EU rules against Apple in multibillion-dollar decision

The European Union on Tuesday determined that Ireland should recover up to 13 billion euros ($14.5 billion) in unpaid taxes from Apple, plus interest, in one of the largest cases of European officials ruling that a multinational company received illegal tax benefits.

{mosads}The European Commission, the EU’s executive body, found that Ireland’s tax dealing with the tech giant constituted illegal “state aid” that gave Apple an advantage over other businesses.

“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,” said Margrethe Vestager, the commissioner in charge of competition policy. “In fact, this selective treatment allowed Apple 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 found that two Irish tax rulings “substantially and artificially lowered the tax paid by Apple in Ireland since 1991,” according to a press release from the commission.

The tax treatment in Ireland allowed Apple to avoid paying taxes on almost all of its sales profits in the EU. Apple recorded its profits from European sales in Ireland rather than in the countries where the products were actually sold. As a result of the tax rulings from Ireland, most of the profits were attributed to “head offices” in Ireland that weren’t subject to tax in any country under Irish laws at the time.

According to the press release, under the terms of Ireland’s taxes on Apple, only around 50 million euros of Apple Sales International’s profits were considered taxable in Ireland in 2011, leaving 15.95 billion euros untaxed.

The company only paid corporate taxes in Ireland of less than 10 million euros in 2011, resulting in an effective tax rate of 0.05 percent of its overall annual profits, the release said.

At the time of the initial probe over two years ago, European officials suggested that Ireland had granted the American tech company special tax arrangements in exchange for employment within the country.

Of Apple’s 22,000 employees in Europe, 5,500 are based in Ireland, according to the company’s own numbers.

Apple and Ireland have defended their actions.

The company criticized the decision in a statement, accusing the commission of attempting 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. It will have a profound and harmful effect on investment and job creation in Europe,” Apple wrote.

“Apple follows the law and pays all of the taxes we owe wherever we operate. We will appeal and we are confident the decision will be overturned.”

Later in a conference call, the company said Ireland would take the lead but Apple would “be a very active participant.

Apple slammed the Commission’s decision, calling it “legal mumbo jumbo,” and cited concerns of the ruling’s ramifications on state sovereignty in the EU.

“We are confident that the Commission’s order will be reversed,” Apple CEO Tim Cook wrote in an open letter to the Apple community in Europe.

In the past several years, the Commission has been investigating whether several companies have received illegal state aid from European countries.

In addition to Apple, the Commission has looked at tax dealings concerning Starbucks, Fiat and Amazon. It found that arrangements involving Starbucks and Fiat constituted state aid, and these cases have been appealed to the EU general court. The Commission hasn’t made a final decision about whether an Amazon arrangement with Luxembourg is state aid.

The state aid cases have drawn criticism from the Obama administration as well as from lawmakers on both sides of the aisle. They have said that U.S. companies are being disproportionately targeted and that the Commission is taking a new approach to state aid rules that is inconsistent with previous decisions and is unfairly being applied retroactively.

The U.S. has also said that because of domestic tax law, the ruling could cost U.S. taxpayers. Large U.S. companies, like Apple, are allowed to claim tax credits in the U.S. for paying foreign taxes, in certain circumstances.

“The United States is committed to tax fairness,” White House spokesman Josh Earnest said Monday in a White House news briefing. “We want to make sure the kinds of agreements we reach with other countries are not manipulated to allow companies to shirk responsibilities.”

A bipartisan group of Senate Finance Committee members expressed concerns about the Commission’s investigation and have supported the Treasury Department’s efforts to urge the Commission to reconsider its approach. They wrote in a letter to Treasury Secretary Jack Lew that “these investigations raise serious questions about our ability to rely on bilateral tax treaties negotiated with EU Member States.”

In a white paper released last week, the Treasury Department said that the investigations could hurt U.S. businesses and the U.S. government.

“A substantial number of additional cases against U.S. companies may lead to a growing chilling effect on U.S.-EU cross-border investment,” Treasury said.

Treasury also criticized retroactive recovery policies, writing that they “would be inconsistent with EU legal principles” and that they “would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries.”

“While we decline to comment on specific cases, Treasury is disappointed that the Commission is acting unilaterally and departing from the important progress the U.S., the EU, and the rest of the international community have made together to combat tax avoidance,” a Treasury spokesperson said Tuesday. “As we have said, 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 Commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU,” the spokesperson added. “We will continue to monitor these cases as they progress, and we will continue to work with the Commission toward our shared objective of preventing the erosion of our corporate tax bases.‎”

The Information Technology Industry Council, a tech advocacy group whose members include Apple, issued a statement criticizing the commission’s decision, calling for more multilateral decision making.

“We are deeply concerned by the Commission’s departure from established channels of multilateral cooperation on tax policy in favor of a unilateral approach that, by imposing unforeseeable and retroactive penalties, risks chilling transatlantic commerce and investment and growth in the EU at the expense of U.S. taxpayers,” President and CEO Dean Garfield said, echoing Treasury’s sentiments.

“It is imperative for policymakers on both sides of the Atlantic to strive for multilateral solutions to the vexing questions raised by cross border taxation,” Garfield added.

This report was updated at 8:18 a.m.