While Apple is no stranger to allegations of tax avoidance from politicians on the warpath, in Brussels it is facing a more worrying threat: a tax repayment order that could potentially run to billions of euros.
Last year US senators accused the group of using Ireland as a haven in the search for the “holy grail of tax avoidance”. The report was a reputational blow that gave added impetus to global tax reform.
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The Brussels investigation is, by contrast, a fiscal reckoning with the past. Ireland denies wrongdoing and Luca Maestri, Apple’s finance chief, pictured below, tells the FT: “It’s very important that people understand that there was no special deal that we cut with Ireland. We simply followed the laws in the country over the 35 years that we have been in Ireland.”
But if the commission case is proven, it could serve a hefty bill to Apple, and provide Ireland with an unexpected tax windfall.
Typically the EU has used its state aid powers to address broader competition issues. But in the past year Brussels has attempted to target the tax affairs of companies such as Apple, Starbucks and Amazon. It is a novel application of the law with far-reaching implications, not just for the companies, or EU countries, but for EU-US relations in general.
This week the European Commission will publish the first findings in the Apple case. The details – including evidence from bygone tax negotiations – are likely to be explosive.
At issue is whether Apple applied pressure to talk down its tax liability with Irish authorities, which essentially amounted to illegal state aidthat gave the iPhone maker an in-built advantage over its rivals.
Mr Maestri denies Apple ever made any threat to move jobs away from Ireland to secure a tax incentive when agreeing tax rulings with the Irish authorities in 1991 and 2007. “If the question is, was there ever a ‘quid pro quo’ that we were trying to strike with the Irish government – that was never the case,” he says. “We’ve always been very transparent with the Irish government that we wanted to be a good corporate citizen.”
Mr Maestri says the process of agreeing the ruling “was a very typical discussion that any company has with any sovereign authority. There was nothing we were trying to hide.”
“If countries change the tax laws, we will abide by the new laws and we will pay taxes according to those laws,” he says.
Mr Maestri adds that corporate income taxes in Ireland have increased more than 10 times since the introduction of the iPhone in 2007, during which time its global sales have increased from $24bn that year to $171bn in 2013.
Apple’s legal rebuttal has two main strands. First that the commission’s attempt to retrospectively apply international guidelines on taxing branches of multinationals is misleading and wrong. The OECD rules only came into force in 2010, and have yet to be adopted by Ireland.
Second Apple argues the rates agreed with Irish authorities are appropriate. It hopes to show its tax bills were a measure of the profits attributable to its Irish subsidiaries and within a similar profit range to comparable companies.
If the commission’s concerns over a sweetheart deal are confirmed, it has the power to order Ireland to recoup 10 years of the illegal support. Depending on the outcome of the probe, any fine is likely to smash the EU’s record state aid fine of about €1bn, say people involved in the case, though Mr Maestri says it would be “speculative” to estimate any number.
This makes the stakes sky-high, not least for the commission. The probe is a new frontier for the EU executive, which formally has no say on how countries set corporate tax rates. Its attempt to intervene on the question of how those rules are enforced – using a state-aid pretext – has ramifications well beyond Ireland.
So far powerful countries such as Germany and France have cheered on the commission investigation. There is speculation in Brussels of investigations extending to other US technology giants from Google to Microsoft.
A decision against Ireland would be a blow to its reputation, intensifying the already acute pressure from other governments that want it to block loopholes used by companies to route profits to tax havens. But Ireland stands to benefit from any extra tax Apple is forced to pay and many tax advisers think it will end up securing more revenue and jobs from the imminent crackdown on multinationals’ tax avoidance.
Mr Maestri says the company would co-operate with Brussels’ inquiry and that Apple has no plans to cut loose from Ireland, regardless of the outcome of the commission’s probe.
“We stayed in Ireland during difficult times and during great times” for Apple, Mr Maestri says, referring to its brush with bankruptcy in the mid to late 1990s. “Over the years we have grown. We are the largest employer in the city [Cork]. We are a very important contributor to the Irish economy.”
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