 "Europeans accuse Ireland of giving Apple illegal tax breaks")
In a warning shot to companies shopping for tax deals around the globe, the European Commission publicly accused Ireland on Tuesday of giving illegal subsidies to Apple and cautioned that the country might need to collect back taxes from the company, which outside analysts said could reach into the billions of dollars.
These findings, which constitute a preliminary indictment of Apple's past arrangements with Ireland, come as policymakers in the United States and Europe try to block some of the inventive manoeuvres multinationals use to limit taxes in their home countries and reduce their worldwide payments as much as possible.
"The light bulb has gone off that trade wars by another name and conducted through the tax system are just as ruinous," said Edward D. Kleinbard, a professor at the University of Southern California's Gould School of Law and a former chief of staff to the Congressional Joint Committee on Taxation.
The commission's 21-page report, which was sent to Ireland in mid-June but released with redactions only on Tuesday, chastises Irish officials for giving Apple unlawful "state aid" that masqueraded as tax breaks. These special deals, it said, created unfair advantages for Ireland over other European Union member countries.
The commission, the administrative arm of the 28-nation European Union, said it was focusing on rulings by the Irish tax authorities in 1991 and 2007 concerning two wholly owned Apple subsidiaries, Apple Operations Europe and Apple Sales International, which had operations in Ireland.
The report found that Irish officials essentially "reverse-engineered" Apple's tax bill by first discussing with company representatives the size of the profit they wanted from the Irish branch. Apple's own tax adviser acknowledged there was "no scientific basis" for the figures, the report said.
That arrangement remained in effect until a 2007 reassessment, despite the remarkable growth of Apple and the market for digital technology.
The case - and the question of how much Apple may ultimately have to pay - is expected to take years to play out. But even the largest estimates pale in comparison to Apple's overall profit.
Both Ireland and Apple defended the tax dealings. Brian Meenan, of Ireland's Department of Finance, said on Tuesday: "We believe we're not in breach of any rules." Apple issued a statement: "Apple has received no selective treatment from Irish officials over the years."
When a Senate investigative panel looked into how American companies dodged taxes by shifting profits offshore, however, Apple's operations in Ireland served as a case study.
The commission, which used some of the Senate panel's research, noted that Apple enjoyed a 400 per cent increase in sales revenue from 2009 to 2012. But while Apple Sales International recorded a revenue increase of 415 percent during the three years from 2009 to 2011, to $63.9 billion, the operating costs used to calculate taxable income in Ireland reportedly grew only 10 to 20 per cent.
Senator Carl Levin, who was chairman of the investigating Senate subcommittee, said the commission's report validated his panel's finding that Apple had negotiated a tax rate of less than 1 per cent.
"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 U.S. taxes, then boosted its profits through a sweetheart deal with the Irish government," Senator Levin stated.
Wall Street analysts assured investors there was no need for alarm about Apple's obligations no matter what the commission ultimately rules. In a research note on Monday, Ben Reitzes, an analyst at Barclays Investment Bank, said any potential fine would have only a minor impact on Apple's financial health. Even $6 billion - the amount Apple would have paid over three years based on Ireland's full statutory tax rate - amounts to a cost of only $1 a share, he wrote.
Apple isn't the only global company coming under scrutiny. The commission announced on Tuesday that there was evidence that Luxembourg gave favorable treatment to Fiat Finance and Trade, a unit of the Italian automaker Fiat. It is also looking into Starbucks' tax deals in the Netherlands.
The investigations are part of a series of initiatives in Europe and the United States aimed at curbing businesses' efforts to avoid paying taxes when countries are struggling with fiscal constraints and weak economies. Last week, United States Treasury Secretary Jacob J. Lew announced regulations to prevent American companies from locating their headquarters overseas as a way of trimming their tax bills. In Paris last week, tax officials from more than 100 countries met to discuss ways to combat tax avoidance by multinationals. And this month, the Organization for Economic Cooperation and Development released its first recommendations, which were aimed at instituting a single set of international tax rules and at stopping countries from offering bargain-basement tax breaks.
"What it points to is a broader shift in the way the developed world is thinking of tax competition," said Rebecca Wilkins of the Citizens for Tax Justice, an advocacy group in Washington. "It used to be viewed as a good thing to lure companies to your shores. What they figured out is that everybody loses in that game. It's just been a massive race to the bottom."
The specific focus of the case against Apple and Ireland is so-called transfer pricing - a practice that commonly involves companies moving profits and losses between subsidiaries by labeling them internal corporate payments for goods or for copyright or patent royalties.
The commission's analysis aimed to prove that Irish authorities had underestimated the taxable profit of the Irish branches of Apple Sales International and Apple Operations Europe.
The report said officials never tried to calculate the transfer of payments among the parts of Apple as if they were separate companies - as standard accounting principles would require.
Nor, according to the report, did the tax agreement use calculations that would adequately allow for an increase in taxes to reflect the company's rapidly growing revenue.
Ireland has set its corporate tax rate at just 12.5 percent. That is roughly one-third the tax rate of other European countries, including France, whose policy makers have criticized Ireland for offering incentives to attract global companies to its shores.
One country having lower tax rates than its neighbors is not against European Union rules. But it could be a violation if a country granted special deals to certain companies that were not available to others.
James Stewart, a financial tax expert at Trinity College Dublin, said that even if a final ruling was years away, Tuesday's report was "damaging to Ireland."
"There's a deeply held belief that our low corporate tax regime is central to Ireland's industrial policy," he said. "It will be much more difficult for Ireland to give similar deals to other multinational companies."
Even so, if Apple were ultimately forced to pay back taxes, Ireland would be the one to collect the windfall.
These findings, which constitute a preliminary indictment of Apple's past arrangements with Ireland, come as policymakers in the United States and Europe try to block some of the inventive manoeuvres multinationals use to limit taxes in their home countries and reduce their worldwide payments as much as possible.
"The light bulb has gone off that trade wars by another name and conducted through the tax system are just as ruinous," said Edward D. Kleinbard, a professor at the University of Southern California's Gould School of Law and a former chief of staff to the Congressional Joint Committee on Taxation.
The commission's 21-page report, which was sent to Ireland in mid-June but released with redactions only on Tuesday, chastises Irish officials for giving Apple unlawful "state aid" that masqueraded as tax breaks. These special deals, it said, created unfair advantages for Ireland over other European Union member countries.
The commission, the administrative arm of the 28-nation European Union, said it was focusing on rulings by the Irish tax authorities in 1991 and 2007 concerning two wholly owned Apple subsidiaries, Apple Operations Europe and Apple Sales International, which had operations in Ireland.
The report found that Irish officials essentially "reverse-engineered" Apple's tax bill by first discussing with company representatives the size of the profit they wanted from the Irish branch. Apple's own tax adviser acknowledged there was "no scientific basis" for the figures, the report said.
That arrangement remained in effect until a 2007 reassessment, despite the remarkable growth of Apple and the market for digital technology.
The case - and the question of how much Apple may ultimately have to pay - is expected to take years to play out. But even the largest estimates pale in comparison to Apple's overall profit.
Both Ireland and Apple defended the tax dealings. Brian Meenan, of Ireland's Department of Finance, said on Tuesday: "We believe we're not in breach of any rules." Apple issued a statement: "Apple has received no selective treatment from Irish officials over the years."
When a Senate investigative panel looked into how American companies dodged taxes by shifting profits offshore, however, Apple's operations in Ireland served as a case study.
The commission, which used some of the Senate panel's research, noted that Apple enjoyed a 400 per cent increase in sales revenue from 2009 to 2012. But while Apple Sales International recorded a revenue increase of 415 percent during the three years from 2009 to 2011, to $63.9 billion, the operating costs used to calculate taxable income in Ireland reportedly grew only 10 to 20 per cent.
Senator Carl Levin, who was chairman of the investigating Senate subcommittee, said the commission's report validated his panel's finding that Apple had negotiated a tax rate of less than 1 per cent.
"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 U.S. taxes, then boosted its profits through a sweetheart deal with the Irish government," Senator Levin stated.
Wall Street analysts assured investors there was no need for alarm about Apple's obligations no matter what the commission ultimately rules. In a research note on Monday, Ben Reitzes, an analyst at Barclays Investment Bank, said any potential fine would have only a minor impact on Apple's financial health. Even $6 billion - the amount Apple would have paid over three years based on Ireland's full statutory tax rate - amounts to a cost of only $1 a share, he wrote.
Apple isn't the only global company coming under scrutiny. The commission announced on Tuesday that there was evidence that Luxembourg gave favorable treatment to Fiat Finance and Trade, a unit of the Italian automaker Fiat. It is also looking into Starbucks' tax deals in the Netherlands.
The investigations are part of a series of initiatives in Europe and the United States aimed at curbing businesses' efforts to avoid paying taxes when countries are struggling with fiscal constraints and weak economies. Last week, United States Treasury Secretary Jacob J. Lew announced regulations to prevent American companies from locating their headquarters overseas as a way of trimming their tax bills. In Paris last week, tax officials from more than 100 countries met to discuss ways to combat tax avoidance by multinationals. And this month, the Organization for Economic Cooperation and Development released its first recommendations, which were aimed at instituting a single set of international tax rules and at stopping countries from offering bargain-basement tax breaks.
"What it points to is a broader shift in the way the developed world is thinking of tax competition," said Rebecca Wilkins of the Citizens for Tax Justice, an advocacy group in Washington. "It used to be viewed as a good thing to lure companies to your shores. What they figured out is that everybody loses in that game. It's just been a massive race to the bottom."
The specific focus of the case against Apple and Ireland is so-called transfer pricing - a practice that commonly involves companies moving profits and losses between subsidiaries by labeling them internal corporate payments for goods or for copyright or patent royalties.
The commission's analysis aimed to prove that Irish authorities had underestimated the taxable profit of the Irish branches of Apple Sales International and Apple Operations Europe.
The report said officials never tried to calculate the transfer of payments among the parts of Apple as if they were separate companies - as standard accounting principles would require.
Nor, according to the report, did the tax agreement use calculations that would adequately allow for an increase in taxes to reflect the company's rapidly growing revenue.
Ireland has set its corporate tax rate at just 12.5 percent. That is roughly one-third the tax rate of other European countries, including France, whose policy makers have criticized Ireland for offering incentives to attract global companies to its shores.
One country having lower tax rates than its neighbors is not against European Union rules. But it could be a violation if a country granted special deals to certain companies that were not available to others.
James Stewart, a financial tax expert at Trinity College Dublin, said that even if a final ruling was years away, Tuesday's report was "damaging to Ireland."
"There's a deeply held belief that our low corporate tax regime is central to Ireland's industrial policy," he said. "It will be much more difficult for Ireland to give similar deals to other multinational companies."
Even so, if Apple were ultimately forced to pay back taxes, Ireland would be the one to collect the windfall.
©2014 The New York Times News Service