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 accumulated over more than a decade by Apple Inc., a move
that intensifies 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,
which face a broader international effort to curb aggressive tax
avoidance. But the commission's decision shows companies could be
on the hook for past behavior and potentially be handed big bills
for allegedly unpaid back taxes.
The sum is the highest ever demanded under the EU's longstanding
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 said
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.
"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 described the decision as "an effort to rewrite Apple's
history in Europe, ignore Ireland's tax laws and upend the
international tax system in the process."
Under EU rules, Ireland has four months to calculate the exact
amount the commission says Apple owes and collect the cash. Apple,
whose shares fell by 0.8% Tuesday in New York, said it would put
the money in an escrow account pending appeals.
Ms. Vestager said 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 it says Apple owes. "It certainly is a
massive amount," Philipp Werner, a Brussels-based partner at law
firm Jones Day. Apple posted a profit of $7.8 billion in its most
recent quarter.
The Obama administration and U.S. lawmakers said the decision
upended international tax norms and could cut into the U.S. tax
base by giving companies foreign tax credits that would reduce
their eventual U.S. tax bills.
A spokeswoman for the U.S. Treasury Department said "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."
House Speaker Paul Ryan (R., Wis.) called the commission's
decision awful. "This is precisely the kind of unpredictable and
heavy-handed taxation that kills jobs and opportunity," he
said.
Under EU rules, the commission has a right to open up legal
proceedings against member countries that don't obey the bloc's
rules.
"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" registered in Ireland that
from the point of view of U.S. tax authorities was overseas and
outside their immediate tax reach. As a result, Ms. Vestager 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 money to finance domestic cash needs 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.
The tax bill was also reduced as Apple's Irish subsidiaries sent
money to the U.S. that financed "more than half of all research
efforts by the Apple group in the U.S. to develop its intellectual
property worldwide," the commission said. This amounted to about $2
billion in 2011 and significantly more in 2014.
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 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. Amazon
has previously said it receives no special tax treatment from
Luxembourg while McDonald's has said it "complies with all tax laws
and rules in Europe."
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. Such claims could reduce the amount
that Ireland would then be able to collect.
But the uncertainty over which countries have the right to the
unpaid taxes could provoke or exacerbate existing disputes between
countries over how to allocate companies' profits internationally,
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 20:09 ET (00:09 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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