The Wall Street Journal
Updated Aug. 30, 2016 8:48 a.m. ET
The tax payment is the highest ever demanded under the EU’s longstanding state-aid rules that forbid companies from gaining advantages over competitors because of government help.
In a statement Tuesday, Apple said it would appeal the decision. Chief Executive Tim Cook, in an open letter, said: “Apple follows the law and we pay all the taxes we owe.”
Irish Finance Minister Michael Noonan said “I disagree profoundly with the Commission’s decision,” adding that the country would appeal the decision in order “to defend the integrity of our tax system.”
The European Commission said the tax arrangements Ireland offered Apple in 1991 and 2007 allowed the company to pay around 1% to almost zero tax on its European profits for more than 10 years, between 2003 and 2014, by designating only a tiny portion of its profit to a taxable Irish branch.
“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,” said European antitrust commissioner Margrethe Vestager, adding that Apple’s structure in Ireland “did not have any factual or economic justification.”
Shares in Apple fell more than 2% in premarket trading in Europe shortly after the decision was announced. Ms. Vestager said Tuesday that Apple would be expected to pay taxes in Ireland in the future based on the ruling, something that could entail billions in extra tax payments a year for the company going forward.
The U.S. Treasury Department has sharply criticized the EU’s tax investigations, arguing that the bloc unfairly targets American companies and acts inconsistently with international tax norms.
On Tuesday, a spokesperson said the Treasury Department was disappointed with the commission’s decision and reiterated that “retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules of individual Member States.”
The White House has previously accused the EU of angling to tax income the bloc doesn’t have a right to tax. Ireland will need to ensure Apple returns the money, regardless of which entity it comes from—including its offshore holding company that is used as a mechanism for deferring U.S. taxes.
Ms. Vestager said the amount Ireland needs to recover could be reduced if U.S. authorities required Apple to pay larger amounts on its profits. But she also defended the EU’s claim on the revenue.
“This has to do with profits generated in Europe and recorded in Europe,” Ms Vestager said. “Whatever the issue Apple may have with the U.S. tax code is not an issue for us.”
At issue in the decision is how Ireland allowed Apple to allocate profit, largely at an Irish-registered unit called Apple Sales International, which purchases Apple goods from its outside manufacturers and sells them at a markup outside the Americas—generating big profits.
In 2011, under the Irish tax ruling, the unit brought in €16 billion in profit, and allocated under €50 million of it to Ireland where it was subject to taxation, Ms. Vestager said. The rest was allocated to a “head office” within the unit that had no activity or employees, and was untaxed, Ms Vestager said. As as result, she said the unit had effective tax rate that year of 0.05%.
Ireland changed the law that allowed for a company like Apple Sales International to have no tax residency effective in 2015, and the EU says that Apple canceled its tax rulings that year. But it is unclear how Apple’s tax arrangements may have changed since or whether it now pays more tax to Ireland, the U.S. or other countries.
The decision against Apple and Ireland sets off a shockwave for multinational companies. Firms are already facing a slow-moving effort to update global tax rules to rein in the future use of legal structures many companies use to shift billions of dollars in profit to tax havens. Now the EU is showing how costly enforcement action on past behavior can be—even for the world’s largest firms.
European companies, including Fiat Chrysler Automobiles NV, have also entered the commission’s firing line over their tax deals with EU governments. But the Apple case dwarfs the Fiat case, where the company was only required to pay back as much as €30 million in taxes.
Companies also face increasing enforcement efforts at a national level. Tax authorities in Spain and France have raided Google’s offices. French authorities have demanded more than €1 billion in back taxes and fines. Google says it pays all the tax it owes.
On Tuesday, Ms. Vestager also said that she expected individual countries to use evidence in the EU ruling to pursue back taxes against Apple at a national level. That wouldn’t necessarily boost Apple’s bill under the EU ruling, however, because those other back-tax payments could reduce the possible payments due to Ireland, she said.
Those enforcement efforts, paired with new tax rules proposed by the bloc in June, could eventually redirect billions of euros in non-U.S. profits from companies like Apple,Alphabet Inc.’s Google and Facebook Inc. to European governments that are currently held offshore. The rules could also speed structural change at some of the world’s biggest technology companies, including Amazon.com Inc.
Some people close to technology companies say they are being unfairly singled out for political purposes to make an example in a battle that should really be between the U.S. and EU over who can lay claim to U.S. firms’ foreign profits. They argue that their behavior is no worse than companies in other industries, or European firms’ behavior.
“We make convenient punching bags,” one executive for a U.S. tech firm said.
The EU “risks chilling trans-Atlantic commerce and investment and growth in the EU at the expense of U.S. taxpayers,” said Dean Garfield, head of the Washington-based lobby group Information Technology Industry Council, which includes Apple, Amazon, Facebook, Google and Microsoft Corp.
—Richard Rubin contributed to this article.
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