Apple Owes Ireland $14.5 Billion in Back Taxes. Will it Matter?

Today the European Commission ruled that Apple was granted illegal state aid by Ireland and it should repay €13 billion ($14.5 billion) in back taxes.

Apple has a habit of setting records, usually in iPhone sales, but being hit with a record-breaking back taxes bill is not what it had in mind.

The European Commission, which is the executive arm of the European Union, investigated the tax structure that Ireland and Apple had built and found that the Irish government had granted the Cupertino giant illegal tax benefits that let the company pay considerably lower taxes than anyone else.

Ireland’s corporation tax is 12.5%, which was already under scrutiny by other EU member states and the US for being too low. However the Commission’s investigation into Ireland found that since 1991 it had allowed Apple to pay taxes as low as 0.005%.

“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,” said Commissioner Margrethe Vestager.

As reactions poured in following the ruling, she stayed firm in the Commission’s assessment that Apple owed money. She rejected accusations that this was a “retroactive penalty” against Apple and that the ruling had simply been made under existing rules.

It’s important to note that the ruling does not constitute a fine or penalty against Apple. At same time, the ruling does not call Ireland’s corporate tax rate into question.

Ireland’s finance minister Michael Noonan however said he “disagrees profoundly” with the ruling.

While Apple has had operations in Cork, Ireland since 1980, the European Commission only had the scope to rule on a ten year period preceding the launch of the inquiry, which was in 2013. This €13 billion bill, plus interest, covers 2003 to 2014.

The Commission investigated two subsidiary companies of Apple—Apple Sales International and Apple Operations Europe, which were registered in Ireland but not tax resident there. These companies were taxed on the basis of the activity that took place in Ireland but the Commission has now stated that they should have been based on worldwide activity, i.e. profits from sales.

According to the European Commission, all Apple product sales in the EU were recorded in Ireland rather than the country where the product was actually sold. This structure meant that Apple avoided taxation on nearly all its profits on sales within the EU. The majority of profits were allocated to a “head office”, which was not based in any country and had no physical location.

“The so-called ‘head office’ did no business. It had no employees, no premises,” said Vestager in her excoriation of the whole set-up. “But under the tax ruling the so-called head office was attributed all the company’s profits for sales throughout Europe Africa, Middle East and India.”

The EC took umbrage with two tax rulings by Ireland, in 1991 and 2007, that allowed this to happen and allowed Apple to “internally allocate profits” within these two companies. The Commission’s investigation now rules that these tax rulings gave Apple an unfair competitive advantage over other companies.

For critics of Apple and how corporations in general avoid taxes, today’s ruling is a win.

Ireland is (despite rosy national headlines about economic growth) still recovering from a crippling economic recession and bailout, and is now put in a difficult position from the government’s view.

An extra €13 billion on the books would make a significant difference. Here’s a little perspective: €12.9 billion is the country’s healthcare budget.

However Ireland has spent the better part of the last two to three decades wooing international investment into the country. Its low (and often criticized) corporate tax rate of 12.5% has been the primary reason that Apple, Google, Facebook, and Twitter, to name just a few, have all set up shop there. This investigation shows that Ireland was willing to go to great lengths to ensure that this investment kept coming in and created jobs in the local economies.

Should Ireland appeal, and it has promised to do so, it still must recover the €13 billion to be held in an escrow account in the interim until an appeal ruling has been made.

For Apple it’s obviously a huge blow but in the grand scheme of things, the company could afford to the pay the bill. After all, it is valued at $570 billion with a cash stockpile of €230 billion. But this ruling also creates an air of uncertainty for European tech and ultimately the world. This goes much further than just Apple. It once again puts the tax structures of tech giants under the microscope. However, nothing will change immediately and we can expect this whole debate to get tied up in appeals all the way to the highest courts in Europe.

Apple CEO Tim Cook responded soon after the ruling with a sugar-coated opening statement that trumpeted the success of Apple’s base in Cork, which opened in 1980 and as Cook writes, pulled the city out of the throes of economic destitution. Apple now employs 6,000 people in Ireland. He then went on to categorically reject the Commission’s assessment.

“The European 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,” he said, stating that Apple always pays the taxes it owes and this ruling will hinder international investment into Europe.

“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 accused the EU of threatening nations’ sovereignty by imposing its view on tax rules instead of the laws of the land in question.

The US Treasury Department also came out against the EU ruling in the hours after it was announced. “The Commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU,” it said in a statement.

It would be foolish to think that the EU will only investigate Apple over taxes. Amazon in Luxembourg is under fire currently and we should expect more investigations into the tax practices of major US tech companies soon.

The EU, and specifically Margrethe Vestager who is also leading antitrust probes against Google, has proven in recent years that it’s prepared to fight against these major corporates when it comes to tax and anti-competitive practices.

Further probes will have a deep impact on how these American companies do business in Europe, and indeed globally, and on the EU-US economic relationship but just how successful the Commission will be is the big question moving forward.

The matter of corporations not paying their full taxes is almost an emotional issue as much as it is a political one. The Commission could expect to have support from average consumers, who pay their taxes and have felt the brunt of the recession in Europe since 2008. Economists on the other hand have a mixed view, raising concerns, much like Cook, that it will negatively impact foreign investment in EU countries.

For now, Apple is reeling and collecting its thoughts. Its shares dropped over 2% this morning, but they’ll no doubt bounce back soon. While the European Commission is steadfast in its ruling, it’s not a clear victory yet. Expect lots of legal and political wrangling in the months, and years, ahead.