The European Commission has ruled that over several years Ireland has granted unjustifiable tax benefits to Apple worth up to €13 billion (about $14.5 billion), which the US computer company must now pay back to the Irish state – plus interest.
The ruling is that Ireland allowed Apple to organize its business in a way that allowed it pay substantially less tax than other businesses and that this is illegal under European Union state aid legislation.
The conclusion comes at the end of a European Commission investigation that began in June 2014 and found that two tax rulings issued by Ireland to Apple have artificially lowered the tax paid by Apple in Ireland since 1991. The European Commission ruling only covers the period 2003 to 2014.
"Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules," said Margrethe Vestager, Commissioner in charge of European Union competition policy, in a statement. "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."
Ireland’s corporation tax rate is set at very low 12.5 percent to try an attract business to headquarter operations in the country but the deal with Apple meant the company was paying less than 1 percent.
The European Commission found that Apple was allowed to set up two Irish incorporated companies of the Apple group – Apple Sales International and Apple Operations Europe – to which all sales of Apple products in Europe were attributed. In addition, sales profits were internally attributed to a virtual "head office" that did not exist in any juridstiction and did not pay tax in any country.
European Commission's view of how Apple assigned European profits to a "virtual" head office that paid no tax.
And this method, accepted and endorsed by Ireland, is how Apple moved to an almost zero tax bill in Europe.
The European Commission stressed that it is not imposing any fine on Apple but does require the restoration of equal treatment with other companies through the repayment of tax that is owed. The European Commission added that the ruling does not call into question Ireland tax system in general or its corporate tax rate.
Tim Cook, CEO of Apple, responded with a statement saying that Apple and the Irish government would appeal the ruling and that the European Commission had "launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process."
"In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe," the statement said. "We never asked for, nor did we receive, any special deals. 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."
Apple also published a FAQ document for investors that stated that nothing would change in the near-term as a result of the ruling. It also pointed out that the appeals process is likely to take several years.
Peter Clarke writes for EEtimes, from where this article is adapted.