| LXBN | August 31, 2016
Well the piper has finally
caught up to Apple, after a 25-year tax deal with Ireland’s government has left
them on the hook for an exorbitant €13 billion penalty. After years of calling
for corporate tax reform, this may be a “careful what you wish for, Tim Cook”
moment.
Apple is, predictably,
furious, and vows to appeal the decision (as does Ireland) they say would
“upend the international tax system.” The European Commission (EC), also
predictably, seems ready for a fight here following their decision. With legal
fees about to start flowing freely the question that remains is: Could Apple
change the way we govern international tax law?
This isn’t the first time
people have found Apple’s tax practices to be shady. In 2013 a U.S. Senate investigation found that Apple pushed
foreign profits into “stateless” company that didn’t pay taxes anywhere, and
used intellectual property to shift U.S. profits into a subsidiary. Two years later, the EU gave even more
specifics when they announced findings that Apple had negotiated two special
deals with the Irish government that allowed it to allocate profits to untaxed
companies. The August 30 opinion from the European Commission is further confirmation of the EU’s 2015 finding.
“The tax rulings issued by
Ireland endorsed an artificial internal allocation of profits within Apple
Sales International and Apple Operations Europe, which has no factual or
economic justification,” said the EC in
a press release. “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.”
Ireland has long been an
attractive tax option for technology firms like Apple, Google, and Facebook,
since the country allows companies to adopt tax structures which allow them to pay
much less than the 12.5 percent headline rate. Technically what the EC is calling
for is for Ireland to recoup the €13 billion in taxes Ireland is owed,
ruling that the Irish tax laws were in violation of EU rules. In the EC’s eyes
the country allowed Apple “undue tax benefits” wherein they paid substantially
less tax—effectively 1%, on sales of €16 billion or
more per year, in Europe, sinking as low as 0.005% in 2014—than other
businesses.
In 2011 the company earned $22
billion (after paying $2 billion to its U.S. parent) in Ireland, but Irish tax
authority agreed only € 50 million was taxable in the country. Under the terms of their
deal, Apple could allocate most of the profits earned by its Irish operating
units to a “head office,” which the EC found
to have no employees or own any premises.
Facing down what amounts to
around $14.5 billion in past taxes (plus interest), Apple is already girding
its loins and gathering its legal defense. As Tim Cook notes in his open letter, the tax arrangements were
repeatedly agreed to by Ireland’s government. But the EC argues that this isn’t
about how much they pay in taxes (though critics may see the agreement as something of a scam, a sweetheart deal that would
in turn bring jobs to Ireland) but where that money goes. According to the EC,
the company allegedly did so by recording all sales in Ireland, rather than in
the countries where the products were actually sold. The amount of unpaid taxes could
be reduced if the U.S. or other EU member states were to require Apple to
pay more taxes on profits.
Of course if you ask Tim Cook,
this is all part of a broken system never meant for the global business
interactions regularly done now.
“Let me explain what goes on
with our international taxes. The money that’s in Ireland [is] money that is
subject to U.S. taxes. The tax law right now says we can keep that in Ireland
or we can bring it back,” said Cook in an interview with The Washington Post last month. “It’s important for everyone
to understand that the allegation made in the E.U. is that Ireland gave us a
special deal. Ireland denies that. The structure we have was applicable to everybody
— it wasn’t something that was done unique to Apple. It was their law. And the
basic controversy at the root of this is, people really aren’t arguing that
Apple should pay more taxes. They’re arguing about who they should be paid to.
And so there’s a tug of war going on between the countries of how you allocate
profits.”
In the interview, Cook also
noted that he was hopeful there would be corporate tax overhaul in the U.S.
next year, as “everyone agrees the system isn’t working.” The silver lining of
this case may be that it ignites a fire under regulators to make that happen.
Indeed, after the EC’s
announcement, the Obama administration and lawmakers in Congress started
speaking out against the decision, calling it everything from a threat “to undermine
foreign investment, the business climate in Europe, and the important spirit of
economic partnership between the U.S. and the EU,” to a “a predatory and naked
tax grab.” It also comes on the heels of the U.S. Treasury Department’s white paperpublished last week which
looked at possible responses to investigations which appear “to be targeting
U.S. companies disproportionately.” And considering Starbucks, and McDonald’s and Amazon have similar appeals on agreements struck with the Netherlands and Luxembourg
respectively, Apple’s historically hefty fine could be the $14.5
billion that breaks the regulatory camel’s back here. It could even be a chance
for the U.S. and the EU to
work a bit more closely on tax harmonization.
But of course, even if that
happens, it’ll likely be after a long, bitter battle between Apple, Ireland,
and the EC—and that’s all before the U.S. even theoretically makes good on its
threats of reform. So ladies and gentlemen, start your engines; we got a big
one coming down.
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