(Bloomberg) The European Union’s finding that Apple Inc. owes Ireland more than $14 billion in back taxes reveals the high cost the U.S. Treasury may pay by failing to keep pace in a global effort to stem corporate tax avoidance—and Apple might represent only the first major U.S. loss.
The EU commissioner for competition said Tuesday that Apple’s tax arrangement with Ireland constitutes anti-competitive “state aid” to the company. If Apple ultimately has to pay billions in taxes to Ireland, the iPhone maker may be able to reduce its U.S. taxes by using foreign-tax credits available under U.S. law. Apple executives and Irish officials have said they plan to challenge the EU’s order.
The EU is already conducting similar investigations of other major U.S. corporations, including McDonald’s Corp. and Amazon.com Inc. Additionally, legal experts say that if the precedent for such EU orders is upheld on appeal, regulators may give harsher scrutiny to the hundreds of tax ruling letters that Luxembourg issued to major U.S. companies, including the Walt Disney Co. and Koch Industries Inc.
Some of those agreements gave companies a chance to slash billions from their tax liabilities at home and abroad.
No ‘Special Deals’
Amazon, through a spokesman, declined to comment. Representatives for McDonald’s, Disney and Koch didn’t immediately respond to requests for comment. Apple’s chief executive officer, Tim Cook, said in a statement: “We never asked for, nor did we receive, any special deals.”
At stake for the U.S. Treasury Department is some of the potential tax revenue on more than $2 trillion in profit that U.S. multinationals have parked overseas. While the EU isn’t directly targeting that cash hoard, the state-aid cases could significantly reduce the revenue that the U.S. government could collect from it. The U.S. tax code, which sets a top corporate income tax rate of 35 percent, allows companies to defer paying that tax on their foreign income until they decide to bring it home via “repatriation.” Over the past few years, the U.S. Congress and President Barack Obama’s administration have been unable to agree on a plan to induce companies to repatriate their earnings at a reduced tax rate. Obama has proposed 14 percent; House Republicans this year proposed 8.75 percent.
Revenue Transfer
The delay may be costly: Federal law also gives companies credits for the foreign taxes they’ve paid, which they can use to reduce their U.S. taxes—subject to certain restrictions. The precise effect is unclear, but U.S. Treasury officials have voiced concern that if U.S. companies are forced to pay large new tax bills to European governments, they may be able to use such credits—effectively transferring revenue from U.S. to European coffers.
The prospect that EU regulators might force U.S. multinationals to pay taxes to countries that helped them avoid taxes at home prompted displeasure from Obama’s White House and from members of Congress Tuesday. But if U.S. policy makers saw new urgency in the large tax bill that was handed to Apple, there was little immediate sign of compromise.
“Instead of standing by and allowing other countries to deliver multibillion-dollar tax bills to American companies, Washington should act now to ensure this doesn’t happen again,” said U.S. Representative Kevin Brady, the chairman of the tax-writing House Ways and Means Committee. Brady, a Texas Republican, called the EU’s decision “a predatory and naked tax grab” that took advantage of what he called a “broken” U.S. tax code.
‘Awful’ Decision
“That’s why House Republicans are moving forward with our tax reform blueprint built for growth that will allow more companies to operate in our country, hire our workers and help grow our economy,” Brady said. House Speaker Paul Ryan called the EU decision “awful” and said it “should be a spur to action.”
White House Press Secretary Josh Earnest, meanwhile, said Obama would “continue, over his next four months remaining in office, making his case” and pushing Congress to address the issue.
The EU’s decision was surprising for its blunt language and high assessment of Apple’s Irish tax liability, but it’s far from certain that Apple will ever pay the $14.5 billion bill. The company, along with the Irish government, has announced plans to appeal the ruling to the European Union’s general court. Legal experts say the EU’s use of antitrust statutes to regulate tax avoidance is a novel enough strategy that it could be struck down.
Dutch Appeal
Already, the Dutch government is appealing an earlier EU order that it collect 30 million euros in taxes from Starbucks Corp. Linda Mills, a spokeswoman for the coffee chain, said in an e-mail that the difference was that “today’s Apple decision is in the billions vs. ours which (pre appeal) scaled only in the millions.”
But with the potential for a continued EU crackdown, tax specialists expect pressure will escalate for the U.S. government to take action before overseas governments take major bites from companies’ offshore earnings.
“Since the U.S. has been very slow to enact reform and get revenue, the status quo has allowed the Europeans the opportunity to move in and get tax money for their governments,” said Kimberly Clausing, a professor at Reed College and an expert in international taxation. “I can’t imagine that this is going to be allowed to continue indefinitely.”
‘Make Everything Worse’
But if the EU’s actions spur American officials to action, they may have the opposite effect on international cooperative efforts. Already, pressure from corporate lobbyists has helped make the U.S. the only major country that hasn’t signed on to a plan devised by the Organization for Economic Cooperation and Development aimed at limiting aggressive tax-avoidance strategies.
The EU’s Apple decision “is going to make everything worse” for the prospects of international cooperation, said Edward Kleinbard, a professor at the University of Southern California and the former chief of staff for the congressional Joint Committee on Taxation. “It’s leading to finger pointing and will upset the OECD’s work” on the issue, he said.
For businesses, the ruling’s long-term impact was unclear. Because it’s subject to appeal, many accountants and corporate tax lawyers said it was too soon to tell whether it would encourage changes in U.S. multinationals’ tax strategies. For example, the effect on corporate inversions, in which U.S. companies move their tax addresses offshore by merging with foreign firms, remained undefined.
Singapore-Bound
But Raymond Wiacek, an international tax lawyer at Jones Day in Washington, said the decision would prompt some multinationals—particularly technology and pharmaceutical companies with valuable intellectual property—to seek out new offshore tax havens.
“You don’t have to use Ireland as your base country—people are moving to Singapore,” Wiacek said. That shift will accelerate unless Congress lowers the U.S. corporate tax rate from 35 percent, which is one of the world’s highest. Singapore taxes companies on profit derived both in Singapore and elsewhere at 17 percent.
Amazon’s Change
Amazon, which awaits the European commission’s finding on whether its own tax deal with Luxembourg constituted improper state aid, has stopped using its shell company there. That company had received royalty payments from Amazon’s subsidiaries in other European countries, effectively moving their profit to Luxembourg. Amazon officials have declined to say what motivated that change.
With the U.S. presidential election two months away, it’s likely that any U.S. effort to overhaul its international tax system will take place during the administration of Obama’s successor. Republican Donald Trump has proposed to tax companies’ offshore earnings at a reduced rate of 10 percent. Trump also proposes to cut the top corporate tax rate to 15 percent, while ending companies’ ability to defer U.S. taxes on overseas earnings. Democrat Hillary Clinton hasn’t offered a specific proposal on international taxation.
Neither campaign immediately responded to a request for comment on the issue Tuesday. Regardless, some observers believe the U.S. will move to enact a new repatriation tax rate no matter who wins the Nov. 8 election.
‘Inevitable’ Feature
“There’s a fair amount of general agreement that repatriation would be a feature of broader tax reform under a new president, which I would say is inevitable,” Jon Traub, the managing principal of tax policy at Deloitte Tax LLP, the tax arm of accounting firm Deloitte LLP told Bloomberg News last week.
As one of the most popular and recognizable brands in the U.S., Apple has thus far avoided congressional action that would alter its tax planning—despite a U.S. Senate panel’s investigation that focused on accounting strategies the company had used to avoid what officials called billions of dollars a year in federal taxes.
The Senate Permanent Subcommittee on Investigations held hearings in which then-chairman Carl Levin, a Michigan Democrat, chastised Apple for “seeking the Holy Grail of Tax Avoidance.” They ended with committee members telling Apple CEO Tim Cook how much they loved their iPhones. The hearings led to no substantial legislative changes to the tax code. According to EU officials Tuesday, the effective tax rate for Apple’s main Irish subsidiary has dropped since the Senate hearings: from 0.5 percent in 2011 to .005 percent in 2014.
‘Completely Made Up’
Apple CFO Luca Maestri disputed those figures Tuesday, saying that the commission’s depiction of Apple’s effective tax rate was “completely made up.” Maestri said the EU had calculated incorrectly by neglecting to include all of the $400 million in taxes the company paid in Ireland in 2014 and by improperly attributing offshore profit to Apple’s Irish subsidiaries.
In Europe, the Apple case is likely to bring heightened pressure to continue the crackdown. While the state-aid cases might slow cooperative international efforts to reach agreement on comprehensive tax policies, they have nonetheless appealed to the populist sentiment in Europe—and may spur U.S. companies and policy makers to take action.
“The arguments are poorly construed, and often target the wrong entities or the wrong countries, but the cases nonetheless are spectacular political statements,” said Romero Tavares, an economics professor at the Vienna University of Economics and Business. He recently published a paper titled, “The Intersection of EU State Aid Cases and U.S. Tax Deferral: A Spectacle of Fireworks, Smoke and Mirrors.”
“Therefore I do believe more cases will come up, more companies will be scrutinized and not only in the Silicon Valley, but across the board,” Tavares said. “The amounts involved are astronomical.”
—With assistance from Leslie Patton, Christopher Palmeri and Spencer Soper
