EU hits Apple with $14.5-bn Irish tax demand

The European Commission ordered Apple to pay Ireland unpaid taxes of up to 13 billion euros ($14.5 billion) on Tuesday as it ruled the firm had received illegal state aid.

Apple and Dublin said the US company’s tax treatment was in line with Irish and European Union law and they would appeal the ruling, which is part of a drive against what the EU says are sweetheart tax deals that usually smaller states in the bloc offer multinational companies to lure jobs and investment.

The US feels its firms are being targeted by the EU and a US Treasury spokesperson warned the move threatens to undermine US investment in Europe. Starbucks has been ordered to pay up to 30 million euros ($33 million) to the Dutch state, while Amazon.com and McDonald’s are also under investigation by the Commission, the EU’s executive arm.

EU Competition Commissioner Margrethe Vestager questioned how anyone might think an arrangement that allowed Apple to pay a tax rate of 0.005 per cent, as Apple’s main Irish unit did in 2014, was fair. “Tax rulings granted by Ireland have artificially reduced Apple’s tax burden for over two decades, in breach of the EU state aid rules. Apple now has to repay the benefits,” Vestager told a news conference. Apple, which had more than $200 billion in cash and readily marketable securities at the end of June, is likely to see the case drag out for years.

‘Artificial’ arrangement

The EU’s ruling challenges the way Ireland agreed to tax the profits of Irish registered Apple subsidiaries, through which most of its non-US profits flowed.

Apple licenses the rights to technology designed in the United States to Irish subsidiaries. These then hire contract manufacturers to make devices which they sell to Apple retail subsidiaries around Europe and Asia. Since the manufacturing cost is a small portion of device sales prices and retail subsidiaries are allocated a small operating margin, Apple Ireland is very profitable. In 2011, it earned $22 billion after paying $2 billion to its US parent in relation to the rights to Apple IP.

However, the Irish tax authority agreed only 50 million euros of this was taxable in Ireland, the European Commission said. Under the terms of Apple’s tax deal, first agreed in 1991 and renewed in 2007, Apple could allocate most of the profits earned by its Irish operating units to a “head office” that did not have any employees or own any premises.

“This ‘head office’ had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter,” the Commission said. The Commission said this agreement had no basis in tax law and was not available to others, and so represented state aid.

Tim cook’s open letter

Apple said it was confident of winning an appeal. “The European Commission 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,” CEO Tim Cook said in a letter to customers posted on Apple’s website.

“A company’s profits should be taxed in the country where the value is created.”

“Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on 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,” Cook added.

Ireland doesn’t want the money

Irish Finance Minister Michael Noonan said he profoundly disagreed with the decision and in order to preserve Ireland’s attractiveness for investment he would appeal. “There is no economic basis for this decision. It's bizarre and it’s an exercise in politics by the Competition Commission,” Noonan said. Ireland’s low corporate tax rate has been a cornerstone of the country’s economic policy for decades.

APPLE'S IRISH TAX FLOW

• Apple Sales International (ASI) in Ireland pays Apple in Cupertino, California, $2 billion in 2011 for the right to use Apple technology outside the United States
   
• ASI pays contract manufacturers to make Apple devices based on Apple technology
   
• ASI sells devices to European customers and generates $22 billion in profits, but Ireland agrees only euro 50 million of this is taxable
   
• ASI (Ireland) transfers almost $22 billion in profits to its head office, which is an Irish registered company, but not tax it anywhere

Sources : Reuters, European Commission