The European Commission (EC) ordered Apple Inc. to pay Ireland unpaid taxes of up to 13 billion euros ($14.5 billion) on Tuesday as it ruled the firm had received illegal state aid.
What is the EC alleging?
The European Union's (EU) executive arm has ruled that Ireland made a deal with Apple that had no basis in tax law. The Commission said this involved cutting Apple's tax bill to almost zero, in return for Apple building factories in Ireland.
The EC says that is unfair and that Apple must pay Ireland the tax it would have paid if normal tax rules were applied.
Why does the EU care if Ireland does not tax Apple?
The EU believes sweetheart tax deals help divert investment and jobs away from countries where it would normally go. Also, the tens of billions of dollars in profits which Apple enjoys tax free in Ireland each year are generated almost exclusively outside Ireland. Hence, Ireland's deal deprives other EU countries of tax revenue they might otherwise earn.
Is Ireland about to land a windfall?
Not anytime soon. Ireland’s finance minister said he plans to appeal the ruling in Europe’s highest court. That will likely take two years or more and Apple may make legal challenges and is also likely to be able to fight any demands from Ireland's Revenue Commissioners in Irish courts, tax lawyers say.
Might Apple settle?
It can certainly afford to, with more than $200 billion in cash or readily marketable securities. But since $13 billion is not a major sum for Apple, investors won't be too worried about the uncertainty it faces and consequently it won't be under pressure from shareholders to settle. The company has been aggressive in defended its tax practices, with CEO Tim Cook testifying to Congress on the issue.
What does the U.S. government think?
The U.S. Treasury and lawmakers have criticized the EU approach of using competition law to challenge tax rulings. They say the approach is targeting U.S companies, deviates from accepted international practice and threatens U.S. investment in Europe.
A U.S. Treasury Department White Paper last week said "it continues to consider potential responses should the Commission continue its present course". U.S law allows the President to double taxes on citizens and companies from countries which apply “discriminatory or extraterritorial taxes” on U.S. firms.
If the EC prevails, does this means that multinationals won't be able to avoid tax in the EU?
No. The Commission’s case against Ireland was helped by its ability to secure access to documents in which Irish officials were unusually frank about the agreement they made with Apple.
EU states wanting to secure investment by helping companies avoid tax will in future be more careful about leaving a paper trail which could suggest a tax ruling is a sweetheart deal.
The EU’s principal legal adviser on tax, Richard Lyal, wrote in a legal journal last year that “It is likely to be only in extreme cases that one can with confidence say that a particular decision reflects a misapplication of the chosen method".
Without evidence of an "extreme" deviance from accepted norms, the Commission would likely be reluctant to initiate a tax case.
(Editing by Alexander Smith)