EU-Apple tax case

The European Commission made a decision that Apple should pay $15 bn of corporate income taxes (plus interest) to Ireland as reimbursement of illegal state aid. Apple sells Chinese-made products all over Europe.

Apple's US parent owns the intellectual property (IP) that is the primary value driver in these products. Apple's Irish affiliates have rest-of­world rights to that IP. So Apple's EU affiliates pay royalties to its Irish affiliates that reduce their taxable income in countries where sales were made. The upshot is that the only country left to tax EU sales income is Ireland, which is a tax haven. In 1991, and again in 2007, Apple struck deals with Ireland.

In exchange for a very low corporate tax rate, Apple agreed to base its European operations on the island member of the European Union (EU). The deal was legitimised through a "comfort letter," a ruling provided by tax authorities giving certain company clarity on how its corporate tax will be calculated. Apple has created thousands of jobs in Ireland in the 25 years since it first struck a deal with Irish tax authorities. By 2015, it had 5,000 employees in the country. When the headquarters in Cork opens, another 1,000 jobs are planned. Apple is growing its presence in Ireland because of low tax rates. It is a big taxpayer in Ireland too.

Ireland made a special deal with Apple — a transfer pricing ruling called an advance pricing agreement — under which Apple's Irish affiliates paid far less than the 12.5 per cent rack rate. For the years 2003 to 2014, Apple's Irish affiliates paid less than one per cent tax on this income. Flow did they do that? The ruling allocated much of their income to imaginary remote head office expenses — as if executives in Cupertino were remotely managing Irish operations. So most of the EU sales income was taxed nowhere.

Apple in Ireland is the fourth large company required to pay back tax, , following Starbucks in the Netherlands, and Amazon and Fiat in Luxembourg. Caught red-handed, Ireland and Apple are seeking to reverse the 13-bn-euro ($15 bn) back payment ordered by the European Court of Justice, but they stand little chance before the court. Contrary to the Irish finance minister's claim, the decision will have no effect on the fiscal sovereignty of member states. Although Apple has a net worth of $600 bn, the loss of $14.5 bn is still a colossal amount of money for the company. It is just under twice as much as Apple's profit from the last quarter ($7.8 bn).

Over the long term, the single European market needs to develop a single tax system that sets the same conditions for people and companies. This, however, is something member states are far from creating; instead they sometimes use their tax rates to compete with one another.



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