Apple’s Irish Tax Deal ‘Engineered’ to Boost Employment, EU Says

By Gaspard Sebag and Jesse Drucker  

Photographer: David Paul Morris/Bloomberg

Apple’s Irish tax arrangements drew scrutiny in the U.S. last year.

Apple Inc. (AAPL) may have to pay millions of euros in taxes in Ireland dating back to 2003 after the European Union said the iPhone maker benefited from improper deals that were “motivated by employment considerations.”
The methods for determining Apple’s costs “appear to have been reverse engineered” to arrive at a taxable income that “does not have an economic basis,” the European Commission said in a letter to Irish officials dated June 11 and posted on the EU website today.
“Overall, it looks like Ireland is caught,” said Alex Cobham, a researcher at the Center for Global Development in London, who
studies tax avoidance. “They’ve done a deal to fix some minimal tax payment for themselves, while turning a deliberate blind eye to the fact that this legitimizes the non-taxation of large amounts of Apple’s profits.”
The EU inquiry comes amid a global crackdown on tax-avoidance as governments struggle to increase revenue and reduce deficits. The commission has said tax avoidance and evasion in the EU cost about 1 trillion euros ($1.27 trillion) a year. In addition to Ireland, the EU tax probe also includes Luxembourg and The Netherlands.
The commission said in the letter that tax rulings granted by the government to Apple in 1991 and 2007 “do not comply with the arm’s length principle” of the Organization for Economic Cooperation and Development. Any potential recovery wouldn’t extend to aid granted before June, 12, 2003, the EU said.
Josh Rosenstock, a spokesman for Cupertino, California-based Apple, said that the company received no selective treatment from the Irish government.

Taxes Increase

“We’re subject to the same tax laws as the countless other companies who do business in Ireland,” Rosenstock said in an e-mail. “Since the iPhone launched in 2007, our tax payments in Ireland and around the world have increased tenfold.”
The EU addressed revenue increases in its letter to Ireland, saying that Irish sales increased fivefold from 2009 through 2012 while the costs reflected in the company’s taxable income rose less than 20 percent.
An Irish Finance Ministry spokeswoman said the government had no comment on today’s EU release, and referred to a statement issued yesterday, which said the state issued a formal response to the Commission earlier this month.
The response addressed “in detail the concerns and some misunderstandings, ” the Dublin-based ministry said yesterday, without giving detail. Apple “did not receive selective treatment and was taxed fully in accordance with the law.”

Employment Considerations

The commission also considers that “employment considerations” motivated the reduction of the margin on certain costs.
Fiat Finance & Trade SA also obtained a selective advantage via Luxembourg tax rulings, according to another filing on the regulator’s website.
The EU’s investigations focus on so-called transfer-pricing arrangements on taxing commercial transactions between company units, the EU’s antitrust arm said in June when it opened formal tax probes covering firms including Apple. Regulators are checking whether the tax deals constituted illegal state aid. Governments can be ordered by the commission to claw back unfair aid.
Apple’s Irish tax arrangements drew scrutiny in the U.S. last year. The company negotiated a tax rate of less than 2 percent with Irish authorities, a U.S. senate report said in May 2013, citing Apple.
As part of the state-aid review process, the commission will seek feedback on its decision to probe the tax breaks.