EC ruling: Ireland gave Apple billions in illegal tax breaks

European investigators said Ireland offered selective treatment allowing Apple to pay 1% or less in tax on European profits in a decision certain to ratchet up trans-Atlantic tension.

  • Caroline Byrne

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Europe’s anti-trust chief today ordered Dublin to collect up to €13 billion ($14.5 billion) in back taxes and interest from US tech firm Apple in the latest high-profile dispute involving a US multinational operating in a low-tax country. 

Ireland’s’ corporate tax rate of 12.5% - already attractive compared to America’s top federal rate of 35% - was allegedly discounted further for Apple in what some have described as a “sweetheart” tax deal in exchange for jobs. Apple employs more than 5,000 in Ireland.

“This is illegal under EU State Aid rules, because it allowed Apple to pay substantially less tax than other businesses,” the European Commission's (EC's) Margrethe Vestager said in a statement announcing the Apple decision. “This selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003 down to 0.005% in 2014.”

Ireland ‘disagrees profoundly’

The Irish government said it “disagreed profoundly” with the conclusions of EU investigators.

"Ireland did not give favourable tax treatment to Apple," the Irish government said in a statement. "Ireland does not do deals with taxpayers. No fine or penalty has been levied against the Irish State. This decision has no effect on the 12.5% rate of corporation tax and is not about Ireland’s wider corporation tax regime."

Michael Noonan, Ireland’s finance minister, will request government approval on August 31 to begin appeal proceedings, Irish broadcaster RTE reported.

Dr. Georg Berrisch, a Baker Botts’ Brussels partner, said it could take years for the multinational to challenge the decision in the General Court of the EU.

Apple said the decision would have “a profound and harmful effect” on investment and job creation in Europe and that it was confident the ruling would be overturned on 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,” Apple said in a statement. "The Commission's case is not about how much Apple pays in taxes, it's about which government collects the money.”

The EC decision and subsequent appeals are expected to ratchet up trans-Atlantic tension and further divide European lawmakers and their North American counterparts. The US Treasury last week released a 30-page “White Paper” saying the adverse rulings could cause a chill in the investment environment at a time when Europe can ill-afford another financial setback. 

The US complained that European authorities were overstepping their powers and becoming a "supranational tax authority". In response, the European Commission denied any bias against American multinationals and said its role was to investigate tax avoidance.

"The (EC) decision will likely contribute to the impression that Brussels is disproportionately targeting US companies," said Berrisch. "However, as regards State Aid, this is not true as the Commission repeatedly ordered Member States to recover large amounts of alleged illegal aid from European companies, including national champions. “ 

Apple CEO Tim Cook, in a Washington Post interview published August 15said Apple followed the law both in its dealings with Ireland and in terms of the stockpile of cash and cash equivalents Apple keeps outside of America. 

About $215 billion of Apple’s $232 billion in cash is held outside of the US, according to its third-quarter earnings. 

"The tax law right now says we can keep that (cash) in Ireland or we can bring it back. And when we bring it back, we will pay 35% federal tax and then a weighted average across the states that we’re in, which is about 5%, so think of it as 40%. We’ve said at 40%, we’re not going to bring it back until there’s a fair rate. There’s no debate about it. Is that legal to do or not legal to do? It is legal to do," Cook said. 

"It is the current tax law. It’s not a matter of being patriotic or not patriotic. It doesn’t go that the more you pay, the more patriotic you are,” Cook added.

Starbucks, Amazon, Fiat

In October 2015, European investigators found that Luxembourg and the Netherlands granted selective tax advantages to Fiat and Starbucks, respectively. The decisions are under appeal to the European courts.

Two in-depth investigations are still underway into Luxembourg regarding tax deals with Amazon and McDonald's which could result in billions more going into the hands European authorities instead of US tax collectors.

The Apple State Aid investigation has been ongoing since June 2014 and involved two tax rulings issued by Ireland to Apple that were found to have “substantially and artificially lowered the tax paid by Apple in Ireland since 1991.”

The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which the Commission said “did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a ‘head office”.

‘Paper’ offices

The Commission ruled that the head offices existed on paper alone and could not have generated the profits ascribed to them.

“These profits allocated to the ‘head offices’ were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force,” according to the EC. “As a result of the allocation method endorsed in the tax rulings, 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.” 

The Commission has the power to order recovery of illegal State Aid for up to 10 years preceding the Commission's first request for information in 2013.

A non-confidential version of the Apple decision will be released at a later time once confidentiality issues have been resolved. 

  • Caroline Byrne

Related to News