Apple gets hit with $14.5B fine over Irish tax scheme

Ireland had given Apple illegal tax breaks over the last 25 years, leading to extremely low rates

Financial trends and news by Steven Loeb
August 30, 2016 | Comments
Short URL: http://vator.tv/n/46fd

Apple may be the most valuable company in the world right now, but that doesn't mean it can just shrug off the kind of fine it was just with by the European Commission.

On Tuesday,  the company was ordered to pay a whopping €13 billion ($14.5 billion) due to "illegal tax benefits" given to it by the Irish government over the last two and a half decades.

This was the end result of an investigation that started over two years ago into the tax loopholes several European countries, including Ireland, were offering huge, multinational companies, such as Apple and Starbucks.

Ultimately, the European Commission concluded that two tax rulings issued by Ireland to Apple substantially, and artificially, lowered the tax paid by Apple in Ireland for the past 25 years.

Part of the scheme involved Apple Sales International and Apple Operations Europe, two Irish-based subsidiaries of Apple Inc, attributing all profits from Apple sales in Europe to a "head office" that "existed only on paper." Even though this office was fake, it still allowed the company to pay virtually no taxes, giving Apple an unfair advantage over its competitors in the region. 

The EC released an infographic showing how exactly this all worked:

"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," Commissioner Margrethe Vestager, in charge of competition policy, said in a statement.

"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 must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 billion, plus interest.

Apple's reaction

In a letter written "to the Apple Community in Europe," Apple CEO Tim Cook called the ruling "unprecedented" and warned of the "serious, wide-reaching implications."

The Commission, he wrote, "is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed," he said.

"At its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money."

Cook also attempted to reframe the narrative, changing it from Ireland giving preferential treatment to Apple, to Apple actually helping to save the Irish economy, 

Apple has been operating in Cork, Ireland since 1980, a time when the town "was suffering from high unemployment and extremely low economic investment."

However, "Apple’s leaders saw a community rich with talent, and one they believed could accommodate growth if the company was fortunate enough to succeed, and, since then, "Countless multinational companies followed Apple by investing in Cork, and today the local economy is stronger than ever."

Cook's argument over the sovereignty of European countries comes at an interesting time. His point is that Apple benefits the Irish economy, and therefore the country should be able to set its own tax rates, and not be forced to change it. This comes only two months after similar persuasions led to the United Kingdom voting to leave the European Union

If it also sounds vaguely like Cook is threatening to leave Ireland as a result of the ruling, he made sure to dispel that notion.

"We are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment. We firmly believe that the facts and the established legal principles upon which the EU was founded will ultimately prevail," he said.  

Shares of Apple are down 0.67% to $106.10 a share.

(Image source: irishcentral.com)

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