The company’s international operations hit a bump recently after the European Commission—the EU’s governing body—ordered Apple to pay back roughly $14.5 billion, plus interest, in taxes to the Irish government.
The ruling was made after an investigation into what some are calling a “sweetheart deal” with Ireland from 2003 to 2013.
Apple paid tax at 1%, or less, on profits attributed to its subsidiaries in Ireland, well below the 35% top rate of corporate tax in the United States and Ireland's 12.5% rate.
That prompted complaints by both European and U.S. lawmakers, who argued that Apple had been given an unfair advantage in exchange for creating jobs in Ireland. CEO Tim Cook was even called to testify on Apple's tax arrangements with Ireland before a Senate committee in 2013.
The Irish Times further explained the ruling:
Only a fraction of the profits of Apple Sales International (an Irish-registered company) were allocated to its Irish branch and subject to tax here. The “remaining vast majority of profits were allocated to the ‘head office’, where they remained untaxed”, according to the commission.
In effect, this money was paid to Apple in the US to fund research and development.
The bill for tax benefits, plus interest, covers 2003 to 2014. Apple has more than $231 billion in cash on its balance sheet to cushion the blow.
European Commissioner Margrethe Vestager said in the organization’s press release:
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 per cent on its European profits in 2003 down to 0.005 per cent in 2014.
Apple’s chief executive, Tim Cook, responded to the ruling with a letter to European customers. It read, in part:
As responsible corporate citizens, we are also proud of our contributions to local economies across Europe, and to communities everywhere. As our business has grown over the years, we have become the largest taxpayer in Ireland, the largest taxpayer in the United States, and the largest taxpayer in the world.
Over the years, we received guidance from Irish tax authorities on how to comply correctly with Irish tax law — the same kind of guidance available to any company doing business there. In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.
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 August 30th 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. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed.
Though Cook said the ruling had “no basis in fact or in law,” some say Apple took advantage of the situation to avoid paying more taxes—even after the EC ordered other companies to repay millions in taxes.
The New York Times published an editorial that read, in part:
Apple has engaged in increasingly aggressive tax avoidance for at least a decade, including stashing some $100 billion in Ireland without paying taxes on much of it anywhere in the world, according to a Senate investigation in 2013. In a display of arrogance, the company seemed to believe that its arrangements in a known tax haven like Ireland would never be deemed illegal — even as European regulators cracked down in similar cases against such multinational corporations as Starbucks, Amazon, Fiat and the German chemical giant BASF.
Congress, for its part, has sat idly by as American corporations have indulged in increasingly intricate forms of tax avoidance made possible by the interplay of an outmoded corporate tax code and modern globalized finance. The biggest tax dodge in need of reform involves deferral, in which American companies can defer paying taxes on foreign-held profits until those sums are repatriated.
Cook wrote that the ruling could drastically affect Ireland’s employment forecast:
Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.
Apple has long supported international tax reform with the objectives of simplicity and clarity. We believe these changes should come about through the proper legislative process, in which proposals are discussed among the leaders and citizens of the affected countries. And as with any new laws, they should be applied going forward — not retroactively.
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.
Apple isn’t the only party fighting the European Commission’s decision. Ireland’s minister for finance, Michael Noonan, said the government would appeal the ruling.
In a statement the Government said it "disagrees profoundly with the commission’s analysis. Ireland did not give favourable tax treatment to Apple."
It added: "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."
Noonan’s response drew criticism from several lawmakers who believe that Ireland should take the money, but Bloomberg reported that “the stakes are higher” for the Irish government:
The country’s corporate tax regime is a cornerstone of its economic policy, attracting Google Inc. and Facebook Inc. to Dublin. Even when Ireland was forced to seek an international bailout six years ago, it resisted pressure to change how it taxes companies. While the Apple ruling doesn’t directly threaten the 12.5 percent rate, the government has promised to stand by executives it says are helping the economy.
"To do anything else, it would be like eating the seed potatoes,” Noonan told broadcaster RTE on Tuesday, adding a failure to fight the case would hurt future generations.
The prospect of losing jobs from international giants such as Apple might push Ireland to another decision as well: Growing discord over Ireland’s corporate taxes could cause the country to leave the European Union—as the United Kingdom did this year in the startling “Brexit” referendum.
Ireland remains, for the most part, a model EU member, though the EU has long been hostile to the country’s 12.5% corporation tax rate. Mainstream politicians have warned that the European Union’s efforts to crack down on that tax rate could push the country towards the exit door.
MEP Brian Hayes of the Fine Gael party warned that the UK, which has consistently been one of the Republic’s key allies in fighting attempts at EU tax harmonisation, can no longer be relied on now Britons have voted for Brexit.
‘Any attempt made to cajole us [on corporation tax], as far as I’m concerned, we’re out the door,’ he told the Irish News.
‘We cannot be tied into an anti-business, anti-growth pact while the Brits are allowed to move on – we have a lot more to lose than anybody else.’
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