The bill is getting quite expensive as the European Commission has just released a statement saying that Apple has benefited from illegal tax benefits in Ireland for its European operations. The commission says that Ireland must recover the “illegal aid” — it is worth $14.5 billion (€13 billion).
The debate over European taxes has been an ongoing issue for the past few years. While it’s not illegal to choose Ireland as your main country for your European headquarter, Ireland has gone one step further and granted tax benefits for Apple specifically. This is unfair for other companies headquartered in Ireland and Commissioner Margrethe Vestager has decided that it’s illegal and Apple must repay these tax benefits.
“Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules,” Vestager wrote. “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. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.”
In particular, Apple has optimized its tax structure by creating a company that only exists on paper. Apple Sales International and Apple Operations Europe, two Irish-based subsidiaries of Apple Inc., attributed the vast majority of their profit to a “head office.” This head office isn’t based in any country on earth, under the sea, or anywhere. So this profit remained untaxed for year, greatly lowering the effective tax rate.
While the total amount of the fine isn’t clear just yet, the European Commission says that Apple has benefited from $14.5 billion in tax benefits. The Commission has the power to fine Apple for a ten-year period preceding the first request for information in 2013. So Apple is getting fined for the period from 2003 to 2014 and also owes interests. Apple and the Irish government could negotiate a deal and the company could end up paying less than that. Apple will also probably contest the decision. Apple changed its structure in Ireland in 2015, so the company now complies with the taxation law in Europe.
Of course, Apple already has a ton of money outside of the U.S., sitting there and doing nothing. During its last earnings report, the company reported $231.5 billion in cash on hand. A significant portion of this big pile of cash is unrepatriated foreign earnings as the U.S. taxes foreign profit just like domestic profit. Paying back Ireland shouldn’t be an issue.
But today’s decision still raises an important question. Should the European Commission chase companies that build complicated schemes to lower their effective tax rates in Europe? Or should the European Union harmonize its corporate tax structure so that companies pay the same amount in all European countries?
Today’s fine is the result of an investigation that started in June 2014. Other American companies are currently being investigated for tax non-compliance — Google’s parent company Alphabet, Starbucks and McDonald’s could be next.
Featured Image: Julie Jacobson/AP