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EU hits Apple with $14.5 billion tax bill. But what is this tax?

Apple, the world’s biggest company, was slapped a $14.5 dollar tax demand by the EU for paying almost ‘no’ tax on revenues running into billions of dollars. HT decodes how companies manage to pull this off and if it really is a problem

business Updated: Aug 31, 2016 18:00 IST
B Sundaresan
A police officer is silhouetted against the Apple logo in Manhattan.(REUTERS)

Apple, the world’s biggest company, was slapped a $14.5 dollar tax demand by the EU for paying almost ‘no’ tax on revenues running into billions of dollars. HT decodes how companies manage to pull this off and if it really is a problem

What prompted the tax demand from Apple?

The European Commission (EC), the executive body of the European Union, said on Tuesday that US tech giant Apple was granted undue tax benefits by Ireland which amounted up to 13 billion euros or $14.5 billion. “This is illegal under EU state aid rules…Ireland must now recover the illegal aid,” EC said in its statement.

But why Ireland?

Ireland is a part of the 28-member EU and Apple runs its international sales and its European operations from the Irish city of Cork, where Apple set up operations in 1980 with “60 employees”. It has since expanded to “6,000 people across Ireland”.

The EU investigation concluded that Ireland, which is already a low corporate tax jurisdiction, granted Apple selective tax treatment or sweetheart deals by the way of two rulings made in 1991 and 2007.

What did these rulings do?

These rulings allowed internal allocation of profits within Apple International Sales and Apple Operations Europe to a “head office”, which according to the EC was not located anywhere and the company could get away with not paying taxes.

Under this arrangement, Apple transferred a major portion of its profits from the two companies to this “stateless head office”, paying taxes on the profits retained by the two companies.

The first company controls the sale of Apple products in Europe, Africa and Asia and holds intellectual property rights of the company’s products, while the Apple Operations Europe manufactures and markets the company’s products.

How much were these transfers?

According to the EC press statement, in 2011, Apple International Sales recorded profits of 16 billion euros but only 50 million euros were taxable in Ireland, resulting in a tax payment of 10 million euros. This is an effective tax rate of 0.05%. The EC claims that this rate went down to as much as 0.005% in 2014.

Why does the EC consider this illegal?

The commission claims that since the “head office” does not have any physical existence – employees or office – and its operations are limited to board meetings of directors, the transfer of profits generated by Apple Sales International and Apple Operations Europe to the “head office” has “no factual or economic justification”.

The illegality stems from the violation of EU’s state aid rules that prohibit conferring of benefits on a selective basis to companies. Since EU is a single market such state aids can distort competition among member countries.

Ireland’s corporate tax system, which already has the lowest tax rate in Europe of 12.5%, was however not called into question.

Does this mean that only Apple was granted these benefits?

According to the EC, yes. But according to Apple, no. In a letter to customer issued soon after the ruling, Apple CEO, Tim Cook said: “The opinion issued on August 30th alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid”.

He added: “Over the years, we received guidance from Irish tax authorities on how to comply correctly with Irish tax law — the same kind of guidance available to any company doing business there”.

What is Ireland’s view on this?

The Irish government maintained that the full amount of tax was paid in this case (Apple) and no State aid was provided. “I disagree profoundly with the commission’s decision… The decision leaves me with no choice but to seek Cabinet approval to appeal the decision before the European Courts,” said finance minister Michael Noonan.

Just to put the figure in perspective $14.5 billion is 6.1% of Ireland’s GDP in 2015 of almost $240 billion. An Irish Times report noted that with this much money Ireland could build 20 hospitals.

However, Ireland is not intent on making Apple cough up the tax because it may jeopardise its attractiveness as an investment destination.

If the rulings were not selective other companies would be doing the same?

This arrangement of allowing companies to transfer profits to subsidiaries incorporated in other jurisdictions has been famously called the “Double Irish”.

Under the rule Ireland did not tax profits booked by subsidiaries of Irish companies outside its territory.

This channel of routing profits was closed with effect from January 1, 2015 reportedly due to increased pressure from the US and the EU to repatriate taxable income. Till then many companies apart from Apple have used the “Double Irish” including Abbott, Adobe, Facebook, Google, IBM, Pfizer, Oracle and Starbucks.

So why only Apple?

According to a Reuters report “The commission’s case against Ireland was helped by its ability to secure access to documents in which Irish officials were unusually frank about the agreement they made with Apple.”

In future, not many will see similar cases as, “without evidence of an extreme deviance from accepted norms, the commission would likely be reluctant to initiate a tax case,” the report added.

Have there been other sweetheart deals?

In October 2015, EC ruled that Netherlands and Luxembourg granted sweetheart deals to Starbucks and Fiat Chrysler respectively for $33 million each.

The commission is also investigating similar deals made by Luxembourg with Amazon and McDonalds.