European Commission demands tech giant repay $14.5 billion in tax breaks to Ireland

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 31, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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