EU Orders Apple to Pay $14.5 Billion in Back Taxes

Bloomberg
Apple's Irish Headquarters

The European commission hands Apple a record fine for violating European law in its tax dealings with Ireland.

Apple faces a multi-billion dollar tax bill after a ruling Tuesday by the European Commission that the tech company's tax dealings with the Irish government violated European law.

In a press conference Tuesday, Margrethe Vestager, the European commissioner for competition, said the Commission has ruled after its antitrust investigation that the iPhone maker got undue tax benefits in Ireland, in breach of EU state aid laws. The Commission said Apple should pay back taxes amounting to up to $14.5 billion (€13 billion), the highest fine ever issued by the EU.

The ruling follows similar rulings against other big U.S. firms, including Amazon, Starbucks and McDonald's, but the fine for Apple trumps them all. It is the Europe's highest-ever fine for alleged corporate tax avoidance, topping the bill of $335 million (€300 million) for Swedish engineering company Atlas Copco to pay Belgian tax authorities earlier this year. In fact, the massive fine is 40 times larger than any previous penalty demand by the European Commission from a company in such a case. An EU executive said in a statement that the fine could be reduced if other countries sought to get more tax out of Apple themselves.

The European Commission found that Ireland allowed Apple to dodge international tax rules by letting the company shelter tens of billions of dollars from tax collectors in return for maintaining jobs in the region. About a quarter of Apple's European staffers, around 5,500 people, are based in the Irish city of Cork, where it is the largest private sector employer.

A preliminary report by the EU in late 2014 had already found, based on early investigations, that tax deals that Ireland granted Apple in 1991 and 2007 were illegal. Tuesday's announcement confirmed that.

The European Commission said Tuesday it has "concluded that Ireland granted undue tax benefits of up to €13 billion to Apple," adding: "This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid."

Commissioner 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 to pay an effective corporate tax rate of 1 percent on its European profits in 2003 down to 0.005 percent in 2014."

Both Apple and Ireland have rejected the accusations, saying Ireland's tax scheme was entirely legal. Apple has said it paid Ireland's 12.5 percent rate on all the income that it generates in the country. But the Commission ruled Tuesday that the Irish scheme amounted to state aid for the tech giant, something banned under Europe's laws for a single market.

Apple and Ireland said they would appeal the ruling. "Apple follows the law and pays all of the taxes we owe wherever we operate," the company said Tuesday. "We will appeal and we are confident the decision will be overturned."

It added: "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. 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 CEO Tim Cook, responding to the claims that Apple engages in a "sophisticated scheme" to avoid paying taxes on $74 billion of revenue held overseas, in 2015 told 60 Minutes: "That is total political crap. There is no truth behind it. Apple pays every tax dollar we owe."

On Tuesday, he wrote in a message to "the Apple community in Europe," which the company published online: "Thirty-six years ago, long before introducing iPhone, iPod or even the Mac, Steve Jobs established Apple’s first operations in Europe. At the time, the company knew that in order to serve customers in Europe, it would need a base there. So, in October 1980, Apple opened a factory in Cork, Ireland with 60 employees."

He continued: "We have operated continuously in Cork ever since, even through periods of uncertainty about our own business, and today we employ nearly 6,000 people across Ireland. The vast majority are still in Cork — including some of the very first employees — now performing a wide variety of functions as part of Apple’s global footprint. Countless multinational companies followed Apple by investing in Cork, and today the local economy is stronger than ever. The success which has propelled Apple’s growth in Cork comes from innovative products that delight our customers. It has helped create and sustain more than 1.5 million jobs across Europe — jobs at Apple, jobs for hundreds of thousands of creative app developers who thrive on the App Store, and jobs with manufacturers and other suppliers."

Cook then went on the offensive, writing: "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. The opinion issued on Aug. 30 alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid. The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been."

Cook also explained: "In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States. European companies doing business in the U.S. are taxed according to the same principle. But the Commission is now calling to retroactively change those rules."

Concluded the Apple CEO: "We are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment. We firmly believe that the facts and the established legal principles upon which the EU was founded will ultimately prevail."

Washington also won't be happy with the decision. The U.S. government had previously accused Brussels of unfairly singling out U.S. companies in its campaign against corporate tax avoidance.

Apple earned $18 billion last year, the biggest-ever result reported by a corporation, and the company in June reported it had cash, cash equivalents and marketable securities of $231.5 billion, of which 92.8 percent, or $214.9 billion, were held in foreign subsidiaries. Even if it's forced to pay up, finding the money for the bill should not be a problem for Apple. During its latest quarter, the company paid nearly $2.7 billion in taxes, leaving it with net income of $7.8 billion, an effective tax rate of 25.5 percent, according to company filings.

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