Apple Inc was ordered to repay a record €13bn ($14.5bn) plus interest after the European Commission said Ireland illegally slashed the iPhone maker’s tax bill.
The world’s richest company benefited from a “selective tax treatment” in Ireland that gave it a “significant advantage over other businesses,” the European Union regulator said yesterday. It’s the largest tax penalty in a three-year crackdown on sweetheart fiscal deals granted by EU nations.
Apple and the Irish government have both vowed to fight the decision, which also risks stoking a fight with the US over taxation policies - with the US having already complained that Europe is unfairly targeting American companies and threatening global tax reforms.
“Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years,” EU Competition Commissioner Margrethe Vestager said in an e-mailed statement. “This selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003 down to 0.005% in 2014.”
Apple was one of the first companies caught up in the EU’s backlash against corporate tax-avoidance. The EU, like other global regulators, has targeted firms that sidestep taxes by moving around profits and costs to wherever they are taxed most advantageously - exploiting loopholes or special deals granted by friendly governments.
“I disagree profoundly with the commission’s decision,” said Irish Finance Minister Michael Noonan. Ireland’s tax system is founded on the strict application of the law “without exception,” he said.
The commission left him with “no choice” but to move toward an appeal before the EU courts. “This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state-aid rules into the sovereign member state competence of taxation,” he said.
Apple said the EU regulator 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.”
The commission’s “case is not about how much Apple pays in taxes, it’s about which government collects the money,” Apple said. “It will have a profound and harmful effect on investment and job creation in Europe.”
Appeals at EU courts can take years to finalise, meaning that the final amount Apple may have to pay won’t be known until then. The money can be held in escrow pending a ruling.
As of last month, Apple had $232bn in cash, with about $214bn of that being held overseas.
Low corporate taxes are the cornerstone of Irish economic policy, with the 12.5% rate the lowest in Western Europe and a draw for Alphabet Inc’s Google and Facebook Inc to Dublin. More than 700 US companies have units there, which employ 140,000 people, according to the American Chamber of Commerce in Ireland.
“This is a significant ruling that could cause multinationals to revisit the tax implications of their current structure,” said Matt Larson, an analyst at Bloomberg Intelligence. “It’s strange to think that Ireland would not want to collect more taxes from Apple, but Ireland’s primary concern here is protecting domestic investment and jobs.”
The US Treasury Department has pushed back hard against the state aid probes, most recently with an unusual white paper that said the Brussels-based commission had overextended its legal authority and threatened global tax reforms.
“Treasury is disappointed that the commission is acting unilaterally and departing from the important progress the US, the EU, and the rest of the international community have made together to combat tax avoidance,” it said in an e-mailed statement.
“We believe that retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules of individual member states,” the Treasury said. “The commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU.”
In preliminary findings in 2014, European competition authorities said Apple’s tax arrangements were improperly designed to give the company a financial boost in return for creating jobs in Ireland.
The investigation by the commission’s antitrust agency centres on two tax rulings that Ireland gave Apple - the first in 1991, long before the iPhone, and another in 2007. The EU said yesterday it can order the repayment of illegal state aid for a 10-year period preceding its first request for information in 2013.
The Apple case may set a new standard for collections among a recent group of European investigations into so-called “state aid” provisions to corporations.
The commission in January ordered Belgium to recover about €700mn in what it called illegal tax breaks from at least 35 companies, including Anheuser-Busch InBev NV and BP. Last year, Starbucks Corp was ordered to pay €30mn in back taxes to the Dutch government. The EU also has open state-aid investigations into Luxembourg’s tax agreements with Amazon.com Inc and McDonald’s Corp.
Rather than issue fines for illegal state subsidies, the EU can order nations to claw back aid, such as unpaid taxes, from the recipients.
That means nations deemed to have granted illegal tax breaks can end up with massive, unwanted tax windfalls if court appeals ultimately fail.
Commission-ordered repayments could wind up costing American taxpayers under US tax law, while benefiting EU taxpayers, the US has said. That’s because multinational corporations with large foreign operations, like Apple, are allowed to claim a credit against their US tax bills for any foreign taxes paid. The offset reduces such companies’ US tax payments.
Depending on how any order is worded, US companies that are forced to make additional payments in Europe might be able to credit them against their US tax bills. Page 16