EU hits Apple with record breaking €13bn tax bill

Profile picture for user ddpreez By Derek du Preez August 29, 2016
Summary:
The European Commission is seemingly losing its patience with multi-national companies that funnel their cash through low-tax member states. Apple is the latest target.

Apple
In recent months we at diginomica have noted how tensions are growing in Europe over how global technology companies pay their tax bills in the region, with some paying less than £5,000 annually to the likes of the UK.

This has been a growing trend amongst the internet giants, which are able to take advantage of early 1990s tax laws that enforce companies to pay tax authorities based on where they were located, rather than where they made sales.

However, competition chiefs within the European Commission are losing patience with the practices of some - and Apple is in the firing line.

Today Apple has been hit with a multi-billion tax penalty after a ruling from Brussels that the company has received illegal state aid from Ireland. The tech giant, which has operations based in Ireland and employees over 5,000 people in the country, will be ordered to pay the huge back-dated tax bill to Dublin.

Competition commissioner Margrethe Vestager’s decision is likely to face appeals in the European courts by both Apple and Ireland. The order is the result of a three year investigation by Brussels and follows increased tension between the US and the EU over tax issues.

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 European Commission has said that “two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991”. It added that “‘head offices’ existed only on paper and could not have generated such profits”.

Just last week the US launched a scathing attack on the European Commission in an attempt to avert the hit against Apple, by stating in a release that Brussels was becoming a “supranational tax authority” that could impact international agreements on tax reform.

Earlier this year, Apple’s chief financial officer, Luca Maestri, told the FT that Apple shouldn’t owe anything beyond what it has already paid the region. He said:

This is a case between the European Commission and Ireland and frankly there is no way to estimate the impact right now, we need to see what the final decision is going to be.

My estimate is zero. I mean, if there is a fair outcome of the investigation, it should be zero.

Apple has said to the US Securities and Exchange Commission that if the ruling by the EU Commission were to go against it, it could have a “material” impact on its finances.

The ruling is also likely to create a backlash from the Irish government, which in recent years has done what it can to lower its corporate tax rate to attract investment in the region from large multinationals. Many companies use Ireland as a base for their European sales, because of the tax benefits.

Growing concerns

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The decision by Brussels is the latest in a string of rulings against international companies, including EDF, Starbucks and Fiat, but the decision against Apple is likely to have the largest financial consequence by a huge margin.

However, it’s not just the European Commission that has a bee in its bonnet about the tax affairs of multinationals, as member states are increasingly finding that the payments they receive from these companies border on the absurd.

For example, Facebook paid just £4,317 in UK tax in 2014. The following year HMRC paid Facebook £27,000 for adverts on the social network to remind people to pay their taxes. The company has now said, following a backlash and public scrutiny, that it will pay “millions more” in taxes going forward.

Equally, the UK hailed a deal it struck with Google over its tax affairs, which will see it pay £130 million in back-dated taxes for the past 10 years. However, despite this being lauded by then Chancellor of the Exchequer George Osborne, it was labelled by experts as “derisory”, given that Google has made estimated profits in the UK of £7.2 billion over the same period.

That’s not to say that these companies aren’t following the law - they are almost certainly receiving expert advice on how to pay the least amount of tax in each member state. That being said, there is an increasing view that these laws are flawed and that the tax practices of these companies are unfair.

International work

In additional to member state rulings and broader EU work against companies that are not paying their fair share of tax, the OECD has been working with countries to improve cross-border cooperation on tax affairs.

At the start of the year the OECD has signed a “Multilateral Competent Authority Agreement”, which it hopes will boost transparency regarding the tax arrangements of multinational enterprises.

The OECD hailed the signing of the agreement as “an important milestone” in increasing cross-border cooperation on tax affairs.

OECD Secretary-General,Angel Gurría, said:

Country-by-Country Reporting will have an immediate impact in boosting international co-operation on tax issues, by enhancing the transparency of multinational enterprises’ operations.”

Under this multilateral agreement, information will be exchanged between tax administrations, giving them a single, global picture on the key indicators of multinational businesses. This is a much-needed tool towards the goal of ensuring that companies pay their fair share of tax.

The agreement, which is not a new law, but rather an information-sharing tool, should make it harder for companies such as Facebook, Apple and Google to use international tax regimes to their advantage and says that firms must now pay tax in the country where their profits are made.

My take

This is going to get messy.