The European Commission has ruled that Apple Inc. (AAPL) received unfair tax benefits from Ireland and will have to repay 13 billion euros or $14.5 billion in back taxes, plus interest.
After a three year investigation into the matter the European regulator has said that two tax rulings, one in 1991 and the other in 2007, issued to Apple by Ireland “substantially and artificially” lowered the tax the company had to pay since 1991. In a statement released this morning Commissioner Margrethe Vestager said, “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. 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.” The back tax which will have to be collected by Ireland from Apple is for the years 2003 to 2014. In 2015 Apple changed its company structure in Ireland. (See also, Apple CEO Tim Cook Sells $36 Million in Company Stock )
Apple was recording all sales in Europe in Ireland instead of individual nations, foregoing those nation’s own tax policies. The company was able to accomplish this by establishing two subsidiaries in Ireland, Apple Sales International and Apple Operations Europe, which held the rights to sell and manufacture Apple products. These subsidiaries then made payments of more than $2 billion a year to Apple Inc. in the U.S. and this amount was deducted from its recorded profits. Most importantly the two tax rulings in question allowed Apple Sales International to split its profits, allocating most to a “head office,” where it remained untaxed, and the rest to its Irish branch. In 2011, Apple Sales International recorded a profit of $22 billion but only 50 million Euros were taxed in Ireland.
Apple and Irish authorities are expected to appeal this ruling. Ireland’s Finance Minister Michael Noonan said, “The decision leaves me with no choice but to seek cabinet approval to appeal. This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation.”
Apple, the most cash-rich company in the U.S., was questioned by the U.S. Senate subcommittee about its offshore cash in 2013. Apple CEO Tim Cook has maintained that it’s simply too expensive for his company to bring money earned abroad back to the U.S. under the current tax laws.(See also, Apple CEO Tim Cook on Tax Repatriation ).