EU asks Apple to repay £11bn to Ireland: What it means

In a landmark, perhaps symbolic, announcement earlier today, Margarethe Vestager, Chairman of the European Union's competition watchdog, directed Apple to pay up to £11 billion in unpaid taxes to Ireland, a country where Apple registers all of its sales in Europe, Asia, Africa and the Middle East.

EU's Allegations

In a press release titled 'State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion', the Commission listed out how Ireland, over the period of several years, 'granted undue tax benefits' to Apple, enabling the company to pay as low as 0.005 per cent of its profits in taxes to the country. The commission adds that no other company registered in Ireland enjoys such low taxes and as such, the 'state aid' granted to Apple goes against the EU's state aid rules.

Vestager has been at the helm of affairs at the EU competition commission for a while and has led popular antitrust probes against Google for the way it scripts contracts with OEMs for Android and how Google unfairly skews shopping results to benefit its services. She recently struck down the much-anticipated merger between Three and O2 in the UK, citing chances of higher pricing and lesser choices for consumers. She has been leading an investigation against Ireland's tax doles to Apple for a while, so we wonder if executives at Apple knew that they had it coming.

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"Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. 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 Vestager. "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," she added.

The unpaid taxes are alleged to have been incurred by Apple between 2003 and 2014, a period when Ireland's tax demands from the company went down gradually until it hit 0.005% in 2014. Ireland charges corporate taxes of up to 12.5% on all profits from other companies, whether from income or gains. The country also charges 25% corporation tax on income accruing from rent or investment.

According to the European Competition Commission, Apple has two companies registered in Ireland, namely Apple Sales International and Apple Operations Europe. Apple's profits from sales of devices and services in the entire EU Single Market goes to Apple Sales International which paid taxes which were just 0.005% of its overall profits. The EU adds that the two companies transferred their profits to an unknown 'head office' which was not subjected to tax in other countries as per an Irish tax law which is no longer in force.

In 2015, a year after Ireland imposed a corporation tax of 0.005% on these two companies, Apple restructured both of them, probably because of the ongoing investigation conducted by the EU, because of which an Irish tax ruling which applied specifically to them collapsed. Just because Apple is back to paying taxes like other companies, the EU does not want to exonerate them for the lack of taxes paid in the 11-year period between 2003 and 2014. Apple Sales International earned a profit of €16 billion in 2011 but only paid taxes (at a lower rate) for €50 million which was considered as taxable income.

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"The Commission's investigation has shown that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which has no factual or economic justification," said the EU's press release.

"As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its "head office" when this "head office" had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there," it added.

Apple's point of view

Apple responded by publishing a letter directed at the Apple Community in Europe. It began by saying that the company's success is a result of innovative products that excite customers rather than tax avoidance anywhere. "As responsible corporate citizens, we are also proud of our contributions to local economies across Europe, and to communities everywhere. As our business has grown over the years, we have become the largest taxpayer in Ireland, the largest taxpayer in the United States, and the largest taxpayer in the world," said the letter.

Apple contends that it abided by guidance from tax authorities in Ireland and all of its financial decisions were in response to such tax rulings. The same principle applies to every other country and by asking Apple to pay taxes that even Ireland says it doesn't owe them, the EU Commission "has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process."

Apple adds that EU's ruling would undermine the sovereignty of EU member states on tax matters and both Apple and Ireland will appeal the ruling and are confident that it will be overturned. The company also terms the ruling as an 'obvious targeting of Apple' and that it will potentially harm investment and job creation in Europe. 

What does this mean?

The European Commission may be justified in highlighting tax rules of member states that give preferential treatment to individual companies at the cost of others. If the Commission has relevant jurisdiction over the matter, it may be able to enforce the ruling on Apple to create a level playing field for all companies vying for space in the highly competitive smartphone, tablet, internet services and apps markets.

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Apple contends that it abided by Ireland's tax rules but never did the company contend that it won't abide by such rules unless the same rules were extended to other companies to abide by principles of fair competition. It is also surprising that the likes of Google and other competitors did not mention or highlight that such tax laws existed since 1991 which solely favoured Apple. Apple took a major stand against the FBI earlier this year in the name of 'principle' when it decided not to create a software to unlock an iPhone which belonged to a terrorist.

The fact that Apple decided to create its European subsidiaries in Ireland despite the fact that there were other countries which offered larger markets for its iPhones, other products and services, may point to the fact that these may have been a give-and-take relationship. Ireland as a sovereign country has the right to decide its own tax laws and it will be interesting to see whether it's sovereignty or the European Commission's principles will eventually overcome a long-drawn litigation which will soon follow.


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