Apple Appeals EU's $14 Billion Tax Demand

A European Commission (EC) ruling last summer found that Apple Inc. (NASDAQ: AAPL) owed the European Union (EU) €13 billion (about $14 billion) in back taxes for the years between 2004 and 2014. On Monday, Apple filed its appeal of the ruling with the EU’s General Court, citing 14 “pleas in law” claiming that the EU court should annul the EC’s August decision or annul the decision in part and order the EC to pay Apple’s costs to defend itself.

The EC’s demand for payment is based on its determination that Apple received a favorable — and illegal — tax ruling in 1991 and again in 2007 that set the company’s tax rate in Ireland at just 4% on profits the company earned for the years between 2004 and 2014. 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 Irish government has already appealed the decision and entered nine pleas in law supporting its case. The government’s primary argument is that Apple received no advantage because Irish law was properly applied. The country’s appeal also cites procedural issues, along with a claim of EC overreach. Ireland has spent about $1.9 million on its appeal so far.

The core of the dispute concerns tax rulings, issued by Ireland to Apple in 1991 and 2007, which provided that income related to intellectual property rights held by Apple Sales International (ASI), an Irish registered non-resident company, were not taxable in Ireland. The theory advanced by Apple is that the intellectual property rights were held by the company’s “head office” in the United States.

In the EC’s view, though, these amounts were taxable in Ireland as there was no “head office” capable of managing the intellectual property rights. Thus, the income must be attributed to the Irish branch. The EC also argued that the Irish tax rulings understated profits properly attributable to activities carried out in Ireland.

Included in Apple’s appeal is the contention that the EC erred regarding the company’s activities outside of Ireland:

The Commission made fundamental errors by failing to recognise that the applicants’ profit-driving activities, in particular the development and commercialisation of intellectual property (‘Apple IP’), were controlled and managed in the United States. The profits from those activities were attributable to the United States, not Ireland. The Commission wrongly considered only the minutes of the applicants’ board meetings and ignored all other evidence of activities. …

The Commission failed to recognise that the Irish branches carried out only routine functions and were not involved in the development and commercialisation of Apple IP which drove profits.

The appeal may take up to two years to decide, according to the Irish Times, and regardless of which side prevails, the other is likely to appeal to the European Court of Justice.

Apple’s stock traded up about 0.4% in Tuesday’s premarket to $136.28, just above the top end of its 52-week range of $89.47 to $136.27. The consensus price target on the shares is $139.82.

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