EU's Tax Decision Invites More Scrutiny of Apple
August 31 2016 - 5:22PM
Dow Jones News
By Natalia Drozdiak
BRUSSELS -- When the European Union's antitrust chief Margrethe
Vestager ruled this week that Apple Inc. owed billions of euros in
alleged unpaid taxes, the decision created a financial and public
relations problem for the technology giant. It also opened up a
Pandora's box of legal questions for Apple and other multinationals
operating in Europe.
Apple has said it would appeal the decision -- as has Ireland,
which the European Commission accused of forging a sweetheart tax
deal with the iPhone maker, in violation of the bloc's prohibition
against "state aid" for selective companies. Both of those legal
challenges could take years.
The decision also opens the door to further scrutiny of Apple
finances, legal structure and tax payments by national governments
across the continent. Ms. Vestager specifically invited them to do
so, saying governments in Europe, as well as the U.S., could claim
a piece of the roughly EUR13 billion, or about $14.5 billion, in
taxes that the commission has estimated Apple avoided paying in
Europe and has ordered Dublin to recoup.
Ms. Vestager's move to inspire other European governments to
undertake their own audits into how Apple paid taxes across Europe
plays into the commission's wider strategy of aiming to close down
tax havens and loopholes in the bloc. The job of actually
identifying any back taxes owed and getting it back into national
coffers would be up to the respective national authorities, Ms.
Vestager said.
A number of individual countries are already investigating
whether rival multinationals paid enough tax. In one of the highest
profile cases, France has been investigating whether Google parent
Alphabet Inc. owes back taxes. Alphabet has said it paid its fair
share.
Apple hasn't been targeted by any country in the EU in
tax-related investigations.
The European Commission invited folk "to come forward and try to
claim a piece of this settlement...so we anticipate that that may
happen and a feeding frenzy may occur," said Jennifer McCloskey,
director of government affairs at ITI, a U.S.-based technology
industry trade group, which represents Apple and other tech
companies.
Apple comment wasn't immediately available.
So far, no other government has said publicly they are
considering the option.
One factor that may limit any claim from elsewhere in Europe:
Most tax authorities in European countries, as well as in the U.S.,
can only seek to claw back taxes for about three or four years
back. The commission's ruling, on the other hand, covers 10 years
under the bloc's state-aid rules.
Some lawyers say if other capitals pursue their own back-tax
claim, they would face big hurdles. The commission has focused its
ruling on what it alleges was Apple's profit shifting from a
taxpaying affiliate in Ireland to its nontaxable, nonresident Irish
affiliate. In its ruling, the commission didn't focus on whether
Apple paid sufficient taxes for its affiliates in other EU
countries, said Howard Liebman, a Brussels-based tax partner at
Jones Day.
"To my mind, that doesn't really give an open invitation to
other EU countries," Mr. Liebman said.
U.S. officials roundly condemned Ms. Vestager's actions, making
it unlikely they would agree to try to benefit from the ruling.
U.S. Treasury Secretary Jack Lew on Wednesday said the EU's
decision "reflects an attempt to reach into the U.S. tax base to
tax income that ought to be taxed in the United States."
Apple or Ireland, however, could upend the commission's decision
altogether if either wins their appeals in court. Barring an
outright decision to overrule the commission's decision, Apple
could win court backing for a smaller claw back.
The commission's stance on how to calculate tax owed by Apple is
stricter than guidelines by the Organization for Economic
Cooperation and Development, lawyers say, making it potentially
vulnerable in court.
Challenging the commission's methodology on calculating the claw
back size will likely be "a very important part" of appeals by
Apple and Ireland, said Jonas Koponen, global head of the antitrust
practice at law firm Linklaters. "The legality would hinge on
that."
Until those questions are resolved in court, the commission's
move could spawn widespread ambiguity for all sorts of
multinational companies operating in Europe, and relying on tax
arrangements similar to the one between Apple and Ireland.
So-called "comfort letters" are common, giving companies clarity on
how a country's specific tax laws will be applied.
"For many companies it creates uncertainty [around]... the
validity of tax rulings they have received in the past -- what
should they do?" Mr. Koponen said.
--Richard Rubin in Washington contributed to this article.
Write to Natalia Drozdiak at natalia.drozdiak@wsj.com
(END) Dow Jones Newswires
August 31, 2016 17:07 ET (21:07 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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