AAPL Apple Inc

By Stu Woo and Sam Schechner 

This is the question at the heart of the dispute between European Union regulators and Apple Inc.: How much value do Apple's offices in Ireland contribute to the company's massive profit across a big chunk of the world?

Regulators in Brussels concluded Tuesday that Apple and Irish tax authorities understated the answer to that question by tens of billions of dollars. EU antitrust authorities ordered Ireland to claw back about 13 billion euros ($14.5 billion) in what they describe as unpaid taxes from the company. Citing EU prohibitions against "state aid," Brussels said two tax deals between Ireland and Apple constituted illegal tax benefits.

Apple and Ireland disagree, saying they will appeal the decision.

Apple, the world's most valuable company by market capitalization, is the most prominent multinational company to face such scrutiny from EU regulators. They have previously ruled that Starbucks Corp., in the Netherlands, and Fiat Chrysler Automobiles NV, in Luxembourg, have received illegal state subsidies, ordering claw backs of between 20 million and 30 million euros, in each case. They also took aim at a handful of multinationals, including brewer AB InBev NV, in Belgium.

All three countries have appealed, and all companies involved have said they pay their fair share of taxes. Still to come: possible state aid claims against Amazon.com Inc. and McDonald's Corp., both in Luxembourg. Both companies say they pay fair taxes.

Apple has based a major international division, called Apple Sales International, in an office in Cork, Ireland, and has nearly 6,000 employees across the country. The unit, which is in charge of sales in Europe, the Middle East, Africa and India, generated more than $22 billion in pretax profit in 2011, said a 2013 U.S. Senate report.

Yet the unit paid Ireland income taxes of less than EUR10 million for 2011, EU regulators said, representing an effective tax rate of 0.05%. That is well below Ireland's 12.5% corporate tax rate. EU regulators said Tuesday that Apple paid that amount because of a tax agreement between the company and Irish tax officials that the two sides struck in 1991 and updated in 2007. Under those agreements, only EUR50 million of that $22 billion (EUR16 billion) were considered taxable in Ireland, the regulators said.

EU regulators said that besides that EUR50 million and some funds that Apple's Irish units send to U.S. operations for research and development (about $2 billion in 2011, according to the Senate report), the bulk of the remaining money sits untaxed by any country. The Senate said this arrangement allowed the company to stockpile about $74 billion in profits made outside the U.S. between 2009 and 2012.

Apple reorganized its Irish structure last year. An Apple spokesman said Tuesday that the company's Ireland operations are now Irish tax residents and paid $400 million in taxes in 2014. Apple says it would pay American taxes on any funds it sends from its foreign operations to the U.S.

EU regulators started increasing their scrutiny of tax deals between EU countries and multinational corporations in 2014, bringing to bear one of the bloc's biggest weapons -- state aid rules -- as part of a broader push by politicians to rein in tax avoidance by big companies. The probes focused on whether countries gave sweetheart tax deals to corporations to attract jobs.

John Cassels, a partner at London law firm Fieldfisher who specializes in EU competition law, said he thought EU regulators had enough evidence to bring forth their case. But he added that "I don't think Ireland is out of line with what other member states have done."

Write to Stu Woo at Stu.Woo@wsj.com and Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

August 30, 2016 13:24 ET (17:24 GMT)

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