By Alexandra Mcleod and Catriona Coppler

On August 30, 2016, the European Commission (“EC”) announced that Ireland’s tax deals with Apple violated the European Union’s state aid rules and that Apple owes $14.5 billion in back taxes. Without getting too deep into the weeds, here’s what you need to know. Apple avoided paying U.S. taxes by vesting a substantial portion of its intellectual property rights in an Ireland-based affiliate. This affiliate then avoided paying taxes to any other country by exploiting the discrepancies between Ireland and U.S. tax codes.[1]

Apple Ireland for years has been able to claim that it was not subject to U.S. tax law because the U.S. bases tax residency on where a company is formed, and the affiliate was formed in Ireland. In Ireland, Apple claims that it was not subject to Irish tax law because Ireland bases tax residency on whether a firm’s management and control resides in Ireland; Apple’s management and control are located in the United States not Ireland.[2] Additionally, as a part of this scheme, Apple treated all European sales as though they occurred in Ireland, but profits on those sales were largely attributed to a “head office” that was not based in any country, which deprived other European countries of taxes on those sales.[3]

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Michael Hiltzik, Inside the Apple tax bombshell:  Why it’s not Good for anyone (especially Apple), L.A. Times (Aug. 31, 2016, 12:20 PM), https://www.latimes.com/business/hiltzik/la-fi-apple-tax-20160831-snap-story.html.

Apple, in an open letter, claims that has always followed the law and that it has paid all the taxes that it owes. The truth is, Apple is not wrong. Apple did in fact receive guidance from Irish tax authorities on how to comply with Irish tax law. While it may have been exploiting gaps in the two tax laws, it was doing so legally and most importantly, it was doing it in a way that helped Ireland’s economy. Ireland’s reputation for having the lowest corporate tax rate in Western Europe has resulted in more than 700 U.S. companies establishing branches in Ireland, which created 140,000 jobs for the Irish economy. Apple itself employs 6,000 people in the country. [4]

So then what is the EC’s problem? It seems that the EC is just trying to send a message. Apple is a major corporation with international recognition and is the perfect target for the EC to set the precedent that this type of “creative lawyering” will no longer be tolerated. This EC’s decision is “an attempt to forbid smaller jurisdictions from using more attractive tax regimes to compete for foreign investment with larger rivals.”[5]

The EC is clear that it will continue cracking down on all types of similar tax avoidance, no matter the perceived legality. Apple was not the first to be hit with such a fine, nor will it be the last on the EC’S list. In the words of the great Jerry Maguire the EC is saying “SHOW ME THE MONEY!” Last year, the EC ordered the Netherlands to recoup $33 million in tax breaks it had given to Starbucks.[6] Additionally, the EC also issued a similar order regarding Luxembourg and Fiat. The next company in line seems to be Amazon and McDonald’s which both have deals with Luxembourg that allegedly save the companies large amounts of money. One thing is clear, the gig is up for all international corporations with tax savvy lawyers that manipulate the tax codes to work in their favor.

[1] Michael Hiltzik, Inside the Apple tax bombshell:  Why it’s not Good for anyone (especially Apple), L.A. Times (Aug. 31, 2016, 12:20 PM), https://www.latimes.com/business/hiltzik/la-fi-apple-tax-20160831-snap-story.html.

[2] Paul Sweeney, On Apple tax, State must side with its citizens, Irish Times (Sept. 5, 2016, 1:00 PM), https://www.irishtimes.com/opinion/on-apple-tax-state-must-side-with-its-citizens-1.2779404.

[3] Id.

[4] Tim Cook, A Message to the Apple Community in Europe, Apple (Aug. 30,2016) https://www.apple.com/ie/customer-letter/.

[5] Press Release, Eur. Comm’n, State Aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion (Aug. 30, 2016) https://europa.eu/rapid/press-release_IP-16-2923_en.htm.

[6] Massimiliano Trovato & Alberto Mingardi, Why Ireland is Right to Appeal Apple Tax Bill, Politico (Sept. 5, 2016 2:22 PM), https://www.politico.eu/article/why-ireland-is-right-to-appeal-apple-tax-bill-state-aid-technology/.

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