Apple Says EU's $14 B Tax Order 'Defies Reality'

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Apple CEO Tim Cook

The tech giant is appealing a 2016 ruling ordering Apple to pay the record sum in back taxes to Ireland, where the company has long enjoyed a sweetheart tax arrangement.

Apple, in the midst of a tax dispute with European regulators, has said the European Union's order for it to pay $14 billion (13 billion euros) in back taxes to Ireland “defies reality and common sense.”

Apple is facing off against the EU in a battle over tax havens within Europe. In 2016, the European Commission ordered the tech giant to pay the record sum to Ireland as compensation for a sweetheart deal in the country that allegedly allowed Apple to avoid paying its fair share of corporate tax.

Apple is appealing the ruling to the General Court, Europe's second-highest. The legal dispute is a key battleground in Europe's attempt to crack down on corporate tax avoidance.

Ireland, whose low tax regime has attracted several multinationals to set up their European headquarters there, is also challenging the Commission’s decision.

Apple’s Chief Financial Officer Luca Maestri led a six-strong delegation to the court where a panel of five judges will hear arguments over two days.

In its arguments at the General Court, Apple accused the Commission of using its powers to combat state aid “to retrofit changes to national law.” Apple claims the Commission is creating legal uncertainty for businesses by trying to change the international tax system.

The EU dismissed those arguments, saying it is not trying to police international tax laws but that Ireland simply did not properly assess Apple's tax bill and undercharged the company. In 2014, Apple's Irish unit paid a 0.005 percent rate of tax.

In 2016, the European Commission, the EU's executive body, ruled that, for more than two decades, Apple has paid too little tax in Europe. The Commission found that Apple benefited from what amounts to illegal state aid as a result of a pair of Irish rulings that artificially reduced its tax burden.

The Apple case is key to a broader attack against multinational tax avoidance being led by European Competition Commissioner Margrethe Vestager, which has targeted fellow tech giant Amazon, but also companies such as Starbucks and carmaker Fiat.

Daniel Beard, Apple's lawyer in the case, said the EU's figures don't add up.

“The Commission contends that essentially all of Apple’s profits from all of its sales outside the Americas must be attributed to two branches in Ireland,” Beard told the court, arguing that because key Apple products and services — including the iPhone, the iPad, the App Store and key intellectual property rights — were developed in the United States, and not in Ireland, the Commission's case was flawed. The company said it will pay $22 billion (20 billion euros) in U.S. taxes on the same profits that the Commission said should have been taxed in Ireland.

“Based on the facts of this case, the primary line defies reality and common sense,” Beard said.

Apple has said, on average, it pays a global tax rate of 26 percent and is the world's largest taxpayer. In its current financial quarter, Apple expects revenue of $61 to $64 billion and a gross margin of 37.5 to 38.5 percent.

Commission lawyer Richard Lyal said Apple’s argument that all its intellectual property-related activities take place in the United States was “perfectly correct and perfectly irrelevant,” arguing instead that Ireland, which taxed Apple's Irish subsidiaries, not Apple Inc. as a whole, had not properly assessed the functions performed by the company's Irish units, the assets used or the risks assumed by the subsidiaries.

“They simply accepted an arbitrary method proposed by the Apple Ireland subsidiaries. That in itself gives rise to a presumption of a special deal, exceptionally advantageous treatment,” said Lyal.

Ireland's lawyer, Paul Gallagher, said the Commission's decision was based on a mismatch between the Irish and U.S. tax systems and was “fundamentally flawed.”

The General Court is expected to rule in the coming months but, whatever the outcome, an appeal to the EU Court of Justice is likely. A final judgment could take several years.