In 2012, Apple paid approximately $6bn in US Corporate Tax on a reported US pretax income of $19bn. This in the words of Apple CEO, Tim Cook, at a Senate subcommittee in Taxes, 30.5% or around 2.5% of the total Corporate Tax revenue raised in the US.
During the same 2012 fiscal year, Apple paid just $713m in foreign taxes on its foreign earnings of $36.8bn, or around 1.93%.
In 2013, US Senate investigators raised questions about whether Apple shifted billions of dollars offshore that should have been included in its US income. At the time, Apple had attributed $3bn in income since 2009 to an affiliate that is incorporated in Ireland. The company’s tax rate worldwide was driven down because Apple’s Irish affiliates paid taxes at a rate of just 2%, the US Senate Permanent Subcommittee on Investigations found. At the time, Apple’s worldwide tax rate was estimated at under 14%.
How did it do that. According to reports that have been denied by Apple, the company allegedly struck a deal with the Irish government as far back as 1991, which allowed the company to share its profits between its Irish branch, which has manufacturing operations in Cork and employs 6,000 people, and an Apple head office that existed only on paper.
Apple paid the standard Irish tax rate on profits booked to its Ireland branch but the profits allocated to the phantom head office were tax free, because under Irish law it was then considered a “stateless company”.
Apple EU tax investigation
Now, following an investigation, which was launched in June 2014, the European Commission has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991.
The tax rulings, mentioned above, endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a “head office”.
The Commission’s assessment showed that these “head offices” existed only on paper and could not have generated such profits. These profits allocated to the “head offices” were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.
This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives the company a significant advantage over other businesses that are subject to the same national taxation rules. The Commission can order recovery of illegal state aid for a ten-year period preceding the Commission’s first request for information in 2013. According to the Commission, Ireland must now recover the unpaid taxes from Apple for the years 2003 to 2014 of up to €13bn (approx $14.5bn, £11bn) plus interest.
Apple response to EU Commission findings
In response to the Commission report, Apple CEO, Tim Cook released an open letter. In it he wrote that the idea that Ireland gave the company a “special deal” on its taxes had “no basis in fact or in law”.
Continuing, Mr Cook wrote: “We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid.”
Cook described the Commission’s move as “unprecedented” and said it would have “serious, wide-reaching implications”, particularly in relation to the sovereignty of EU member states over their own tax matters.
“At its root,” he wrote, “the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money.”
Ireland has said it plans to appeal the Commission’s ruling and Apple will do the same.
Apple has said it has long supported international tax reform with the objectives of simplicity and clarity but that in its view any new laws should be applied going forward — not retroactively.