Apple May be Forced to Pay Back Millions in Taxes

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Summary: The European Commission has launched an investigation into Apple’s tax practices in Ireland. Apple currently pays Irish tax rates on much of its profits, but many argue that Apple should pay U.S. tax rates instead.

The Guardian reports that depending on the result of the European commission’s (EC) investigation of Apple, the company may be forced to repay taxes on billions of euros of revenues. The EC has opened an investigation into sweetheart tax deals made with the Irish government in 1991 and in 2007. The outgoing competition commissioner, Joaquin Almunia, has stated that recipients of any illegal state aid will be ordered to repay it.

  

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State aid is illegal in the European Union if it is found to interfere with the free internal market. For example, the airline Ryanair had to repay 10 million euros in illegal state aid from three airports because the airline gained “an undue economic advantage over competitors” through its arrangements with the airports. Ryanair has contested the order.

The investigation dates back to the deals made between Apple and Ireland when it was a younger company and from when the iPhone was first launched in 2007. The investigation could take up to eighteen months to complete.

The maximum amount that a company may have to pay back would be €800 million, Seamus Coffey explained. Coffey is an economics professor at University College Cork. Coffey has examined Apple’s tax affairs in Ireland. Coffey said, “The EC can demand back payments for ten years, which would take it back to 2004.” The Apple subsidiaries that would be included in the calculations, Apple Operations Europe and Apple Sales Europe, had annual profits of between €60 million and €80 million between 2009 and 2012. Their annual revenues were between €500 million and €680 million.

Coffey added, “You’re taxed on profits, not revenues, but even if the EC said that all revenue was pure profit, then over 10 years it would owe the Irish tax rate of 12.5% on about €6.8 billion–that’s about €850 million. But it won’t be anything like that.” Coffey predicts that a more realistic figure would be 12.5% on ten years of profits profits amounting to around €800 million, which would be about €100 million Apple would have to pay.

The EC is investigating tax deals between the Irish government and the two subsidiaries, but is not delving into the complex tax plans that Apple uses for most of its revenues. Apple, like other international tech companies, will “park” profits in businesses owned by the United States and bank accounts located in Ireland. Taxes are not payable until the money arrives in the United States, which has caused political tension in the United States. Many senators have demanded that companies pay taxes on foreign-held cash.

European governments have grown frustrated with tax arrangements used by tremendous American companies which serve to shift revenues to countries with lower taxes. Apple, Facebook, Google, and Amazon have all come under fire for methods they have implemented to pay lower taxes on foreign revenues, especially for such transactions that occur in the European Union.

Almunia stated that the preliminary investigation hints that deals made between Apple and Ireland in 1991 and 2007 do “constitute state aid” but that “the commission has doubts about the compatibility of such State aid with the internal market [in the EU].” He also said that a  2007 deal that replaced the 1991 deal broke the rules as well.

Apple’s international headquarters are located in Knocknaheeny, which is a crumbling suburb north of Cork. Apple is its second-largest employer. Apple insists that it pays all taxes due. Commission experts revealed that Apple paid only 3.7% in taxes on foreign profits of $31 billion last year.

Ireland denied any special deals with Apple, which has been operating there since the 1980s when Steve Jobs, Apple’s co-founder, arranged for part of the economic rights to exploit Apple’s intellectual property, which was developed in California, to be transferred to an “Irish Apple” company. Two-thirds of Apple’s worldwide 2011 profits were attributed to companies registered in Cork. Apple Sales International had no employees until 2012 and was controlled by an American board of directors, but the company is based in Ireland. In 2011, it paid $10 million in taxes on revenues of $22 billion from non-US based Apple activities, a measly  0.045% in taxes.

Senator Carl Levin, who chairs the Senate Permanent Subcommittee on Investigations, issued a scathing report on Apple’s tax methods, showed strong support for the investigation: “The facts are abundantly clear: Apple developed its crown jewels–lucrative intellectual property–in the United States, used a tax loophole to shift the profits generated by that valuable property offshore to avoid paying U.S. taxes, then boosted its profits through a sweetheart deal with the Irish government.” In addition, he said, “Apple’s Irish tax rate has no rational basis; it was determined by what Apple was ‘prepared to accept’–with the threat that it would cut jobs in Ireland if it didn’t get its way. That low tax rate came on top of Apple’s ploy of saying its three main Irish subsidiaries are not tax residents anywhere. Hopefully this finding will help persuade Congress that we should close the loopholes in our tax code that allow Apple-type gimmicks whose sole purposes is to avoid paying U.S. taxes.”

Coffey agreed that Apple owes taxes to the United States: “Apple owes a lot of taxes–but to the U.S. government, not the Irish government.”

Crawford Spence, a Warwick Business School professor of accounting who is researching tax avoidance, observed, “What we are seeing with the actions of the European commission is possibly evidence that the legal boundaries around tax planning are shifting too. Recent years have seen the moral boundaries shift over both corporate and personal tax planning. Companies like Google and Amazon have been lambasted for developing tax arrangements which are entirely legal.”

Conor Healy, chief executive of the Cork chamber of commerce, said that over 40 international companies, such as Amazon, McAfee, and Google, have operations in the Cork area, which have brought 100,000 jobs to the community.

The Irish finance ministry issued a statement saying it is “confident that there is no breach of state aid rules in this case,” and that “the commission has not formally decided that there is state aid, only that it is formally examining the case.”

Coffey explained that the 1991 deal would be considered illegal state aid if it were made only to Apple, instead of being applied equally to any company or industry. He did say “There are some pretty damning quotes from the minutes of meetings in 1990 [where the deal was being negotiated].”

The EC’s primary concerns about the 2007 deal is that Apple declared too small of a profit in Ireland. Coffey noted, “But if it was declaring too little in Ireland, then it must have been declaring too much somewhere else. The perception is that it funnels its revenues through Ireland, but that’s not true–it funnels them through the U.S. It’s a U.S. company.”

In response to the investigation, Apple said, “Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government. Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.” Apple added that since the iPhone launched in 2007, its tax payments to Ireland have increased ten times.

Photo credit: technobuffalo.com