The European Commission ruled Tuesday morning after a three year probe into Apple’s tax affairs that Ireland granted undue tax benefits of up to €13bn to the multinational tech company.
Before the figure was released, many commentators predicted the commission would order the tech company to pay €200m in back taxes, but the number was much bigger than expected.
Irish economist Sheamus Coffey estimated the EU’s expected ruling on transfer pricing, but the EU ended up calculating its sums on the relation between the parent companies and the Irish branches.
In a statement, the European Commission declared that it is illegal under state aid rules for member states to give tax benefits to selected companies.
European Commissioner Margrethe Vestager said: “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% on its European profits in 2003 down to 0.005% in 2014."
Apple and Ireland appeal the decision
Meanwhile, the Cupertino-based tech giant, like the Irish government, has released a statement vehemently defending its tax stance and emphasising its rich Irish history. Apple said it opened its first European operation in Cork at a time of high unemployment and extremely low economic investment.
In the open letter Apple's CEO Tim Cook claimed the Commission is trying to “rewrite Apple’s history in Europe” and is ignoring Ireland’s tax laws.“We never asked for, nor did we receive, any special deals," he said. "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 anymore than we've already paid.”
Cook said Apple’s research and development takes place in California, so the majority of its profits are taxed in the United States. He added: “The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been.”
Both Apple and Ireland plan to appeal the commission's ruling.
Heather Self, tax partner at Pinsent Masons, wonders whether the commission will back down due to lack of resources and the aggressive responses it’s received from national governments - as well as a consortium of US tech companies applying pressure to the Netherlands, urging it not to back down to tax rules which insist groups who book sales offshore should pay more in tax.
“I think what [Ireland] object to and what the US objects to is that this is going back 10 years and it is undermining the certainty companies need to make investments,” said Self.
She continued: “The particular point the EU have focused on here is that they've said the Advanced Pricing Arrangements (APAs) that Ireland agreed to did not accord with economic reality and that profits were not taxed anywhere.
“In the past when companies had got rulings they've quite often only presented the picture to one tax authority. But now with country-by-country reporting and automatic sharing of rulings you're going to have to look at more of a global picture.
"I wonder whether this will end up being an agreement between Apple and the US, that the US will collect some more tax." But ultimately, Self added that through this decision the EU is making it harder for the US to commit to BEPS. “If the US doesn't commit to BEPs it's going to be very hard for it to have the impact the OECD wants it to.”
Aisling Donohue, tax partner at MG partners, expects the Irish revenue to be entangled in a court battle with the European commission for at least 15 years, pointing to a recent state aid case Ireland engaged in with a mineral oil company. Ireland lost this case after 16 years of fighting.
This will likely become a “political nightmare” for the Irish government, who have an upcoming Budget where it was expected to make very modest tax cuts after years of austerity, and they are now going to have to do that while saying they do not want to accept tens of billions, says Donohue.
Predicting the reaction from Irish taxpayers, Donohue said: “This goes back to a habit that Ireland has which is that we introduce very nasty tax laws for our own companies and then we don't apply them to multinationals.
She concluded: “Could you imagine after years of bailouts and austerity the public anger that will be caused by the government appearing to not want to take about €19bn off a multi-national?”
About Richard Hattersley
Richard is AccountingWEB's Practice Editor. If you have any comments or suggestions for us get in touch.