When the mailboy delivered the letter from the EU Competition Commissioner, the CEO of Apple thought it was just another competition complaint.
“What the heck,” he would have thought, “Another complaint from Brussels.”
But it wasn’t about competition. It was about tax. And the EU wanted Apple to pay to the Irish government 13 billion euros (19 billion including interest) in back taxes.
Work with W&D on this.
The essential story is that some multinational US firms (e.g. Apple) transfer profits to a low tax jurisdiction (e.g. Ireland) by transferring the ownership of intellectual property to subsidiary companies based in that low tax jurisdiction.
As most of the profit component of a product (e.g. the iPhone) that that the multinational (e.g. Apple) sells is IP, the largest profit component ends up being taxed in the low tax jurisdiction (e.g. Ireland).
The company tax rate in the US is 35%. The company tax rate in Ireland is 12.5%.
But, wait, there’s more. Apple did a special deal with Ireland to lower its effective tax rate to about 1%.
Nice work if you can get it.
This arrangement seems perfectly legal. But, the US tax authorities hate it, as the profits cannot be taxed in the US unless brought into the US.
The EU doesn’t like it either, as it means that tax revenue for Europe is lower than might otherwise be the case.
Here’s the seriously smart thing the EU have done. Rather than charging Apple with tax evasion, they have ordered Ireland to recoup 19 billion euros from Apple, as the 19 billion euros is unlawful state aid.
W&D dips his lid to Margrethe Vestager (the EU competition commissioner). This is brilliant. Rather than trying to untie the Gordian knot of international company tax law, transfer pricing etc, she has sliced through it with a simple, easy to understand action. The tax deal with Apple was a particular type of state aid, which is illegal under EU law.
The US Treasury is now furious with the EU. To W&D, this fury looks like sour grapes. Just because the US couldn’t get its hands on the Apple tax, well, doggone it, no-one else should.
The 19 billion euros would make a nice earner for the Irish taxpayer – that’s more than it costs to run the Irish health system in a year.
The dilemma for the Irish government is that it supports Apple in its fight against the EU. But just think about that. The EU wants to hand the government of Ireland a cheque for 19 billion euros. And in full view of the Irish voter.
Will the Irish government say, "No thanks."