Update

Apple must pay Ireland $14.5 billion in unpaid taxes

Two Irish tax rulings constituted illegal state aid, the European Commission has ruled.

eu apple tax infographic

Apple must repay up to €13 billion (US$14.5 billion) in underpaid taxes in Ireland, the European Commission ruled on Aug. 30, 2016.

Credit: European Commission

Apple’s tax benefits in Ireland are illegal, and the company will have to pay up to €13 billion ($14.5 billion) in back taxes, plus interest.

That’s the verdict European Commissioner Margrethe Vestager delivered Tuesday, wrapping up a two-year investigation of the company’s tax affairs stretching back to 2003.

The investigation found that Apple’s effective tax rate on profit reported in Ireland was just €500 per million euros in profit, falling to €50 per million in 2014.

“I would have a feeling if my effective tax rate were 0.05 percent, falling to 0.005 percent. I would feel that maybe I should have another look at my tax bill,” she said.

The Commission looked into tax rulings granted by the Irish government to two Apple subsidiaries, Apple Operations Europe, which makes some Apple computers, and Apple Sales International, which resells the company’s products throughout Europe, the Middle East, Africa, and India.

The latter accounts for almost all the unpaid taxes Ireland now needs to recover, Vestager said.

Vestager said that the Irish tax authorities had allowed Apple to split profit from the two companies, which were subject to normal taxes, with “head office” companies that were subject to no taxes, either in Ireland or elsewhere.

“Splitting the profits did not have any factual or economic justification. The so-called head office had no employees, no premises, no real activities,” she said. Those head-office companies were allocated almost all the profits.

This selective tax treatment in Ireland is illegal under European Union state aid rules, she said, and distorts competition.

To restore fair competition, Ireland must recover up to €13 billion in back taxes from Apple for the period from 2003 to 2014.

“It is for the Irish authorities to determine the exact amount and the modalities of payment,” she said.

Apple will have to pay up even if the ruling is appealed, with the money going into an escrow account, she said.

Should the U.S. government decide to change its tax rules so that Apple owes more tax in the U.S. on its EU profits, then the sum to be repaid in Ireland could be reduced by a corresponding amount, she said.

Apple is not the only company in the Commission’s sights: It has also issued tax rulings against Starbucks and Fiat, and is still investigating Amazon.com and McDonalds in Luxembourg, Vestager said.

“All companies, big or small, should pay taxes where they make their profits. We need changes in corporate philosophies, and we need changes in legislation to address loopholes and to ensure transparency,” she concluded.

Apple CEO Tim Cook responded with an open letter dedicated to the “Apple community in Europe,” explaining how Apple’s operations in Cork, Ireland have boosted the local economy and created roughly 1.5 million jobs across Europe. The company claims to have always complied with the law, and has “never asked for, nor did we receive, any special deals,” according to Cook.

“Over the years, we received guidance from Irish tax authorities on how to comply correctly with Irish tax law—the same kind of guidance available to any company doing business there. In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.”

Both Ireland and Apple are planning on appealing the Commission’s decision, and Cook is “confident that the Commission’s order will be reversed.” 

This story was originally posted on August 30, 2016, at 3:48 a.m. Pacific. It was updated on August 30, 2016, at 9:20 a.m. Pacific with details of Tim Cook's statement. 

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