Apple may have to repay tax linked to billions of euros of revenues after Brussels criticised “illegal state aid” that the US group received through deals with the Irish government between 1991 and 2007.
The European commission formally opened an investigation into the deal on Tuesday as the outgoing competition commissioner, Joaquín Almunia, warned that the recipient of any illegal state aid – in this case Apple – would be liable to repay it.
The investigation, which could take up to 18 months to conclude, comes as European governments become increasingly critical of tax arrangements used by US technology companies to shift revenues to low-tax countries. Apple, Google, Amazon and Facebook have all come under scrutiny for the methods they use to cut the tax they pay on their non-US revenues, especially for transactions in the EU.
Almunia said the commission’s preliminary investigation suggests that deals made between Apple and the Irish government in 1991 and 2007 “constitute state aid” and that “the commission has doubts about the compatibility of such state aid with the internal market [in the EU]”. He said that a deal which replaced them in 2007 also breaks the rules.
Apple’s international headquarters are based in Knocknaheeny, a run-down northern suburb of Cork where it is now the second biggest employer. Apple says that it pays all taxes due. Commission experts say it paid just 3.7% tax on non-US profits of $31bn (£19bn) last year.
The Irish government has rejected suggestions of a special deal with Apple, which has been operating in the country since the 1980s, when the company’s co-founder Steve Jobs arranged for a portion of the economic rights to exploit the group’s intellectual property – developed in California – to be transferred from an American company to a new “Irish Apple” company.
Two-thirds of Apple’s global profits for 2011 were attributed to companies registered in Cork.
The maximum amount payable if the commission, which enforces European Union laws, demands repayment by Apple could be €800m, according to one expert.
Seamus Coffey, an economics lecturer at University College Cork, who has examined Apple’s Irish tax affairs, said: “The EC can demand back payments for 10 years, which would take it back to 2004.”
Figures in the commission’s calculation show that the relevant Apple subsidiaries – Apple Operations Europe and Apple Sales Europe – had annual profits of between €60m and €80m between 2009 and 2012, and annual revenues of between €500m and €680m.
“You’re taxed on profits, not revenues, but even if the EC said that all that revenue was pure profit, then over 10 years it would owe the Irish tax rate of 12.5% on about €6.8bn – that’s about €850m,” said Coffey. However, Coffey said a more likely figure would be 12.5% on total profits over the 10 years of perhaps €800m, amounting to €100m.
The commission is investigating the tax deals between the Irish government and the two companies – but not the complex tax arrangements Apple, like other tech multinationals, uses for the majority of its revenues. They “park” profits in US-owned companies and bank accounts located in Ireland – because no tax is payable until the money arrives in the US. That has been a source of political friction in the US, with tech companies lobbying for a “cash repatriation amnesty” while senators call on the companies to pay tax on the foreign-held cash.
Apple has come under fire in the US for its complex tax arrangements, under which a company called Apple Sales International, which until 2012 had no employees and was controlled by a US-based board, is based in Ireland – where in 2011 it paid taxes of $10m on revenues of $22bn from non-US-based Apple activities, a rate equivalent to 0.045%.Senator Carl Levin, who published a damning report on Apple’s tax practices last year, issued a strong statement in support of the investigation.
“The facts are abundantly clear: Apple developed its crown jewels – lucrative intellectual property – in the United States, used a tax loophole to shift the profits generated by that valuable property offshore to avoid paying US taxes, then boosted its profits through a sweetheart deal with the Irish government,” said Levin, who chairs the Senate Permanent Subcommittee on Investigations.
“Apple’s Irish tax rate has no rational basis; it was determined by what Apple was ‘prepared to accept’ – with the threat that it would cut jobs in Ireland if it didn’t get its way. That low tax rate came on top of Apple’s ploy of saying its three main Irish subsidiaries are not tax resident anywhere. Hopefully this finding will help persuade Congress that we should close the loopholes in our tax code that allow Apple-type gimmicks whose sole purpose is to avoid paying US taxes.”
Coffey commented: “Apple owes a lot of taxes - but to the US government, not the Irish government.”
Warwick Business School professor of accounting Crawford Spence, who is researching tax avoidance, said: “What we are seeing with the actions of the European commission is possibly evidence that the legal boundaries around tax planning are shifting too. Recent years have seen the moral boundaries shift over both corporate and personal tax planning. Companies like Google and Amazon have been lambasted for developing tax arrangements which are entirely legal.”
Over 40 multinationals – including Amazon, Google and software security group McAfee – have operations in and around Cork, bringing 100,000 jobs to the area, according to Conor Healy, chief executive of the Cork chamber of commerce.
The Irish finance ministry said in a statement that it is “confident that there is no breach of state aid rules in this case”. It added that “the commission has not formally decided that there is state aid, only that it is formally examining this case”.
Coffey said that the 1991 deal would constitute illegal state aid if it were made only to Apple, and wasn’t applied equally to any company or industry. “There are some pretty damning quotes from the minutes of meetings in 1990 [when the deal was being negotiated],” he noted.
The EC’s key concerns about the 2007 deal seemed to be that Apple had declared too little profit in Ireland, Coffey said. “But if it was declaring too little in Ireland, then it must have been declaring too much somewhere else. The perception is that it funnels its revenues through Ireland, but that’s not true – it funnels them through the US. It’s a US company.”
In a statement, an Apple spokesman said: “Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government.
“Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.”
The spokesman said that since the iPhone’s launch in 2007, Apple’s tax payments in Ireland and around the world had increased tenfold.
