Apple’s European Tax Headache

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If, as the European Commission (EC) alleges, Apple Inc. (NASDAQ: AAPL) has paid an infinitesimally small 0.005% tax rate in Ireland, it’s no wonder it continues to hold around $200 billion in cash earned outside the United States over the past 10 years. About 90% of that cash was earned by Irish subsidiaries.

And contrary to CEO Tim Cook’s assertion to a U.S. congressional committee in 2013 that Apple pays “all the taxes we owe, every single penny,” the EC says the company and the government of Ireland have underpaid to the tune of about $14.5 billion, and the Commission wants its money.

The EC’s decision is based on its determination that Apple received a favorable — and illegal — tax ruling in 1991 that set the company’s tax rate in Ireland at just 4% on profits the company earned for the past 10 years. The EC, the executive branch of the European Union, prohibits member states from giving tax benefits to selected companies, according to EC commissioner Margrethe Vestager, and the commission determined that that is precisely what happened between Apple and Ireland.

The company and the country disagree, of course, and Ireland’s finance minister has said that he will seek parliamentary approval to appeal the EC ruling. Apple has said that it pays Ireland’s 12.5% tax rate on revenues it generates in the country. That could be a substantial amount because Apple’s patents are held by its Irish subsidiary.

In a statement issued Monday, Apple said:

The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process. The Commission’s case is not about how much Apple pays in taxes, it’s about which government collects the money. It will have a profound and harmful effect on investment and job creation in Europe.

During a trip to the United States in April, Vestager said that even if Apple repatriates part or all of its offshore profits, such a move was “of no concern” to the EC. Apple said at the time that it planned to repatriate about $91.5 billion and pay a U.S. tax bill of $30 billion. Those funds, argued some Apple supporters, are immune from EC taxation.

According to an April report in the Financial Times, U.S. Treasury Secretary Jack Lew “expressed his concern that the European Commission is retroactively applying a sweeping new state aid theory with an outsized impact on US companies.” Lew also noted that both the United States and the EU have a “shared objective of preventing the continued erosion of the corporate tax base.”

The dispute has not been resolved by the EC’s ruling against Apple. If anything, it is likely to wind up as another hot-button issue in the U.S. presidential election. Starbucks, Amazon, Google and other U.S. companies are facing similar EC investigations in other EU countries.