Apple Found To Have Received Illegal Tax Benefits, Ordered To Pay $14.5 Billion In Back Taxes

    /    Aug 30, 2016   /     Tech, World  /    0 Comments  /    391 Views

Apple was the recipient of illegal tax breaks from Ireland. That was the finding today of a European Union (EU) Commission investigation into the tech giant’s business and tax practices. The result? The tech giant has been ordered to pay €13 billion ($14.5 billion U.S.), plus interest, to settle back taxes owed to Ireland.

Addressing the ruling, Commissioner Margrethe Vestager said:

Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple AAPL -0.12% to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.

The Commission investigation, which was officially launched in 2014, focused on whether Apple had engaged in sweetheart deals with Ireland to lower their tax bills. In 2015, the Commission, which investigated similar deals involving Fiat Finance and Trade in Luxembourg and Starbucks in the Netherlands, found that “selective tax advantages” were granted to those companies. Those advantages, the Commission found, allowed those companies to artificially lower their tax bills, “saving” millions in taxes. As a result, the Commission ordered Fiat and Starbucks to repay tens of millions of euros in back taxes. Those decisions are being appealed.

Following the launch of the Commission’s investigation, Apple subsequently agreed to pay 318 million euros ($347.72 million U.S.) to settle a tax dispute in Italy involving the payment of back taxes. Apple had initially denied the suggestion that Apple owed any additional taxes, with Cook telling CBS’ 60 Minutes just two weeks before, that “Apple pays every tax dollar we owe,” calling the idea that Apple is avoiding taxes on overseas profits “political crap.”

However, the Commission found the opposite, claiming that two tax rulings issued by Ireland to Apple have “substantially and artificially” lowered the tax paid by Apple in Ireland since 1991. Those rulings created a tax arrangement between two Irish companies – both related to Apple (Apple Sales International and Apple Operations Europe) – which did not correspond to what the Commission found to be the economic reality. In fact, according to the Commission, and long suggested by critics of Apple’s tax structures, almost all sales profits recorded by the two companies were internally attributed to a “head office” which existed only on paper and could not, the Commission found, have generated those kinds of profits. The result? Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.

Apple’s CEO Tim Cook had previously declared fiscal year 2014 “one for the record books.”

In 2014, Apple also boasted that international sales accounted for 60% of the quarter’s revenue. However, the Commission found that Apple avoided tax on almost all profits from sales in the EU by booking the profits in Ireland rather than the country in which the product was sold. This tax treatment was, the Commission found, “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.”

Here’s how the Commission says the tax structure worked:

As a result, the Commission ordered recovery of what it called “illegal state aid” for a ten-year period preceding the Commission’s first request for information in 2013. That means that Apple gets a break on any activities the Commission deemed improper beginning in 1991 but must pay up for the time period from 2003 to 2014. That bill totals €13 billion ($14.5 billion US), plus interest.

Apple has continued to deny the allegations that it benefitted from any deal made with Ireland, with Cook saying, “The structure we have was applicable to everybody — it wasn’t something that was done unique to Apple. It was their law.”

And while Ireland also claims that it did nothing wrong, it did switch gears in 2014, the same year the investigation began in earnest, with an announcement that it will put an end to tax-favored breaks used by companies like Apple and Google.

Ireland’s finance minister, Michael Noonan, plans to appeal the ruling, saying, “The decision leaves me with no choice but to seek cabinet approval to appeal. 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.”

The issue of sovereignty has come into play on this side of the pond as well. Last week, the U.S. Treasury Department issued a white paper (downloads as a pdf), commissioned by Treasury Secretary Jack Lew, accusing the European Commission of a power grab. Among other things, the Department said the investigations against Apple and other American-based companies was “supra-national.”

Why take a stand? Treasury is worried about losing tax revenue in the U.S. Currently, Apple has billions in cash parked overseas. That money won’t be taxed in the U.S. until it’s brought back to the country. Earlier this summer, Cook said that he wouldn’t bring Apple’s overseas funds back to the U.S. “until there’s a fair rate,” meaning, of course, a “fair” tax rate.

If the Commission successfully makes Apple pay up now, the U.S. could lose out on that “some day” tax revenue. Treasury wrote, in part, that taxing corporate profits abroad might mean “the companies’ U.S. tax liability would be reduced dollar for dollar by these recoveries when their offshore earnings are repatriated or treated as repatriated as part of possible U.S. tax reform.” That, Treasury found, would “effectively constitute a transfer of revenue to the EU from the U.S. government and its taxpayers.”

Now, Treasury must sit and watch with the rest of the world.

Apple is expected to appeal the ruling. Apple’s CEO, Tim Cook, has previously said about the investigation, “I don’t know how they will rule. I hope that we get a fair hearing. If we don’t, then we would obviously appeal it.”

Apple, named by Forbes as the World’s Most Valuable Brand, has long admitted to lowering its tax rate by taking advantage of global tax laws but continues to maintain that they have always acted legally.

Forbes

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