The European Commission (EC) has announced that Apple must pay more than $14 billion in back taxes. In its expected ruling, the EC asserts the Irish government showed tax favoritism to Apple that was not similarly extended to other companies, allowing Apple to pay an effective tax rate of one percent or less from 2003 to 2014.
The EC argues this amounted to “illegal state aid” in the amount of roughly $14.5 billion, which must now be collected by Ireland:
This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules. The Commission can order recovery of illegal state aid for a ten-year period preceding the Commission’s first request for information in 2013. Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 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. This is due to Apple’s decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.
Taxes are collected by national governments, not the EC. However, this ruling is part of a larger crackdown by the EC on the tax policies of individual governments such as Luxembourg and The Netherlands, in addition to Ireland. The issue is really between EU member states and the EC, which is trying to stamp out aggressive tax polices used by governments to lure foreign companies to set up shop in their countries. Ireland in particular has been quite successful in getting US companies to set up their European headquarters there.
The Apple-Ireland tax investigation began several years ago, motivated in part by an economic need to collect more taxes from large corporations as European national economies suffered in the wake of the 2008 recession and counter-productive European austerity policies.
While the US has decried similar corporate “tax avoidance,” it will likely strongly protest that the EC has overstepped its authority in this case. There are many US officials who also believe there’s an anti-American dimension at play and that Europe has unfairly targeted American companies with tax and antitrust enforcement policies.
Ireland (and Apple) can appeal the EC’s determination to the European Court of Justice, but such appeals, as in the US, could wind up taking years. Though perhaps counter-intuitive, there are indications that the Irish government will appeal the EC’s directive, which is seen as a threat to Ireland’s ability to attract future foreign investment.
Postscript: Apple CEO Tim Cook responded to the EC announcement in an open letter “to the Apple Community in Europe,” in which he stressed Apple’s long history in Ireland and job creation there and across Europe. He slammed the EC’s move as “unprecedented” and seeking to “upend the international tax system”:
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. The opinion issued on August 30th 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 Commission’s move is unprecedented and it has serious, wide-reaching implications. 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.
Postscript 2: Ireland confirmed earlier today that it would appeal the EC ruling to maintain its ability to use its tax code to attract foreign investment. According to a Reuters report:
Finance Minister Michael Noonan has insisted Dublin would fight any adverse ruling ever since the European Union began investigating Apple’s Irish tax affairs in 2014, arguing that it had to protect a tax regime that has attracted large numbers of multinational employers.
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