In a ruling that could have vast business and tax repercussions across the globe, the European Union has ordered Apple to pay $14.5 billion in back taxes to Ireland after the agency said the company was given "undue tax benefits" in the past.
In an Aug. 30 announcement, Margrethe Vestager, the EU's antitrust chief, said that EU "member states cannot give tax benefits to selected companies," which allegedly occurred in the past when Ireland "granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years."
An EU investigation that began in June 2014 recently determined that the violations occurred and that "this selective treatment allowed Apple to pay an effective corporate tax rate of 1 percent on its European profits in 2003 down to 0.005 per cent in 2014," according to the agency. That amount was "substantially less than other businesses" and now must be recovered by Ireland, the EU ruled.
That lower rate was used to tax Apple in Ireland since 1991 based on tax rulings, which "substantially and artificially lowered the tax paid by Apple in Ireland since 1991," the report continued. "The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a 'head office.'"
The alleged head offices "existed only on paper and could not have generated such profits," the report continues, and were "not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force."
Under its order, Ireland must now recover the unpaid taxes from Apple for 2003 to 2014 of up to $14.5 billion, plus interest. "In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market," the report continued. "This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold."
Apple CEO Tim Cook (pictured) quickly defended his company in an Aug. 30 open letter to customers after the EU issued its ruling. The company, he wrote, has had a business presence in Cork, Ireland, since it first began operations some 36 years ago. Apple opened a factory there in October 1980 from which it based its European operations.
"Over the years, we received guidance from Irish tax authorities on how to comply correctly with Irish tax law—the same kind of guidance available to any company doing business there," he wrote. "In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe."
The EU has "launched an effort to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process," Cook wrote of the EU's tax ruling. "The opinion issued on August 30 alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid."
The EU's order was "unprecedented and it has serious, wide-reaching implications," he wrote. "It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission's ruling and Apple will do the same. We are confident that the Commission's order will be reversed."
The key issue in the EU's case, he wrote, "is not about how much Apple pays in taxes. It is about which government collects the money."
In Apple's case, the majority of its business is taxed in the United States, where its key business operations are located, he wrote. "European companies doing business in the U.S. are taxed according to the same principle. But the Commission is now calling to retroactively change those rules."