p>The <a href="https://www.ft.com/content/1386906c-5dd1-4167-bc96-72940fc473bf">market share</a> of foreign cars in China has fallen from 64% in 2020 to 44% in 2023. The challenge for German companies like Volkswagen is to transform this into an opportunity for greater diversification.</p>
<p>Diversifying while maintaining existing trade and investments in China will be difficult, however, as we should expect the Asian country to charge a higher price to foreign companies for the access to its domestic market. Yet at such a time of geopolitical uncertainty, diversification must be the first strategic priority. </p>
<p>A <a href="https://www.ifw-kiel.de/publications/news/cost-of-decoupling-from-china-for-german-economy-severe-but-not-devastating/">recent study</a> from the German-based Kiel Institute for the World Economy suggests that if there was an abrupt halt to trade with China, it would cause Germany’s economy to shrink by 5% – a slump comparable to the global financial crisis or the COVID-19 pandemic. </p>
<h2>2. Borrow to invest</h2>
<p>In 2009, Germany added a “<a href="https://en.wikipedia.org/wiki/Debt_brake_(Germany)">debt brake</a>” to its constitution. <a href="https://www.dw.com/en/what-is-germanys-debt-brake/a-67587332">The rule</a>, which severely restricts Germany’s ability to borrow and run deficits, was seen as incentivising sensible spending and ensuring that the public finances would remain healthy.</p>
<p>This became the mantra used by Angela Merkel and the so-called <a href="https://en.wikipedia.org/wiki/Troika_(European_group)">Troika</a> of the European Commission, European Central Bank and IMF in the years following the global financial crisis as Greece and other countries struggled with their debts. </p>
<p>The landscape has now fundamentally changed, however. Germany’s constitutional court <a href="https://www.reuters.com/world/europe/german-court-make-key-ruling-budget-manoeuvre-2023-11-15/#:%7E:text=BERLIN%2C%20Nov%2015%20(Reuters),billion)%20hole%20in%20its%20finances.">recently blocked</a> the transfer of €60 billion (£51 billion) from a pandemic budget to a climate fund precisely because of the “debt brake” clause. This has led to a <a href="https://www.ft.com/content/60674329-5be3-4802-a05a-851ee2990efd">budget crisis</a> that is yet to be resolved. </p>
<p>More generally the debt brake has become a major challenge because Germany, and the EU as a whole, are competing against other countries that are subsidising their companies. For instance, <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4752">Brussels recently launched</a> an investigation on the likely presence of major market distortions resulting from Chinese state subsidies in the automotive sector. </p>
<p>The only way forward for Germany is to invest heavily in infrastructure, research & development (R&D), and more efficient state operations to help companies transform themselves and stay competitive globally. To finance this, greater reliance on debt is unavoidable. </p>
<h2>3. Attract investments from abroad, bet on Europe to innovate</h2>
<p>Recent <a href="https://www.reuters.com/markets/europe/foreign-direct-investment-germany-dives-35-bln-euros-h1-2023-09-12/">Bundesbank figures</a> show that foreign direct investment in Germany decreased to €3.5 billion in the first half of 2023 from €34.1 billion in the same period in 2022. This is a dramatic fall and the lowest inflow figure in almost 20 years. It calls for careful reflection on Germany’s loss of competitiveness and its ability to attract foreign investment.</p>
<p>The only way to fix this downtrend is to bet on innovation driven by EU-led R&D investments. Innovation has long been the engine of German (and EU) economic performance. Germany is <a href="https://sciencebusiness.net/news-byte/horizon-europe/eu-rd-intensity-falls-2022-despite-increased-spending">one of the</a> highest spenders on R&D in the bloc, at slightly over 3% of GDP per year. </p>
<p>Yet this is in the same ballpark as a decade ago, while the US and Japan now invest close to 3.5% of GDP. Stepping up R&D and keeping pace with the latest technological developments is a must for Germany (and the EU).</p>
<p>In a world where countries from China to the US are increasingly subsidising their corporations, and enacting policies to protect their local economies, Germany must make long-term investments in infrastructure, government efficiency and stimulating corporate ecosystems. This will attract greater investment from abroad, which will be crucial for Germany and its EU counterparts to innovate and thus stay competitive in the global arena.</p><img src="https://counter.theconversation.com/content/221464/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Niccolò Pisani does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The EU’s biggest economy is on its uppers. Turning it around may involve additional pain in the short term.Niccolò Pisani, Professor of Strategy and International Business, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1997152023-02-21T18:11:56Z2023-02-21T18:11:56ZEU poised to copy US subsidies for green technology – new evidence from China shows how it could backfire<figure><img src="https://images.theconversation.com/files/511174/original/file-20230220-18-uo54av.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There's a reason why the west has long avoided state aid. </span> <span class="attribution"><a class="source" href="https://unsplash.com/s/photos/wind-turbine">Shaun Dakin/Unsplash</a></span></figcaption></figure><p>The EU <a href="https://www.ft.com/content/9bfe7e7e-83b7-47f2-8d59-e180215d534a">is preparing</a> to abandon its longstanding restrictions on state aid to take on US and Chinese subsidies over green technologies. European Commission president Ursula von der Leyen is spearheading a new commitment from EU leaders to “act decisively to ensure its long-term competitiveness, prosperity and role on the global stage”.</p>
<p>She has talked about the need to counter hidden subsidies from the Chinese, both in green tech and in other sectors, though <a href="https://www.cnbc.com/2023/02/02/bidens-ira-has-left-europe-blind-sided-and-playing-catchup-could-lead-to-2-big-mistakes.html">the trigger</a> for the EU’s new approach is really President Joe Biden’s <a href="https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-inflation-reduction-act-heres-whats-in-it">Inflation Reduction Act (IRA)</a>. This has committed the US to a record US$369 billion (£305 billion) to green its economy, including using tax breaks and subsidies. </p>
<p>It effectively tears up the international consensus around not using state aid, embracing what the US has railed against for years. <a href="https://www.economist.com/leaders/2023/01/12/the-destructive-new-logic-that-threatens-globalisation">The Economist</a> has said that globalisation is no longer about racing, but racing and tripping others. </p>
<p>The EU is now proposing to introduce its own tax credits and subsidies for cleantech companies, as well as fast-tracking regulation in this area. </p>
<p>Meanwhile, the UK has been <a href="https://www.politico.eu/article/uk-calls-out-biden-over-electric-vehicle-subsidies/">coming under pressure</a> from the likes of car manufacturers to respond. So far, it has been trying to find exemptions to the US’s general approach of only offering incentives to products made in America, while <a href="https://www.bloomberg.com/news/articles/2023-01-27/uk-sees-no-need-for-subsidies-in-us-eu-green-technology-battle?leadSource=uverify%20wall">also claiming</a> the UK has no need to subsidise these kinds of areas because it is already ahead. </p>
<p>The economics of this drift to protectionism are worrying. Our <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/caje.12644">recent research</a> on the effects of state subsidies in China suggest that such policies could do the US and EU economies more harm than good overall. </p>
<h2>What the research says</h2>
<p>Since the dawn of the industrial revolution, states have played <a href="https://www.cambridge.org/core/books/bringing-the-state-back-in/629F1D194C7E4FC19CF5208F345D6AD8">a significant role</a> in developing their economies. <a href="https://hbr.org/2013/04/how-chinese-subsidies-changed">China is</a> the recent prime example, where the use of subsidies to develop particular industries such as electric cars or solar panels has been highly visible. </p>
<p><a href="https://timesofindia.indiatimes.com/city/bengaluru/govt-to-offer-up-to-50-of-project-cost-to-cos-setting-up-chip-plant/articleshow/88463324.cms">India seems</a> to be <a href="https://www.indiaglobalbusiness.com/igb-archive/5-ways-india-can-attract-companies-moving-out-of-china">moving</a> in the same direction. The government is paying half of the cost of making computer chips, among a variety of incentives to <a href="https://www.economist.com/briefing/2023/01/12/globalisation-already-slowing-is-suffering-a-new-assault">encourage investment</a> in different sectors. </p>
<p>Equally, in the developed world, government procurement has driven many <a href="https://www.project-syndicate.org/onpoint/innovation-technological-and-market-risk-key-role-of-the-state-by-william-h-janeway-2023-01?utm_source=Project+Syndicate+Newsletter&utm_campaign=63657e1de4-op_newsletter_01_20_2023&utm_medium=email&utm_term=0_73bad5b7d8-63657e1de4-105526401&mc_cid=63657e1de4&mc_eid=b4a93ff839">world-changing innovations</a>. Whole sectors such as <a href="https://www.project-syndicate.org/onpoint/innovation-technological-and-market-risk-key-role-of-the-state-by-william-h-janeway-2023-01?utm_source=Project+Syndicate+Newsletter&utm_campaign=63657e1de4-op_newsletter_01_20_2023&utm_medium=email&utm_term=0_73bad5b7d8-63657e1de4-105526401&mc_cid=63657e1de4&mc_eid=b4a93ff839">biotech and information technology</a> relied on government procurement to get started. America’s Silicon Valley <a href="https://www.ft.com/content/8c0152d2-d0f2-11e2-be7b-00144feab7de">originally grew</a> on the back of military contracts, for instance. </p>
<p><a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-6419.00079?casa_token=aq2hewEcQeMAAAAA:o-YjKMyBz7cDoPYcAzdqiDPL10ETLkEgkIHFyNlAXuSxjoRqDksex6BMl9uN02Z-Snbj0jxupLCzYtVX">Research</a> in this area does acknowledge a case for subsidising infant industries in which a country wants to specialise. China’s state subsidies in the steel and solar panel industries would be a good example. </p>
<p>Yet there is a price to be paid: the money a government spends means that less will be available for helping its citizens in other ways. <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-6419.00079?casa_token=aq2hewEcQeMAAAAA:o-YjKMyBz7cDoPYcAzdqiDPL10ETLkEgkIHFyNlAXuSxjoRqDksex6BMl9uN02Z-Snbj0jxupLCzYtVX">For example</a> Brazil’s wheat-industry subsidies in the 1980s were estimated to have produced a net loss of 15% to welfare spending. </p>
<p><a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-6419.00079?casa_token=aq2hewEcQeMAAAAA:o-YjKMyBz7cDoPYcAzdqiDPL10ETLkEgkIHFyNlAXuSxjoRqDksex6BMl9uN02Z-Snbj0jxupLCzYtVX">Around the same time</a>, it was estimated that if the EU removed the common agricultural policy, the extra money available for government spending could increase real incomes by between 0.3% and 3.5% as a proportion of GDP. Findings like these probably explain why the World Trade Organization has discouraged state aid for decades. </p>
<h2>Consequences</h2>
<p>The new green subsidies will create winners and losers at different levels. Within the EU, for example, it will un-level the playing field between member states. Those that can afford to spend more on their green tech industries will potentially crowd out those with less. </p>
<p>Even within a country, there’s unlikely to be a win-win. Our research team has <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/caje.12644">recently published</a> a paper about China’s subsidies, using a new approach that makes it possible to estimate the direct and indirect effects on subsidised and non-subsidised firms at the same time. </p>
<p>This is the first time anyone has looked at subsidies in this way. Our project looked at 1998-2007, since those were the years where the necessary data was available. </p>
<p>We found that subsidised firms become relatively more productive, thus making them more competitive. Yet firms that are not subsidised can see their productivity growth reduced. </p>
<p>The determining factor is whether they operate in a geographical cluster alongside subsidised firms. When more than a quarter of firms in a cluster in China were being subsidised, the remainder suffered. </p>
<p>Those losing out were typically foreign-owned firms and those owned by the Chinese state, while private Chinese firms were the beneficiaries. </p>
<p>When we aggregated all the data, it showed that this negative indirect effect tends to dominate. In other words, subsidies produce unintended losers and make the market less competitive and more inefficient as a whole. </p>
<p>The bottom line is, subsidies are not without problems, even for China. In the last decade we have seen what “losers” can do to an economy, or a society - think of movements towards populism and autocracy in many places. </p>
<p>Therefore, there needs to be a more thorough debate about the benefits and costs of subsidies before states apply them, and some carefully designed policies to prepare for the potential losers.</p><img src="https://counter.theconversation.com/content/199715/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Just because the US is tearing up the international consensus against state aid doesn’t meant the likes of the EU and UK should follow suit.Jun Du, Professor of Economics, Centre Director of Centre for Business Prosperity (CBP), Aston UniversityHolger Görg, Acting President, Kiel Institute for the World EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1705162021-10-28T12:34:07Z2021-10-28T12:34:07ZState spending on anti-poverty programs could substantially reduce child abuse and neglect<figure><img src="https://images.theconversation.com/files/428868/original/file-20211027-23-7v8rbt.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C2075%2C1377&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Public spending aimed at reducing poverty can lead to deep reductions in child maltreatment and could improve overall child well-being. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/father-and-son-going-to-kindergarten-royalty-free-image/1288962069?adppopup=true">shih-wei/ E+ via Getty Images</a></span></figcaption></figure><p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em></p>
<h2>The big idea</h2>
<p>States’ financial investments in public benefit programs for low-income families are associated with less child abuse and neglect, also known as maltreatment. These investments are also associated with less need for foster care and maltreatment-related deaths, according to our <a href="https://doi.org/10.1542/peds.2021-050685">recent publication in the journal Pediatrics</a>.</p>
<p>Our research team included the two of us – <a href="https://www.childrensmercy.org/profiles/hank-t-puls/">Hank Puls</a>, a pediatrician who <a href="https://scholar.google.com/citations?hl=en&user=qkBLs3YAAAAJ&view_op=list_works&sortby=pubdate">conducts research on the prevention of child maltreatment</a>, and <a href="https://medschool.kp.org/about/leadership/paul-chung">Paul Chung</a>, who studies childhood determinants of adult health – as well as <a href="https://scholar.google.com/citations?user=8o47xsAAAAAJ&hl=en">Matthew Hall</a>, <a href="https://www.childrensmercy.org/profiles/james-d-anderst/">James Anderst</a>, <a href="https://www.kumc.edu/tgurley-calvez.html">Tami Gurley</a> and <a href="https://www.massgeneral.org/children/research/james-perrin">James Perrin</a>. </p>
<p>Our study examined the relationship between states’ rates of child maltreatment and their annual spending per person in poverty on major benefit programs from 2010 to 2017. Benefit programs included those providing cash, housing or material resources, childcare assistance, refundable earned income tax credits and medical assistance programs such as Medicaid. </p>
<p>Our findings indicate that an increase of US$1,000, or 13%, in annual spending per person in poverty on these programs by all 50 states and Washington, D.C., might be associated with approximately 181,000 fewer children reported for maltreatment, 28,500 fewer victims, 4,100 fewer children entering foster care and 130 fewer children dying – every year.</p>
<p>Our results also suggest that reductions in child maltreatment might provide fiscal returns in the long term for states and society. The 13% increase in spending amounted to $46.5 billion nationally. We estimate these reductions might return $1.5 billion to $9.3 billion in <a href="https://doi.org/10.1016/j.chiabu.2018.09.018">avoided economic burdens associated with maltreatment</a> in the short term, but as much as $25.8 billion to $153.2 billion over the course of children’s lives.</p>
<h2>Why it matters</h2>
<p>Child maltreatment is a public health crisis. By 18 years of age, <a href="https://doi.org/10.1001/jamapediatrics.2014.410">at least 1 in 8 U.S. children</a> will have experienced abuse or neglect. This leads to poorer <a href="https://doi.org/10.1016/S0140-6736(08)61706-7">overall health and mental health</a>, as well as worse <a href="https://doi.org/10.1016/j.chiabu.2017.12.022">socioeconomic outcomes</a>, for those individuals and society.</p>
<p>We believe that our study serves as an example of how benefit programs might have positive effects beyond their stated objectives. Benefit programs likely have powerful, broad and unmeasured effects on a host of health issues – the combined impacts of which might dwarf those found for child maltreatment alone. </p>
<p>For example, Medicaid expansion improves <a href="https://www.kff.org/medicaid/report/the-effects-of-medicaid-expansion-under-the-aca-updated-findings-from-a-literature-review/">health care access</a> and some <a href="https://doi.org/10.1001/jama.2019.12345">health</a> and <a href="https://doi.org/10.1377/hlthaff.2021.00776">mental health</a> outcomes. Medicaid also <a href="https://doi.org/10.1377/hlthaff.2017.0331">significantly reduces poverty</a> and can reduce <a href="https://doi.org/10.1377/hlthaff.2016.1650">parental stress</a>. Our study suggests that that one such “side effect” of benefit programs may be improving families’ overall well-being to the extent that fewer children are abused or neglected.</p>
<h2>What still isn’t known</h2>
<p>A more nuanced understanding of how benefit programs might prevent child maltreatment is needed. <a href="https://datacenter.kidscount.org/data/bar/44-children-in-poverty-by-race-and-ethnicity?loc=1&loct=2#1/any/false/1729/10,11,9,12,1/323">Poverty</a> is not equally distributed among all children in the U.S., and how these programs might affect maltreatment and other health-related disparities in specific populations remains unknown.</p>
<p>The COVID-19 pandemic may have led to an <a href="https://www.nytimes.com/2020/04/07/opinion/coronavirus-child-abuse.html">increased risk for child maltreatment</a>. But it’s still unclear whether economic relief, such as the CARES Act and eviction protections, aided in reducing some of the perceived risk, if at all.</p>
<p>More recently, the American Rescue Plan Act provided direct economic relief to Americans and included fundamental changes to tax credits, such as the Child Tax Credit and the Earned Income Tax Credit. These changes increased income for families and, in some cases, <a href="https://www.brookings.edu/blog/up-front/2021/05/27/the-american-families-plan-too-many-tax-credits-for-children/">better allocated benefits to the lowest income Americans</a>. President Biden’s <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/">American Families Plan</a> proposes to extend those tax credit reforms and additionally invest in child care and early education. It will be critical to examine how these policy changes to benefit programs might influence poverty, child maltreatment and well-being, in general.</p>
<h2>What’s next</h2>
<p>We believe that ample opportunities remain to responsibly invest in public benefit programs. For example, <a href="https://www.kff.org/medicaid/issue-brief/status-of-state-medicaid-expansion-decisions-interactive-map/">12 states have yet to expand Medicaid</a>, over 30 million Americans remain uninsured, <a href="https://aspe.hhs.gov/reports/factsheet-estimates-child-care-eligibility-receipt-fiscal-year-2017">6 in 7 eligible families do not receive child care assistance</a> and <a href="https://www.aappublications.org/news/2021/09/14/childpovertyreport091421">1 in 6 U.S. children</a> still live in poverty. </p>
<p>Our findings provide optimism that public benefit programs can not only lift families out of poverty but also address child maltreatment and improve health more broadly.</p>
<p>[<em>Over 110,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p><img src="https://counter.theconversation.com/content/170516/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Public investments in benefit programs could save tens of thousands of children from being victims of child abuse and have important later-life effects on child welfare and overall health.Henry T. Puls, Associate Professor of Pediatrics, Children's Mercy Kansas City, University of Missouri-Kansas CityPaul J. Chung, Adjunct Professor of Pediatrics and Health Policy and Management, University of California, Los AngelesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1472122020-09-30T13:23:06Z2020-09-30T13:23:06ZState aid is biggest Brexit dispute between UK and EU – there’s a workable compromise<p>Officials from the UK and the EU <a href="https://www.brusselstimes.com/news/eu-affairs/133302/uk-and-eu-start-9th-round-of-brexit-negotiations-on-tuesday/">are meeting</a> at a crunch point in the negotiations for a future free trade agreement. A number of issues could scupper the talks, but perhaps the biggest is state aid. So what is the dispute about – and can it be resolved?</p>
<p>The UK has been bound by the rules on state aid as a member state of the EU. These essentially <a href="https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:12008E107">ban member states</a> from giving aid in any form, if it “distorts or threatens to distort competition” by favouring certain companies. </p>
<p>There are numerous exceptions, such as “aid having a social character, granted to individual consumers”, aid following natural disasters and aid to help economic development in places with very low standards of living. But in general, the rules seek to prevent member states from using government money to give companies an unfair advantage over rivals in other member states. </p>
<p>The rules are <a href="https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:12008E108">enforced by</a> the EU commission, and the commission and member states have adopted a mass of <a href="https://ec.europa.eu/competition/state_aid/legislation/legislation.html">secondary state aid law</a> on issues such as <a href="https://ec.europa.eu/competition/state_aid/legislation/horizontal.html">regional development</a>. In practice, many state aid issues are litigated in the courts – going either to the EU court directly or via national courts asking the EU court questions about the law.</p>
<h2>The competing proposals</h2>
<p>Voices on both <a href="https://www.spiked-online.com/2020/09/08/the-eu-has-been-negotiating-in-bad-faith-all-along/">the UK</a> and <a href="https://www.voanews.com/europe/theater-brinkmanship-mark-brexit-talks">the EU</a> sides argue that the other side has been negotiating the future trade agreement in bad faith. So what is the true picture as regards state aid?</p>
<p>The UK <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/840655/Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_the_European_Union_and_the_European_Atomic_Energy_Community.pdf">withdrawal agreement</a> says that the two sides should negotiate agreements as referred to in the separate <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/840656/Political_Declaration_setting_out_the_framework_for_the_future_relationship_between_the_European_Union_and_the_United_Kingdom.pdf">political declaration</a> on their future relationship. According to paragraph 77 of that declaration, the UK and EU “should uphold the common high standards” which currently apply, including a “robust and comprehensive framework” for state aid control, and “should rely on appropriate and relevant union and international standards”, with “appropriate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement”.</p>
<p>But the UK and EU have completely different proposals for what this means for a future free trade agreement. The UK’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/886010/DRAFT_UK-EU_Comprehensive_Free_Trade_Agreement.pdf">proposed free trade agreement</a> refers (in chapter 21) to only consultations on subsidies, with no reference to how the rules might be enforced domestically, and a ban only on agricultural export subsidies. It excludes these consultations from dispute settlement. This conflicts with the political declaration, which specifically mentions a framework, along with enforcement and dispute settlement. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Subsidy bag under the magnifying glass" src="https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=438&fit=crop&dpr=1 754w, https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=438&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/360800/original/file-20200930-22-ofy0g1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=438&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Declaration says one thing, proposals say another.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/money-bag-word-subsidy-wooden-houses-1279322677">Andril Yalansky</a></span>
</figcaption>
</figure>
<p>For its part, the <a href="https://ec.europa.eu/info/publications/draft-text-agreement-new-partnership-united-kingdom">EU proposal</a> includes continuing to apply the substance of EU state-aid law to the UK. While the rules would now be enforced by a UK authority, not the commission, courts in the UK could still ask the EU court to interpret them under the proposal. </p>
<p>Even future EU state aid laws would apply in principle to the UK. The UK could refuse to apply them, but would face penalties if it did that. This is not very close to the political declaration either, given that the declaration makes no reference to the UK courts asking the EU courts questions.</p>
<p>The EU proposal refers to keeping EU standards, while the UK refers to international standards – yet the political declaration refers to both. So each side has some reason to argue that this aspect of its proposals is consistent with the declaration. But this gets us no closer to agreement.</p>
<p>The UK <a href="https://www.theguardian.com/politics/2020/sep/29/brexit-brussels-rebuffs-new-uk-proposals-on-state-subsidies">has reportedly</a> most recently proposed a set of “principles” to control domestic subsidies, but these were rejected by the EU because they didn’t come with any means for the EU to ensure that they were honoured. </p>
<h2>Room for compromise?</h2>
<p>Building on this latest proposal, a possible compromise might consist of the UK agreeing to a domestic framework on state aid, with effective enforcement and dispute settlement, governed not by EU law but by international law in the form of the World Trade Organization’s <a href="https://www.wto.org/english/tratop_e/scm_e/subs_e.htm">subsidies code</a>. The Institute For Government think tank has produced <a href="https://www.instituteforgovernment.org.uk/sites/default/files/publications/beyond-state-aid.pdf">detailed proposals</a> as to how that might work. </p>
<p>Both sides could, if they chose, declare this as a victory: the UK would no longer be applying current or future EU law, and there would be no role for the EU court. Meanwhile, the EU would have a commitment from the UK to apply restrictions on subsidies, enforceable by arbitration if need be. </p>
<p>But it would nevertheless need both sides to compromise: there are reportedly some in the UK government who want to avoid any significant commitment on subsidies or state aid at all – and it is hard to imagine the EU agreeing to that.</p>
<p>Each side points to examples of what the EU has agreed to in the past: the UK position is similar to what the EU has agreed to <a href="https://ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/index_en.htm">with Canada</a>, for instance. But then Japan and the EU have agreed to more restraints on subsidies, similar to the possible compromise suggested above; and the UK has accepted those constraints in its own <a href="https://www.ft.com/content/edb7d155-56b4-4065-9f83-31b2247fa178">free trade agreement</a> with Japan.</p>
<p>A final complication is the connection between this issue and the UK’s controversial <a href="https://www.prospectmagazine.co.uk/politics/internal-market-bill-break-international-law-brexit">Internal Market Bill</a>. The bill would give ministers power to override the state aid rules in the <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/840230/Revised_Protocol_to_the_Withdrawal_Agreement.pdf">Northern Ireland protocol</a> to the withdrawal agreement, which goes even further than what the EU has proposed for the future free trade deal with the whole UK (for instance, the EU commission decides on whether to allow the aid).</p>
<p>Time will soon tell whether the two sides are willing to thrash out a compromise on this issue – and whether, even if they do so, the talks might nevertheless be derailed for some other reason.</p><img src="https://counter.theconversation.com/content/147212/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Peers has received funding from the ESRC to study migration issues post-Brexit.. </span></em></p>In the row between the UK and EU over how to handle state subsidies after Brexit, both sides insist their proposals are consistent with the political declaration.Steve Peers, Professor of Law, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1373032020-04-29T13:22:43Z2020-04-29T13:22:43ZTax havens: there’s a chance now to apply conditions to bail outs<figure><img src="https://images.theconversation.com/files/331366/original/file-20200429-51489-1rqg9k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Essential services in society are paid for by taxes – which lots of companies avoid paying.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/paramedic-wearing-personal-protective-equipment-ppe-1702088257">Shutterstock</a></span></figcaption></figure><p>The huge economic slowdown brought about by COVID-19 has resulted in companies around the world seeking help from their governments. The conditions of these bailouts vary but some countries have notably said that tax avoiders should not benefit. Poland and Denmark <a href="https://www.nytimes.com/reuters/2020/04/20/world/europe/20reuters-health-coronavirus-denmark.html">were the first</a>, with Austria, France and Italy <a href="https://www.politico.eu/article/if-you-want-a-bailout-in-europe-dont-use-tax-havens/">making similar noises</a>.</p>
<p>Companies that avoid paying tax argue that they operate within the law <a href="https://theconversation.com/explainer-whats-the-difference-between-tax-avoidance-and-evasion-57755">and do not breach any rules</a>. This may be true. But the outcomes for government purses have been dire. <a href="https://missingprofits.world/">One piece of research</a> found 40% of all corporate tax revenues are parked in tax havens, leading to a tax loss for global society of US$700 billion in 2017 alone. </p>
<p>How can a company that has avoided giving back to the society in which it operates and paying into crucial services now expect to be bailed out?</p>
<p>Good corporate citizenship involves the fair payment of local taxes. For far too long corporations have seen tax as a cost to their business rather than a repayment to the stakeholders that provide key infrastructure and services like roads, police and hospitals.</p>
<p>At the same time, there has been rising global competition between states to <a href="https://theconversation.com/how-ireland-managed-to-keep-investment-flowing-during-the-tough-times-44379">attract foreign business investment</a>. This results in a race to the bottom for countries trying to raise tax revenues, with offshore tax havens often charging zero taxes for the businesses based there. </p>
<p>Over the last few decades, giant multinationals have got away with very little in the way of corporate tax payments. Exposés like the <a href="https://theconversation.com/luxembourg-leaks-reveal-the-organised-hypocrisy-of-the-modern-corporation-33969">Luxembourg leaks</a> revealed how companies shift their profits from the country where they were earned (such as the UK) to a country that has a much lower corporate tax rate (such as Luxembourg). These are the same tax receipts that pay for the hospitals struggling to cope with the surge in demand from COVID-19 sufferers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=394&fit=crop&dpr=1 600w, https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=394&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=394&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/331342/original/file-20200429-51495-10sv30q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Lots of multinationals move their profits to tax havens like Monaco.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/panoramic-view-fontvieille-new-district-monaco-592843472">Shutterstock</a></span>
</figcaption>
</figure>
<p>There is an <a href="http://repository.essex.ac.uk/8128/1/WP2013-2_Corporate_Governance.pdf">entire industry</a> set up around this practice. Armies of lawyers, bankers and accountants enable companies to funnel their profits to low-tax jurisdictions. This may be legal but instead of helping states protect their infrastructures and services, this erodes their tax receipts.</p>
<p>Open to debate is the definition of a tax haven. The EU has its <a href="https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/">official list</a> of “non-cooperative jurisdictions for tax purposes”. This includes places like the Cayman Islands and Panama, which are outside of the EU. Yet some of the biggest tax havens are in the EU, <a href="https://fsi.taxjustice.net/en/introduction/fsi-results">including Luxembourg and Ireland</a>. </p>
<p>This is a highly sensitive and political issue. But the reality is that it has become normal for multinationals to even shift their profits from one EU country to other EU countries which have lower corporate tax rates. <a href="https://missingprofits.world/">One study finds</a> that France, for example, loses 22% of its corporate revenue to tax havens – 18% of this goes to other EU countries. In 2017 it lost US$13 billion, of which more than US$11 billion went mostly to Luxembourg, Belgium, the Netherlands and Ireland. </p>
<p>Another <a href="https://www.taxjustice.net/2020/04/08/revealed-netherlands-blocking-eus-covid19-recovery-plan-has-cost-eu-countries-10bn-in-lost-corporate-tax-a-year/">recent study by the Tax Justice Network think tank</a> found that Italy and Spain – both badly hit by coronavirus – lost significant tax revenues (US$1.5 billion and US$1 billion, respectively) to the Netherlands in 2017. Yet most of the recent announcements by countries to not give state aid to tax avoiders <a href="https://www.politico.eu/article/if-you-want-a-bailout-in-europe-dont-use-tax-havens/">only use the EU’s official list</a>.</p>
<h2>A long-term solution</h2>
<p>A better solution to this problem would be to introduce <a href="https://theconversation.com/country-by-country-reporting-is-a-victory-for-citizens-over-companies-14654">country-by-country reporting</a>. This would allow investors and government to accurately tell where a company trades, where it parks its profits, and where and what taxes it actually pays. Considering accounting has international standards and most big corporations are audited by one of the Big Four auditing firms, this should be relatively easy to implement.</p>
<p>Unfortunately, however, researchers have shown time and again – for example in the creation of privatised international accounting standards or <a href="https://link.springer.com/chapter/10.1057/978-1-137-54212-0_13">the dominance of the Big Four global accounting firms</a> – how the practice of accounting is highly political and captured by powerful corporate interests. As a result, more and more of the tax burden falls on ordinary people who have less power <a href="https://www.tuc.org.uk/sites/default/files/documents/completedownload.pdf">and influence over their tax affairs</a>. </p>
<p>Now that we are in a profound economic crisis, with a number of multinationals reliant on state aid, we have a unique opportunity to change business as usual. Corporations are in trouble and seeking state aid so governments can now call the shots, and make sure that money is not given away without conditions. Such conditions can include not having a subsidiary in a tax haven, transparency about profits earned in each country, and greater openness and commitment to paying fair taxes in the countries where revenues are earned.</p>
<p>This will require genuine global cooperation on tax matters. A race to the bottom between countries for tax collection should no longer be tolerated. At stake are the jobs, pensions, education and healthcare for citizens in every country.</p><img src="https://counter.theconversation.com/content/137303/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Atul K. Shah is affiliated with Tax Justice Network a non-profit think tank.</span></em></p>Some EU countries have said they won’t help companies based in tax havens – but that doesn’t include the EU’s own tax havens.Atul K. Shah, Professor, Accounting and Finance, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1331912020-03-06T17:12:06Z2020-03-06T17:12:06ZFlybe: could it be time for a government-backed regional airline?<p>Flybe’s <a href="https://www.theguardian.com/business/live/2020/mar/05/flybe-collapses-into-administration-coronavirus-cost-ftse-stock-markets-business-live">collapse</a> has left passengers stranded and put 2,000 jobs at risk. Europe’s biggest regional airline is thought to be one of the first business casualties of the new coronavirus outbreak, which reduced demand for flights. Both tourists and businesses have cut back on flying due to the epidemic.</p>
<p>But the airline had longstanding issues, which raise the question of whether the state should support a regional carrier of Flybe’s significance. While small compared to airlines such as EasyJet or British Airways, Flybe is disproportionately important for smaller airports around the UK. If you want to fly between Aberdeen, Belfast, Cardiff and Jersey, it is one of the main options, if not the only one. </p>
<p>Of course, this raises issues around climate change and the extent that government should support people commuting by plane between cities like London and Exeter. But more remote parts of the country, in particular are always going to difficult – and potentially unprofitable – to service. Flybe <a href="https://www.bbc.co.uk/news/business-51093934">served many of them</a>.</p>
<p>Flybe was rescued in July 2019 by a consortium that includes Virgin Atlantic. This followed losses of almost <a href="https://www.bbc.co.uk/news/business-45887289">£30 million</a> in 2018. <a href="https://www.bbc.co.uk/news/business-51749882">Reasons for Flybe’s collapse</a> include the competitive nature of the airline industry, an ineffective use of its fleet and a lack of clarity in its business strategy, especially so after its acquisition in 2019.</p>
<p>Flybe also claimed, not unreasonably, that the UK’s <a href="https://www.bbc.co.uk/news/uk-51120765">air passenger duty</a> tax had a disproportionate effect on its profitability. This is a tax paid on international flights out of the country, but for internal UK flights the tax is charged on departure and arrival. So for an airline that operated <a href="https://www.bbc.co.uk/news/business-51100029">38% of UK domestic flights</a> the duty was a significant burden. It is estimated that <a href="https://www.bbc.co.uk/news/business-51749882">the duty cost Flybe around £100 million per year</a>. </p>
<p>Coronavirus hit Flybe in this context. Demand for air transport is pro-cyclical, which means more people fly when the economy is strong, and fewer people fly when it is weak. For example, following crises like the 9/11 terrorist attacks, SARS and in the wake of the financial crisis fewer people <a href="https://www.theguardian.com/business/2003/may/20/terrorism.sars">booked flights</a>. The impact of the recent coronavirus outbreak on the airline industry as a whole has been estimated at <a href="https://edition.cnn.com/2020/03/05/business/airlines-coronavirus-iata-travel/index.html">US$113 billion</a> due to travel restrictions and reduced demand, with airlines in Asia and Europe worst affected.</p>
<h2>A state-backed solution?</h2>
<p>As part of Flybe’s 2019 rescue deal, the UK government agreed to defer the air passenger duty tax of £100 million for for <a href="https://www.theguardian.com/business/2020/jan/14/flybe-government-talks-airline-tax-bill-sajid-javid">three years</a> and considered cutting air passenger duty for domestic flights because of the importance of the airline to public transport in the UK. The airline operates almost two in five of the UK’s domestic routes. </p>
<p>There followed an outcry from competitors. <a href="https://www.theguardian.com/business/2020/jan/16/ryanair-demands-same-tax-holiday-amid-flybe-rescue-deal-backlash">Ryanair</a> and <a href="https://www.independent.co.uk/travel/news-and-advice/flybe-iag-british-airways-flight-tax-cut-environment-domestic-apd-a9284921.html">IAG</a> (which owns British Airways) complained that the tax deferral gave Flybe an unfair advantage.</p>
<p>On the face of it, their objections look legitimate. But both of these airlines have been subject to similar complaints. The <a href="https://www.theguardian.com/business/2014/jun/22/british-airways-strike-action-threat-pay-claim-ba">trade union UNITE has claimed</a> British Airways staff are reliant on working tax credits to supplement their salary – is this so different to the public purse subsidising its profitability? </p>
<p>Ryanair, meanwhile, has <a href="https://www.ch-aviation.com/portal/news/83229-ryanair-faces-portuguese-tax-investigation">faced</a> <a href="http://www.travelweekly.co.uk/articles/41949/ryanair-faces-allegation-of-tax-evasion-in-italy">numerous</a> <a href="https://www.ibtimes.co.uk/brookfield-aviation-international-alleged-be-letterbox-company-controlled-by-ryanair-1533172">investigations</a> for alleged tax evasion over the past decade. While the airline maintains in all cases that it only avoids paying taxes legally, is this so different to Flybe receiving help from the state? </p>
<p>Then there’s the fact that Flybe performs a public service in many respects. Its collapse reaches further than its employees and those customers whose flights have been cancelled. Flybe covers 70% of flights from <a href="https://www.aerotime.aero/rytis.beresnevicius/24457-flybe-potential-collapse-implications-for-uk?page=1">Exeter Airport</a> and 80% of those at <a href="https://www.bbc.co.uk/news/uk-northern-ireland-51745019">Belfast City Airport</a>, for example. The impact on the airports and staff, passengers flying from those airports and the local economy will be significant. </p>
<p>The airline also provides an important service in connecting passengers in the UK. In <a href="https://www.routesonline.com/news/29/breaking-news/288731/how-flybe-connects-the-uk-/">January 2020</a>, the airline served 26 UK airports and 16 international airports facilitating the operations of larger international airlines like Virgin Atlantic, which only operate from major hubs like London, Manchester and Birmingham.</p>
<p>The more lucrative routes that Flybe used to operate will be acquired by other airlines. But, by no means will all routes find an operator, certainly not those that are unprofitable, irrespective of their value to the communities they serve.</p>
<p>There is perhaps good reason to object to government support for an airline under private ownership, as Flybe was following its 2019 rescue. But its demise and the impact of administration for so many in the UK certainly raises the question of whether the government should actually run a regional carrier. </p>
<p>This would not be without precedent – the government of the island of Guernsey owns <a href="https://www.telegraph.co.uk/travel/news/aurigny-losses-channel-islands-airlines/">Aurigny Airways</a>, ensuring its citizens remain connected. Plus, the UK government has recently brought a chunk of the country’s railways <a href="https://www.bbc.co.uk/news/uk-england-51298820">under its control</a>. Extending this idea to elements of the aviation industry is not an enormous step further to take.</p><img src="https://counter.theconversation.com/content/133191/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geraint Harvey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The airline operates almost two in five of the UK’s domestic routes.Geraint Harvey, Professor in People & Organisations, Swansea UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/704402016-12-15T15:17:30Z2016-12-15T15:17:30ZWhy EU rules risk making Italy’s banking crisis a whole lot worse<figure><img src="https://images.theconversation.com/files/150295/original/image-20161215-13679-1i6g9ds.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The coming storm. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/pic-208489615/stock-photo-italy-waving-flag-on-a-bad-day.html?src=iHt5JyDUS7e1XpvAm8vzQw-1-66">ESB Professional</a></span></figcaption></figure><p>In the wake of the Italian <a href="https://theconversation.com/italys-no-vote-lights-another-fire-under-the-european-union-69919">constitutional referendum</a>, the country’s banking crisis is going from bad to worse. The European Central Bank (ECB)‘s <a href="https://www.ft.com/content/710e0b76-c132-11e6-9bca-2b93a6856354">decision</a> to refuse an extension to <a href="http://english.mps.it/Pages/index.aspx">Banca Monte dei Paschi di Siena</a> to raise €5 billion (£4.2 billion) has left the country’s third-largest bank facing a government bailout that looks likely to inflict severe pain on many ordinary Italian savers. </p>
<p>As if that were not enough, Italy’s biggest bank, UniCredit, <a href="http://www.bbc.co.uk/news/business-38299542">announced</a> a restructuring plan that requires a capital raising of €13 billion in the first three months of next year. Given the torrid time Monte dei Paschi has had trying to find sufficient private backing, will UniCredit need help from the Italian taxpayer, too?</p>
<p>The problems at Monte dei Pashci and UniCredit reflect the parlous state of the country’s banking system. The economy <a href="https://www.gfmag.com/global-data/country-data/italy-gdp-country-report">has been</a> struggling for a number of years and borrowers have been defaulting, creating a mountain of bad loans. Around 20% of bank loans <a href="http://www.wsj.com/articles/bad-debt-piled-in-italian-banks-looms-as-next-crisis-1467671900">are</a> bad, <a href="https://infostat.bancaditalia.it/inquiry/#eNqVjrEKwjAURX8oJC%2FFWixkSNJXCCZpIWkRl9ChgiAoKOrQjzcITuLgXe7hLPdiX1st0BP0o7Bm%0ARKLjTjSmbYl2Qkm%2FNVFaI9ltep5rPSgMGEU%2FKGUTwPKBBEUCnmD1bTIsMegCNhyIiegCWtwLp2SS%0AEXVHHeVQAQCnZZGrKiELTk2kgfOMOWsgXY9eHKbTdWbz5ddndj%2FOj%2FdL04R%2FJ9gLHtRGGQ%3D%3D">amounting to</a> a staggering €360 billion (<a href="http://www.cnbc.com/2016/11/29/italian-banks-hold-nearly-a-third-of-euro-zones-bad-loans-ecb.html">about</a> one-third of all bad loans in the eurozone). </p>
<p>More than 70% of these loans <a href="https://www.imf.org/external/pubs/ft/wp/2016/wp16135.pdf">are to</a> small and medium-sized businesses. Small firms in Italy tend to have numerous bank relationships, commonly with accounts at four or five banks. Hence their defaults have polluted bank balance sheets across the sector. </p>
<p>I hear critics saying the Bank of Italy, the regulator, was slow to deal with the problem, only intervening within the past 18 months. Individual banks also stand accused of being complicit in rolling over non-performing loans – disguising the true picture. The situation is worse for banks in the south, where economies have been faring even worse. And Matteo Renzi’s defeat in the referendum exacerbates the whole problem by denying the sector reforms to help banks recover bad loans by speeding up insolvency processes, among other things. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=411&fit=crop&dpr=1 600w, https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=411&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=411&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=516&fit=crop&dpr=1 754w, https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=516&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/150301/original/image-20161215-13679-1xn48ur.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=516&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Too much good life?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/pic-259651475/stock-photo-delicious-spaghetti-on-a-fork-close-up-on-black-background.html?src=zHQZNMN6JOJBMYko5oG0iw-1-68">Irene van der Meijs</a></span>
</figcaption>
</figure>
<h2>The bail-in problem</h2>
<p>The Bank of Italy <a href="https://www.ft.com/content/3e5b44ec-9207-11e5-bd82-c1fb87bef7af">restructured</a> four small banks last year, but its ability to rapidly resolve problems at bigger banks is hindered by EU <a href="http://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32014L0059">bank bailout</a> and <a href="http://ec.europa.eu/competition/state_aid/overview/index_en.html">state aid</a> rules. These say direct state aid cannot be provided until a bank has looked for private injections of capital, including making investors in a class of bank debts known as <a href="http://www.irishtimes.com/business/financial-services/banks-plan-bail-in-bond-sales-ahead-of-new-european-rules-1.2841766">bail-in bonds</a> take some pain by converting their bonds into shares. </p>
<p>The logic is that these unsecured bondholders should bear the same risks as shareholders, thus reducing the burden on the taxpayer in the event of a rescue. Investors have nonetheless been lured into these bail-in bonds, including those of Monte dei Paschi and UniCredit, by higher returns than other bank bonds, betting they would not end up being converted. </p>
<p>In most countries institutional investors including pension funds and insurance companies are the main investors in unsecured bank bonds. But in Italy there’s an additional problem: households <a href="https://www.ft.com/content/5aabd08c-4916-11e6-8d68-72e9211e86ab">own about</a> a third of the total – 40,000 retail investors <a href="http://uk.reuters.com/article/us-eurozone-banks-italy-montepaschi-idUKKBN1400V8">own</a> Monte dei Paschi bonds, for instance. </p>
<p>When the four small Italian banks <a href="http://www.bbc.com/news/world-europe-35062239">were restructured</a>, the value of their bonds was wiped out. In addition to political condemnation, there were widespread protests and at least one suicide. Particularly when the country is going through such a politically volatile <a href="https://theconversation.com/what-is-italys-five-star-movement-69596">period</a>, the government will be very wary of another bail-in as part of any Monte dei Paschi rescue. Depositors above around €90,000 are also supposed to lose out, though it is hard to see this being politically possible regardless of the rules.</p>
<h2>What comes next</h2>
<p>The ECB decided the request from Monte dei Paschi for a deadline extension for its recapitalisation from year-end to January 20 was a delaying tactic. It said the bank had to sort things out faster – together with the new Italian government, headed by Renzi loyalist <a href="http://www.bbc.co.uk/news/world-europe-38290098">Paolo Gentiloni</a>. This means the world’s oldest bank, established in 1472, now has barely two weeks to find a private solution and avoid inflicting a bail-in on the country. </p>
<p>The recapitalisation plan has three components. The first is a voluntary bond swap – similar to bail-in bonds, except bondholders choose whether to convert their bonds to shares or not. This <a href="http://www.wsj.com/articles/italys-monte-dei-paschi-to-reopen-debt-to-equity-swap-offer-1481494685">has raised</a> around €1 billion from institutional investors, but there has been no take-up from retail investors. They have viewed the exchange as too risky and have been concerned about whether the regulator has fully approved the retail swap transactions. </p>
<p>Second, Monte dei Paschi hopes to get €1 billion from Qatar’s sovereign wealth fund. Finally, a consortium of banks has said it will try to sell the bank’s shares in the open market. They will not be underwritten, however, so there is no guarantee of raising significant funds. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/150299/original/image-20161215-13651-w8l3ep.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The sick old man of Italy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/pic-461329066.html">francesco carniani</a></span>
</figcaption>
</figure>
<p>So even if the capital-raising is successful there is likely to be a shortfall of several billion euros. The question then is what happens next. The government will certainly not let this historic institution fail, despite a <a href="http://www.tradingeconomics.com/italy/government-debt-to-gdp">national debt</a> in excess of 130% of GDP – among the highest in the world. </p>
<p>Failure to resolve the problems would compound financial market jitters surrounding Italian banks. That could lead to widespread failure and the export of similar problems, due to a collapse of confidence, to other fragile eurozone countries. </p>
<p>To unlock an injection of state funds the Bank of Italy would therefore need to decide whether to follow the EU rules and risk the wrath of the retail bondholders with a bail-in – and/or provide guarantees to cover their losses. Ironically, the ECB would then potentially have to provide guarantees, liquidity injections and capital support to maintain confidence in the Italian system. </p>
<p>Meanwhile, all eyes will be on the UniCredit capital-raising to see if it fares any better. It should do: UniCredit’s proposed rights issue requires market credibility that Monte dei Paschi does not have at present. Were it to hit difficulties, however, this crisis will move from major to monumental. Either way, it looks likely to be some time before the problems in Italian banking even begin to look like being resolved.</p><img src="https://counter.theconversation.com/content/70440/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Molyneux does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Problems at Monte dei Paschi and UniCredit are bad enough without bail-in rules to contend with.Philip Molyneux, Professor of Banking and Finance, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/653252016-09-15T05:31:40Z2016-09-15T05:31:40ZState aid lessons for Australia from the Apple EU tax case<p>State aid is <a href="https://www.theguardian.com/technology/2016/sep/01/eu-state-aid-tax-avoidance-apple">not necessarily the right forum</a> to tackle tax avoidance by multinationals, but it is effective. </p>
<p>The <a href="https://theconversation.com/european-commission-warns-multinationals-as-apple-ordered-to-pay-13-billion-in-tax-64657">European Commission’s case against Apple</a> for receiving undue tax benefits from Ireland demonstrates the EU has had it with multinational corporations transferring profits between entities to avoid paying taxes inside the Union.</p>
<p>The aim for a <a href="https://europa.eu/globalstrategy/en/shared-vision-common-action-stronger-europe">“closer Union”</a> is not compatible with fellow states eroding each other’s tax bases. At the same time, the EU individually and as part of OECD is calling for transparency in tax matters for both <a href="http://ec.europa.eu/finance/company-reporting/country-by-country-reporting/index_en.htm">corporations</a> and <a href="http://www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm">individuals</a>. The EU might have sped up these processes with its action, and the Australian Tax Office could surf on the same wave.</p>
<p>But there are also broader implications for Australian companies.</p>
<p>The EU is Australia’s second largest trading partner and several Australian controlled companies operate in the EU. If these companies receive any kind of nonobjective VIP treatment channelled from public revenues they might want to turn to the relevant local authorities or a lawyer to get clarity in the matter of their status.</p>
<p>State aid can take many forms. For example, one form of state aid could be an EU member state granting compensation for parallel broadcasting to an Australian television operator for conversion from analogue to digital broadcasting. This would be considered illegal state aid because it favours one type of platform over another.</p>
<p>A municipality enabling a transport company to provide transport for consumers at a cheaper price than its competitors by compensating the company in different forms (like contractual rebates and marketing deals) may qualify as aid. State aid may be present when companies are allowed to charge higher than market prices due to a national law favouring certain types of energy providers. State aid can also be tax benefits.</p>
<p>The Apple tax ruling serves to emphasise to foreign direct investors active in the EU that they are not beyond the reach of EU state aid rules. </p>
<p>State aid regulation is designed to tackle a wide range of subsidies potentially distorting competition in the EU’s internal market. Unlike under the World Trade Organisation, subsidies are not restricted to goods. WTO rules apply to businesses outside of the EU and recognise a failure to collect tax as a <a href="http://taxfoundation.org/article/overview-foreign-sales-corporationextraterritorial-income-fsceti-exclusion">subsidy</a>.</p>
<h2>How the state aid rules work</h2>
<p>State aid law is part of the EU competition rules. It gives the Commission extraordinary powers to investigate, make decisions, and enforce those decisions. These rules are intrusive and regulate how member states of the EU can spend their revenue. </p>
<p>State aid is viewed as a selective advantage conferred by national public authorities to entities engaged in economic activities. Under <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12008E107&from=EN">Article 107 TFEU</a> state aid is prohibited, unless it can be justified by reasons of general economic development or genuine policy objectives. Tax relief creating potential revenue constitutes illegal state aid if:</p>
<ul>
<li>it is a form of state intervention</li>
<li>on a selective basis the recipient receives an advantage</li>
<li>it distorts or may distort competition</li>
<li>it is likely to affect trade between EU member states.</li>
</ul>
<p>Due to Ireland’s selectivity and Apple’s alleged competitive advantage, the Commission found the tax treatment tailored for Apple to be selective compared to other businesses with a similar legal and factual situation. </p>
<p>For the advantage to Apple, it assessed whether the Irish tax arrangements with Apple followed the “<a href="https://stats.oecd.org/glossary/detail.asp?ID=7245">arm’s length principle</a>”. The findings were that it was not so because the taxable basis in the 1991 ruling was negotiated rather than substantiated by reference to comparable transactions. Ireland accepted the calculation suggested by Apple, without attempting to reason the method and asking for supporting evidence. The arrangement was artificial and not subject to revision, so Apple was deemed the beneficiary of a state-provided economic advantage.</p>
<p>Since 2013, the Commission’s investigations of tax ruling practices of member states has produced several rulings on breach of state aid rules. Luxembourg, the Netherlands and Belgium have all been found guilty of granting large multinationals (such as Fiat and Starbucks) similar tax advantages as Ireland did to Apple.</p>
<p>Now the process of recovery will begin, unless it is totally impossible. The standard procedure is for retroactive recovery to be applied. The amount subject to recovery, including a commercial rate of interest, is counted from the date the beneficiary had access to the aid until the actual recovery date. </p>
<p>As state aid rules do not cover business conducted outside of the EU, the EU invites other nations, including Australia, to their share of the €13 billion pie. Australia would just need to prove that part of the recovered tax claim falls under its jurisdiction.</p><img src="https://counter.theconversation.com/content/65325/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pamela Finckenberg-Broman is a PhD student at Griffith University and receives PhD scholarship funding from Griffith University. </span></em></p>Australian companies could fall foul of the same state aid rules being applied to Apple to crack down on tax avoidance.Dr Pamela Finckenberg-Broman, PhD Candidate Griffith Law school, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/646482016-08-31T10:47:10Z2016-08-31T10:47:10ZThree problems with the EU’s €13 billion ruling on Apple’s Irish taxes<p>The EU’s ruling that Apple must pay the Irish tax authorities <a href="http://europa.eu/rapid/press-release_IP-16-2923_en.htm">€13 billion in back taxes</a> appears to be a victory for fair tax campaigners. The amount is equal to about 30% of the total tax take in Ireland, or almost €7,000 for every employee in the country.</p>
<p>But at a macro level, the ruling is profoundly misguided. It is bad news for Apple, the Irish government and the EU’s relations with the US.</p>
<p>At an Irish level, the outcome is especially embarrassing. A minority government <a href="http://www.irishtimes.com/business/economy/government-faces-threat-of-split-after-eu-s-apple-ruling-1.2773654">will be challenged</a> when it seeks to appeal the EU ruling. Why appeal against a helicopter dropping €13 billion on the Irish economy? US foreign direct investment is the <a href="http://www.irishtimes.com/business/economy/ireland-the-main-beneficiary-of-us-foreign-direct-investment-1.2127361">key to Ireland’s economic development</a> and failing to stand by agreements that were made in the past is neither ethical nor wise. But this is hard to explain to the victims of Ireland’s <a href="http://www.karlwhelan.com/Papers/Whelan-IrelandPaper-June2013.pdf">recent economic woes</a>. </p>
<p>Worse, the ruling may open the door for European countries where Apple products were sold to claim some of this €13 billion in taxes. The US could claim that part of it was due to research activity that took place in the US. </p>
<p>All US companies are required to pay a 35% tax rate in the US but are only required to pay these taxes when they repatriate the profits to the US. They therefore frequently delay this through various legal channels to avoid having to pay their taxes immediately. The US government, meanwhile, would prefer that these companies do not pay taxes overseas. </p>
<p>For example, if Apple sells an iPhone in France and earns a profit of €200 the tax it owes will depend on the jurisdiction of the seller. If the consumer purchased the phone from a French-registered Apple subsidiary, the French government would levy €66 in taxes, according to France’s 33.33% corporate tax rate. The company would still be liable for a 35% tax payment of €70 to the US – but can credit the €66 that it has already paid in France, leaving the US with just €4 when the profits are repatriated. </p>
<p>On the other hand, if the customer purchased the same phone from a US subsidiary, the US would receive the full €70 and France would receive nothing. But if the customer purchased the phone from a low-tax jurisdiction such as Ireland (or the Netherlands, Luxembourg or Belgium), it is possible that very little tax will be payable in Europe and the US will obtain nearer €70 when Apple eventually sends the profits back to the US.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=424&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=424&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=424&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=533&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=533&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136029/original/image-20160831-791-1e83uza.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=533&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Apple’s tax arrangements.</span>
<span class="attribution"><a class="source" href="http://ec.europa.eu/competition/publications/infographics/2016_07_en.pdf">European Commission</a></span>
</figcaption>
</figure>
<p>Thus, Apple had a complex set of arrangements to achieve this outcome – all of which were thought to be legal. They involved using non-resident Irish companies to sell goods across the EU. As a result very little tax was payable in Ireland and the US was looking forward to receiving the lion’s share of the taxable profits. </p>
<p>The EU’s ruling that Apple obtained “state aid” from Ireland as a result of paying very little tax and that it owes back-taxes to the tune of €13 billion to the Irish authorities <a href="https://theconversation.com/european-commission-warns-multinationals-as-apple-ordered-to-pay-13-billion-in-tax-64657">thwarts this set-up</a>. The US government will therefore feel that Europe is expropriating the taxes that it is due on incredibly profitable consumer products. In 2015, Apple earned <a href="https://www.sec.gov/cgi-bin/viewer?action=view&cik=320193&accession_number=0001193125-15-356351&xbrl_type=v#">international profits of US$48 billion</a>. To put this in perspective: Coca-Cola <a href="https://www.sec.gov/cgi-bin/viewer?action=view&cik=21344&accession_number=0000021344-16-000050&xbrl_type=v#">earned US$8 billion</a> internationally, while <a href="https://www.sec.gov/cgi-bin/viewer?action=view&cik=55067&accession_number=0001628280-16-011639&xbrl_type=v#">Kellogg’s earned US$0.3 billion</a>. </p>
<p>Leaving populism aside, it is very hard to argue that any European country has a right to the excess profits that Apple earns as a result of its great marketing, excellent design and some technical innovation that probably occurred in the US. Therefore, it is easy to understand why the US Treasury states that the ruling <a href="http://www.reuters.com/article/us-eu-apple-taxavoidance-idUSKCN114211">will undermine US foreign investment in Europe</a>. If Europe levies a profits tax on US innovation – and hijacks the taxes that the US hoped to receive in the future – it will serve to undermine transatlantic relations. </p>
<h2>EU overstretch?</h2>
<p>Apportioning Apple’s huge profits among the countries where a product is designed, manufactured and sold is difficult. Until the EU’s recent fight to reclaim taxes, there was an acceptance that gains would ultimately find their way back to the US, even if it involved circumnavigating transactions through Belgium, Ireland, Luxembourg and the Netherlands. European companies selling goods in the US would have used equivalent structures. This is why the US government is <a href="http://www.ft.com/cms/s/0/1081af60-69f3-11e6-a0b1-d87a9fea034f.html#axzz4IdysT58B">so unhappy with the ruling</a>. </p>
<p>It also serves to undermine many <a href="https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/White-Paper-State-Aid.pdf">existing arrangements</a> by drawing attention to the tax agreements reached between national tax authorities and multinational companies. It is inconceivable that the Irish tax authorities foresaw the seismic success of the iPhone, when Ireland negotiated its agreements with Apple in 1991 and 2007. Advance agreements between tax authorities and companies were seen as a pragmatic solution to the apportioning of income from internationally-produced products to individual countries. </p>
<p>Characterising these agreements as “state aid” is a very recent EU innovation. And calculating this state aid with the benefit of hindsight sets a dangerous precedent. Retrospective reassessments of agreements that are reached between companies and sovereign governments and the spectre of determining them “state aid” are likely to undermine international relationships and create many years of bitter litigation. Meanwhile, new tax arrangements are likely to emerge that will ensure that innovative products from outside the EU continue to contribute little to the European exchequer. </p>
<p>With both Amazon and McDonald’s tax set-ups in Luxembourg <a href="http://abcnews.go.com/International/amazon-mcdonalds-face-eu-tax-audit-similar-apples/story?id=41741475">also under investigation</a>, expect this dispute between the EU, US multinationals and US government to continue.</p><img src="https://counter.theconversation.com/content/64648/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eamonn Walsh does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The EU’s ruling is profoundly misguided and could undermine US investment in Europe.Eamonn Walsh, Professor of Accounting, University College DublinLicensed as Creative Commons – attribution, no derivatives.