Will Apple’s Gloomy Tax Penalty Have a International, Silver Lining?
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 paper published 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.