Saturday, September 3, 2016

Apple Owes Back-Taxes in the E.U.: Blame Ireland or Apple?

The European Commission issued a formal decision on August 30, 2016 that the state of Ireland “recoup roughly €13 billion ($14.5 billion) of unpaid taxes accumulated over more than a decade by Apple, Inc.”[1] The decision “shows companies could be on the hook for past behavior and potentially be handed big bills for allegedly unpaid back taxes.”[2] E.U. law “forbid companies from gaining advantages over competitors because of government help.”[3] This applies both the federal government and the state governments, so the law could be better stated as, “No state government shall help companies gain advantages over their competitors.” Presumably Ireland’s government made the offer of help, rather than Apple getting that government to comply with the company’s wishes. If so, the state government rather than the company should be held responsible. Put another way, if Apple’s board and management considered the Irish offer to be legitimate at the time, Apple should not be held to pay the back taxes; rather, the state government should pay a penalty to the Commission.
In the wake of the decision, Tim Cook, CEO of Apple, wrote, “Apple follows the law and we pay all the taxes we owe.”[4] In other words, the company took the Irish offer as legal and thus paid only the taxes owed as per Ireland’s position. To be sure, the arrangement was sweet for the company. According to the Commission, Ireland offered Apple tax arrangements in 1991 and 2007 allowing the company “to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.”[5] Ireland allowed the company to allocate profit at an Irish-registered unit called Apple Sales International, which purchased Apple goods from its outside manufacturers and sold them at a markup outside North and South America. In 2011, the unit brought in €16 billion in profit, and allocated under €50 million of it to Ireland where it was subject to taxation. The rest was allocated to a “head office” registered in Ireland and thus outside of U.S. jurisdiction.[6] The tax benefit is clearly unfair prime facie, to the U.S., and to other foreign companies doing business in the E.U. It should be noted, however, that the U.S. tax system encouraged “companies to find as low a foreign tax rate as they can, book as much profit as possible outside the U.S. and leave the money overseas.”[7] This is precisely what Apple did.
The principal question before us here is not whether the arrangement was fair, but, rather, whether the state government or the company was to blame, and thus deemed culpable to be fined or taxed. It is significant that the E.U.’s antitrust commissioner, Margrethe Vestager, noted that 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.”[8] The state government is thus the culprit here in that it granted the illegal benefits. Doubtless Apple’s management and board had no reason to suspect that an offer from a government would be illegal. When a U.S. state government makes an offer to a company so it will build a factory in the state, the company’s management does not have reason to suspect that the offer is against U.S. law.
Hence, a spokeswoman for the U.S. federal treasury observed that “retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules” of the E.U. state governments.[9] Apple’s benefits may be quite unfair, yet so too are retroactive tax assessments when the company had no reason to call into question Ireland’s tax rules. I suspect that the unfairness in the former biased E.U. federal officials against viewing the state government rather than the company as culpable. If the issue is that of a state government violating federal law, then the federal executive should hold the state government to account, and thus fine it rather than the company.

[1] Natalia Drozdiak and Sam Schechner, “$14.5 Billion Irish Tax Bill,” The Wall Street Journal, August 31, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Richard Rubin, “EU Decision Upsets Treasury, Congress,” The Wall Street Journal, August 31, 2016.
“Companies based in the U.S. owe the full 35% corporate tax rate on their global profits. They get tax credits for payments to foreign governments, and they don't pay the residual U.S. tax until they bring the money home.”
[8] Drozdiak and Schechner, “$14.5 Billion Irish Tax Bill,”, italics added.
[9] Ibid.