AAPL Apple Inc

By Natalia Drozdiak in Brussels and Sam Schechner in Paris 

The European Union's antitrust regulator has demanded that Ireland recoup roughly EUR13 billion ($14.5 billion) of unpaid taxes over a decade from Apple Inc., a move that could intensify a feud between the EU and the U.S. over the bloc's tax probes into American companies.

The size of the tax demand, which came in a formal decision issued Tuesday, risks further unsettling multinational companies already facing a slow-moving international effort to curb aggressive tax avoidance, showing their past behavior could land them with big bills for allegedly unpaid back taxes.

The sum is the highest ever demanded under the EU's longstanding state-aid rules that forbid companies from gaining advantages over competitors because of government help.

The decision -- which ordered a payment well above most analysts' expectations -- is likely to be the subject of years of appeals up to the EU's top court. It could also set off a broader scramble by the U.S. and individual EU governments over the right to tax billions of dollars of offshore profits made by Apple and other large companies.

Apple disputed the reasoning of the decision and said it would appeal. Chief Executive Tim Cook, in an open letter, added: "Apple follows the law and we pay all the taxes we owe."

Irish Finance Minister Michael Noonan said he disagreed "profoundly" with the European Commission's decision and that Ireland would appeal the decision in order "to defend the integrity of our tax system."

The European Commission said tax arrangements that Ireland offered Apple in 1991 and 2007 allowed the company to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.

Apple was thereby able "to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market," the commission said.

"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," said European antitrust commissioner Margrethe Vestager.

Mr. Cook fired back that "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."

Ireland now has four months under EU rules to calculate the exact amount Apple owes and collect the cash. Apple, whose shares were 0.7% lower in midday trading in New York, said it would put the money in an escrow account pending appeals.

Ms. Vestager said Tuesday that Apple would also be expected in the future to pay taxes based on the ruling, but it is unclear how much that would boost the company's effective tax rate because Apple changed its European tax structure in 2015.

Lawyers said that the EU had been aggressive in calculating the amount of unpaid taxes that Apple owes.

"It certainly is a massive amount," Philipp Werner, a Brussels-based partner at law firm Jones Day.

The U.S. Treasury Department has sharply criticized the EU's tax investigations, arguing that the bloc unfairly targets American companies and acts inconsistently with international tax norms.

On Tuesday, a spokeswoman said the Treasury Department was disappointed with the commission's decision and reiterated that "retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules of individual Member States."

Under EU rules, however, the commission has a right to open up legal proceedings against member countries that don't obey the bloc's rules.

The White House has previously accused the EU of seeking to tax income the bloc doesn't have a right to tax.

Ms. Vestager said the amount Ireland needs to recover could be reduced if U.S. authorities or other governments required Apple to pay larger amounts on its profits. But she also defended the EU's right to demand back taxes be paid.

"This has to do with profits generated in Europe and recorded in Europe, " Ms Vestager said. "Whatever the issue Apple may have with the U.S. tax code is not an issue for us."

At issue in the decision is how Ireland allowed Apple to allocate profit, largely at an Irish-registered unit called Apple Sales International, which purchases Apple goods from its outside manufacturers and sells them at a markup outside the Americas.

In 2011, under the Irish tax ruling, the unit brought in EUR16 billion in profit, and allocated under EUR50 million of it to Ireland where it was subject to taxation, Ms. Vestager said. The rest was allocated to a "head office" that Ms. Vestager said was without "economic justification." As a result, she said the unit had effective tax rate that year of 0.05%.

Luca Maestri, Apple's chief financial officer, disputed that calculation, calling it a "completely made-up number." He added that the profits the EU is saying should have been taxed in Ireland actually should be taxed in the U.S.

Apple hasn't actually paid U.S. taxes on the foreign profits, however, because it has been holding them in foreign subsidiaries and has been borrowing instead of repatriating the profits. As of June, Apple had $215 billion in cash and other liquid investments in its non-U.S. subsidiaries, according to securities filings.

European companies, including Fiat Chrysler Automobiles NV, have also entered the commission's firing line over their tax deals with EU governments. But the Apple case dwarfs the Fiat case, where the car maker was only required to pay back as much as EUR30 million in taxes.

The commission also continues to investigate Amazon.com Inc. and McDonald's Corp. over their tax arrangements in Luxembourg.

Ms. Vestager said that she expected individual countries to use evidence in the EU ruling to pursue back taxes against Apple at a national level, staking claims to the EUR13 billion in taxes identified by the commission.

The uncertainty over whom the unpaid tax money belongs to could provoke or exacerbate existing disputes between countries, Jones Day's Mr. Werner said.

--Richard Rubin contributed to this article.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

August 30, 2016 14:09 ET (18:09 GMT)

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