The European Union was created out of a desire to have a long lasting peace between the many countries and neighbors that were often enemies for the better part of a thousand years. It was the master plan to bring all the competing countries and provinces together with a common purpose: to further entrench the idea that shared interests and ideals will bring about everlasting prosperity, and help advance the interests of Europe and the agenda of its people in a much more harmonious way.
The EU saw its origins in the early 1950s, as an economic and customs union between 6 countries, championed by France and Germany. It was a project to help rebuild Europe to its previous glory after 2 major wars that left the continent and its people in shambles, literally. In years since, the with the EU has evolved into a politico-economic union of 28 member states, all of which retain individual country sovereignty. What emerged was an internal single market with over 500 million inhabitants, rivaling the US. The model is practical in theory, as it allows for each of the members to retain its distinct identity yet offers the benefits of having full access and open markets within the bloc of countries.
The Euro was introduced in 1999 as the last step in a long process to remove the hurdles involved in dealing with multiple currencies. The adoption of the Euro truly streamlined commerce and exchange of goods and services among all participants. The EU commission sets the trade rules and companies just follow their guidelines to get access. So when Apple got hit by a $14.5 billion back-tax bill on August 30 from the EU commission, ruling that Ireland gave Apple an unfair advantage through preferential tax treatments, it sent shock waves in corporate boardrooms and marked a new addition to a long list of incidents with the potential to plague the union and undermine its future.
Sovereign countries get to set their own tax rates, and some have been known to use tax laws as a way to lure multinationals to do business in their countries and bring new jobs in the process. In essence, these countries are selling access to the single market through tax subsidies. Ireland, Luxembourg and The Netherlands are often cited but all members engage in some sort of favoritism. These practices are perfectly legal yet in Apple’s case, the European Commission ruled the arrangement as unfairly disadvantageous to other countries, where corporate tax rates have to be at least 12.5%. This minimum rate requirement is significantly higher than the less than 1% that Apple was apparently paying under Irish law and covenants.
While collecting that much cash for the Irish treasury should seemingly be a good thing, it was construed as another instance of Brussels (the de facto EU capital) encroaching on sovereign states and their ability to set and determine tax policies. This type of interference is what drove the Brexit vote a few months back.
Apple will certainly appeal the ruling but regardless, the outcome will likely be more uncertainty about the business climate that companies have to operate in. The case as a whole is simply not great for business.
Such situations only exacerbate an already tenuous economic and business climate in a region that is still struggling from the remnants of a great financial crisis, migrant crisis, terrorism and political deadlock stemming from stagnant wages and resentment towards the ruling elites on all corners of the continent. Fascism and extreme-right parties are on the rise, Euro skeptics are growing both in numbers and stature, and many countries are facing new electoral challenges in the coming years. Combined, these elements are creating an environment in which business is tougher to execute and growth harder to achieve. While we have a vested interest in a strong and unified Europe, the current hurdles are just too great. All of these undercurrents are making for capital markets that are tough to navigate, predict and invest in.
No one knows if the union will remain intact or what Brexit will bring, but as investors, it is increasingly tougher to find opportunities in a place where uncertainty remains the only constant reality. The EU’s increased hostility towards business, as proven by the Apple case, will further complicate any decisions to invest and commit to companies within the bloc. While Europe still has some great brands, companies, and technology, one has to look beyond the bloc and find opportunities in companies that have diversified their revenue base beyond the EU and have a true global reach.
By Hatem Dhiab
Managing Partner, Investment Advisor Representative
Source: European Commission
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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