The European Commission has ordered Apple Inc. to pay Ireland unpaid taxes of up to 13 billion euros (US$14.5 billion) 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, Reuters reports.
The EU move is part of a drive against what it says are sweetheart tax deals that usually smaller states in the bloc offer multinational companies to lure jobs and investment.
A US Treasury spokesperson warned the move threatens to undermine US investment in Europe and “the important spirit of economic partnership between the US and the EU.”
Starbucks Corp. has been ordered to pay up to 30 million euros to the Dutch state, while Amazon.com Inc. and McDonald’s Corp. are also under investigation by the commission, the EU’s executive arm.
Apple’s stock fell less than 1 percent.
EU Competition Commissioner Margrethe Vestager questioned how anyone might think an arrangement that allowed Apple to pay a tax rate of 0.005 percent, 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 US$200 billion in cash and readily marketable securities at the end of June, is likely to see the case drag out for years in EU and possibly Irish courts.
Tax experts say the commission faces a tough battle to convince courts to back up its stand.
While the EU has found that certain tax regulations are anti-competitive, it has never before ruled whether countries have applied tax regulations fairly in the way it has with Apple, Starbucks and others.
As a result, some lawyers and accountants said they doubted Apple would end up paying back any tax.
“I am not persuaded by the reasoning the EU has applied,” said Tim Wach, global managing director at international tax advisers Taxand.
In Washington, members of both parties in Congress said the EU’s stunning decision should prod the US to rewrite its tax code to give American companies an incentive to bring home some US$2.1 trillion in US corporate profits held abroad.
“Above all, this is yet another reason why we need to fix our tax code,” House Speaker Paul Ryan, the highest-ranking elected Republican, said in a statement. “Today’s decision should be a spur to action.”
Apple was found to be holding over US$181 billion offshore, more than any US company, in a study published last year by two left-leaning nonprofit groups – Citizens for Tax Justice and the US Public Interest Research Group Education Fund.
The EU’s ruling challenges the way that 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 US$22 billion after paying US$2 billion to its US parent in relation to the rights to Apple intellectual property.
However, the Irish tax authority agreed only 50 million euros of this was taxable in Ireland, the EC 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.
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.
Ireland’s low corporate tax rate has been a cornerstone of the country’s economic policy for decades, drawing investors from multinational companies whose staff account for almost one in 10 of the country’s workers.
For many technology firms like Google and Facebook, a key attraction is that Ireland allows companies to adopt tax structures which see them pay much less than the 12.5 percent headline rate. The companies say they follow all tax rules.
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,” chief executive 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,” he added.
Apple employs 5,500 people in areas such as logistics and distribution in the Irish city of Cork, which has about a quarter of Apple’s Europe-based staff.
– Contact us at [email protected]