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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report continues, and were “not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force.”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.”
EU Claims Apple Owes $14.5B in Back Taxes to Ireland
Cook wrote that the EU provides “obvious targeting of Apple” and that the decision will harm investment and job creation in Europe. “Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed,” he wrote.
“We are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment,” wrote Cook. “We firmly believe that the facts and the established legal principles upon which the EU was founded will ultimately prevail.”
Analysts: A Long Legal Battle Is Expected
Apple’s appeal and any eventual payment of back taxes, if that occurs, is likely to take some time, said several analysts who spoke with eWEEK about the situation.
Louise Gracia, a professor at the Warwick Business School at the University of Warwick in Coventry, England, said in an email that the “ruling is a serious attempt at curtailing the power large multinationals have in avoiding their tax liabilities, and sends a warning to countries that facilitate hard-edged corporate tax minimization strategies.”
The EU ruling also “raises some bigger issues beyond the tax practices of Apple, not least the tension created by EU encroachment into the tax practices of individual member states,” she wrote. “It also shines a spotlight on the paltry levels of corporate tax that large multinationals are actually paying. Even if we accept the job and wealth creation arguments put forward by multinationals as mitigation against tax liability, this has to be within reason.”
While “no one is arguing that large multinationals should pay extra or shoulder the responsibility for social order in society, it is not unreasonable to expect them to pay their fair share,” she wrote. “Apple has fallen short in this instance. The outcome of the appeal is unknown and will be for some considerable time.”
Charles King, principal analyst at Pund-IT, told eWEEK in an email that “the way in which U.S. companies leverage offshore holdings to lower their tax burden has been festering for years” and it “was inevitable that foreign regulators would scrutinize Apple and other companies, and it seemed likely that they would rule against them.”
King said he expects the ruling by the EU to stand but that Apple’s tax bill with Ireland will likely be reduced significantly. “Congress doesn’t like to be lectured to by foreign entities so the appeal process could take years to conclude and impact other areas of U.S./EU cooperation.”
Rob Enderle, principal of Enderle Group, said: “Apple is hardly alone in using Ireland as a tax heaven, and I expect this is just the tip of the iceberg.” But Apple “has one of the strongest legal teams in the world so if they can’t get this overturned, it is unlikely anyone else will.”
If the EU’s case against Apple is ultimately successful, “expect massive tax bills for other multi-nationals who have been using Ireland similarly,” wrote Enderle.
Another analyst, Jan Dawson of Jackdaw Research, said that both sides clearly see the case from different angles, based on their interests. “If you’re inclined to believe that big U.S. tech companies don’t pay enough taxes in Europe, this likely confirms that view and makes it official, whereas if you’re more inclined to believe that the EU uses its various investigations as a way to handicap big U.S. tech companies who are more successful than European equivalents, there’s more evidence here for you, too.”
Apple’s position isn’t that it’s “avoiding taxation altogether, but rather [it] chooses to pay taxes when it repatriates money to the U.S.,” wrote Dawson.
Dan Olds, principal analyst with Gabriel Consulting Group, wrote in an email reply to an eWEEK inquiry that he thinks the case and the EU’s ruling were “inevitable given Ireland’s reputation as a European tax haven (particularly for tech companies) and how successful Apple has been over the past decade. I would imagine that less profitable companies aren’t getting this kind of scrutiny.”
Olds said he agrees with Cook that the EU ruling could have a chilling effect on jobs in Europe. “If Ireland is forced to change their tax laws, Apple will find another place within the EU to land their operations, but they probably won’t get nearly as good a deal as they’ve had in Ireland. The EU will extract their taxes, which will be passed on to consumers in the form of higher prices.”