Europe Duns Apple for $14.5B in Illegal Tax Breaks

The European Union on Tuesday nailed Apple with a US$14.5 billion bill for back taxes.

“The European Commission has today has adopted a decision that Apple’s tax benefits in Ireland are illegal,” said EC Competition Chief Margrethe Vestager at a press conference in Brussels.

Tax breaks Ireland granted to Apple for more than two decades artificially reduced Apple’s tax burden, in breach of European Union rules, she explained.

“Apple now has to repay the benefits worth up to 13 billion euros, plus interest,” Vestager said.

“This decision sends a clear message,” she added. “Member states cannot give unfair tax benefits to selected companies, no matter if they are European or foreign, large or small, part of a group or not.”

EU Apple taxes

Strong Case

The EC’s case is a strong one, said Joseph Carson, head of global strategic alliances at Thycotic.

“While Apple and Ireland maintain that they are compliant with Irish and European tax laws, the way the tax structure was applied meant that Apple paid very little tax,” he told the E-Commerce Times.

Meanwhile, the tax structure available to Apple wasn’t available to other companies. In the EC’s eyes, that made the tax deal a method of state aid to Apple that gave Ireland a competitive advantage over its European neighbors.

“These types of tax structure ultimately do not benefit anyone — country nor citizen,” Carson said.

“A few jobs result from some of these types of tax incentives,” ne noted, “but in many other cases, they are very few to none, so the ultimate benefit to the economy is limited.”

No Tax Rigging

Apple CEO Tim Cook denied that his company had received preferential treatment in Ireland.

“We never asked for, nor did we receive, any special deals,” he wrote in a message to Apple’s European community.

“Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe,” Cook warned.

“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,” he added.

The EC’s decision is not about Apple, but about who should be collecting taxes from multinational corporations, Cook argued.

Taxing Problem

As complex as taxes on multinational corporations are, one principle recognized around the world is that profits should be taxed in the country where value is created, according to Cook.

Since nearly all of Apple’s case research and development takes place in California, the vast majority of its profits are taxed in the United States, he pointed out.

Not everyone agrees with the fairness of the “value created” rule, however.

“The average person probably has a right to challenge the reasonableness of Ireland facilitating Apple to pay so little tax on its European profits,” suggested Louise Gracia, a tax regulation researcher at the University of Warwick.

“Given that large multinationals work and operate across countries, using the infrastructure and labor within those countries, there is an implicit fairness in requiring them to pay tax on the profits generated within a country in that country,” she explained.

Clouding Clarity

With its decision, the EC has sowed uncertainty in an area where clarity is necessary.

“Global multinationals, such as Apple, need to be clear on the tax and other implications of doing business in the regions where they are active,” said Steve Durbin, managing director of the Information Security Forum. “They are then in a strong position to make significant investment decisions.”

In Ireland, those decisions resulted in Apple’s creation of more than 6,000 jobs. By undermining the decisions made by the Irish government with respect to Apple, the EC has cast a cloud over other governments’ similar decisions.

“This will be used as a test case to establish exactly who has the final say in such jurisdictional matters,” Durbin told the E-Commerce Times.

A win for the EC’s competition watchdogs would have consequences for any foreign company doing business in Europe, observed Jim McGregor, principal analyst at Tirias Research.

“If the EU wins the case, the result could be a significant hit to the authority of the member countries and any agreements they have entered into with international companies — not just American tech companies,” he told the E-Commerce Times. “The effects of this case could be widely felt across all industries.”

Destablizing Europe

The EU’s decision could have a destabilizing effect on Europe, warned Darren Hayes, an assistant professor at Pace University.

“The EU risks setting a precedent where other U.S. companies may relocate to non-EU countries, which have more favorable tax incentives, thereby driving up unemployment at a time when economic slowdown continues for many EU members,” he told the E-Commerce Times.

“All nations create their own tax incentives, including the USA, and therefore this move will be seen by many as counterproductive,” he said, and it “creates tremendous risks to Ireland and other EU members.”

Apple and Ireland intend to appeal the EC’s decision, and the legal wrangling will last for years, predicted Trip Chowdhry, managing director for equity research at Global Equities Research.

“I don’t see an outcome to this for the next 15 to 20 years,” he told the E-Commerce Times. “One message from the decision is that the European Union is under pressure. We’ve already seen Britain exiting the European Union. This union seems to be crumbling.”

John Mello is a freelance technology writer and contributor to Chief Security Officer magazine. You can connect with him on Google+.

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