Commission accuses Ireland of tax deals with Apple

Apple offices in Hollyhill, Cork

The European Union's competition watchdog says tax rebates that Ireland granted Apple appear to amount to illegal state aid and may have to be recouped.

Apple funnels the bulk of its international sales through subsidiaries in Ireland, where it benefits from low, negotiated tax deals.

In a letter to the Irish Government, the 28-nation bloc's executive Commission said the tax treatment granted to Apple raises "doubts about compatibility" with EU law.

The Commission says tax deals struck with Apple in 1991 and then 2007 show "several inconsistencies" and might not comply with international taxation standards.

The EU announced the probe in June. It is now requesting further documents from Ireland before making a decision which is likely to take several months.

If the EU's preliminary finding is confirmed over the coming months, Apple could face a repayment bill worth billions.

The EU first announced the probe in June, also targeting coffee store chain Starbucks and others as part of a crackdown on multinationals exploiting tax loopholes.

The investigation focuses on exaggerated transfer pricing, where one part of a company charges another part an inflated price for goods or services to shift profits to low-tax locations.

If Apple had to repay some taxes, the money would come as a windfall to Irish state coffers.

However, fearful of losing its reputation as a business-friendly country with low corporate taxes, the Government is adamant that no EU rules have been breached.

The Commission was critical of the fact that Apple's applicable tax rate appears to have been the result of "a negotiation rather than a pricing methodology" which a "prudent, independent" tax authority should not have accepted.

Apple's tax practices have also attracted scrutiny in the US, where a Senate committee last year published a scathing report on the California-based firm's tax schemes.

The report held up Apple as an example of legal tax avoidance made possible by complicated US tax rules, estimating the firm avoided at least $3.5bn (€2.75bn) in federal taxes in 2011 and $9bn (€7.1bn) in 2012 by using its tax strategy.

Apple - one the world's most valuable and profitable firms - sat on $164bn (€129.23bn) in cash and cash equivalents, with $138bn (€108.8bn) stashed away in foreign subsidiaries, according to its latest quarterly report in June.

The company estimated its effective US tax rate is 26.1%, as opposed to the statutory US rate of 35%, primarily because of undistributed foreign earnings.

"A substantial portion" of those foreign earnings was generated by subsidiaries organised in Ireland, Apple said in the regulatory filing, adding that "such earnings are intended to be indefinitely reinvested outside the US".

The two subsidiaries at the centre of the controversy are Apple Sales International (ASI) and Apple Operations Europe (AOE) - neither of which are tax-resident in Ireland but are incorporated here.

Apple declined to explain today why these two companies have been established in this way, but denied any wrongdoing.

“Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the (Irish) Government,” a spokeswoman said.

“Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.”

Apple said comprehensive corporate tax reform is badly needed.

The elaborate system of subsidiaries and profit shifting has not escaped the American administration, with President Barack Obama earlier this year accusing multinationals of relocating to exploit unpatriotic tax loopholes and singling out Ireland for special criticism over firms “gaming the system”.

The controversy also tainted a trade mission to California involving Taoiseach Enda Kenny earlier this year when, during a visit to San Francisco, governor of the state Jerry Brown said Apple was now an Irish company and California would be an independent country if it had Ireland’s tax laws.

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