(Bloomberg) When Apple Inc. was ordered by European regulators to pay $14.5 billion plus interest in back taxes to Ireland, the giant technology company seemed to be facing an expensive headache. Turns out it’s a headache for the U.S. Treasury Department as well.

Under current U.S. tax rules, specialists say Apple would probably be able to claim a foreign tax credit for the repayment, allowing it to lower its tax bill in America, where the 35 percent corporate income-tax rate is one of the world’s highest. Unlike other industrialized countries, the U.S. taxes its multinational corporations on their global income—while allowing a dollar-for-dollar credit for the foreign taxes they’ve paid.

So if Apple claimed the credit, the U.S. would stand to lose $14.5 billion in tax revenues, if the European regulators’ finding holds up and current rules apply.

Another quirk of the U.S. system lets companies defer their taxes on their offshore earnings until they “repatriate” them, or bring them back to the U.S. Currently U.S. companies have amassed more than $2 trillion in profit that they’ve not yet repatriated.

Now, the foreign-tax credit is putting Treasury officials in a bind amid concern that the European Commission’s investigations into Apple and other multinationals, including Amazon.com Inc. and McDonald’s Corp., will cut into that tax base. In Apple’s case, regulators determined that Ireland offered the company an ultra-low tax rate that violated the commission’s “state-aid” rules, which are designed to foster competition among companies. Both Apple and Ireland are appealing the finding; a resolution may take years.

‘Not Appropriate’
Treasury Secretary Jacob J. Lew said last month it’s “not appropriate” for “Europe to be rewriting tax law retroactively, reaching into a tax base that properly should be a U.S. tax base, because it’s U.S. income.”

Treasury officials have been wrestling with the question of whether extra payments required of companies by the European “state aid” cases would qualify for foreign-tax credits. But Lew wrote in an opinion piece for Tuesday’s Wall Street Journal that “U.S. companies could claim foreign tax credits against their U.S. tax bill for any tax-related payments to European Union member states.”

“If Treasury says it’s creditable, then the U.S. is subsidizing European governments,” said Sam Kaywood, an international tax lawyer at Alston & Bird in Atlanta. “It’s a tough spot for Treasury to be in.” A Treasury spokesman declined to comment for this story.

Different Rates
President Barack Obama’s administration, members of Congress and Republican presidential nominee Donald Trump have all called for cutting taxes on companies’ offshore earnings—as a way of inducing repatriation. But they haven’t agreed on a rate: Obama has suggested 14 percent; Trump, 10 percent; and House Republicans propose a top rate of 8.75 percent.

Foreign tax credits would take some of the revenue juice out of any homecoming. Under Obama’s plan, which would allow for partial use of tax credits against the reduced tax rate, Apple’s full Irish tax payment would result in a tax credit worth $5.8 billion, for example. Foreign tax credits will also play a role in the House Republicans’ plan—though their effect is less clear. A senior economic adviser to Trump didn’t respond to a request for comment.

‘Possibility’ Cited
In an unusual “white paper” on Aug. 24, Treasury officials wrote: “There is a possibility that any repayments ordered by the commission will be considered foreign income taxes that are creditable against U.S. taxes owed by the companies in the United States.”

It’s unclear why officials used the term “possibility.” Foreign tax credits have been a fixture of tax law since 1918; they’re designed to prevent double taxation of foreign income. The hedging may have reflected uncertainty over whether European regulators would require an actual tax payment or a penalty, which isn’t creditable, tax specialists said. The European Union’s competition commissioner, Margrethe Vestager, left no doubt during an Aug. 30 news conference. “It is not a penalty; it is unpaid taxes to be paid,” she said.

The commission’s ruling is “probably creditable,” said Michelle Hanlon, an accounting professor focused on international tax at the Massachusetts Institute of Technology.

Lucrative and Legal
The foreign tax credit has become a lucrative, legal way for multinational companies that have accumulated large overseas cash piles to dramatically lower and sometimes eliminate the 35 percent U.S. income-tax rate on the profit they send home. General Electric Co. has disclosed having $119 billion in offshore profit; Microsoft Corp., $108.3 billion; and Alphabet Inc., the parent company of Google, $47.4 billion.

Some 7,190 corporations claimed over $109.6 billion in foreign tax credits in 2012, according to the most recently available data from the Internal Revenue Service. Those companies reduced the U.S. tax they owed on nearly $420 billion in foreign income. Overall, the credits allowed companies to slice about 37 percent off aggregate corporate income taxes that year.

To claim a credit, companies first must repatriate earnings stashed in the overseas unit that generated a foreign tax bill. The trick to minimize U.S. taxes is to match the size of the credit to the size of the anticipated domestic tax hit. Under U.S. rules, companies can combine income and credits from high-tax countries, like Japan and Germany, with those from low-tax countries, like Ireland and the Netherlands.

‘Tax Distilleries’
Corporate tax departments, which work hard on getting the mix just right, were dubbed “tax distilleries” in a 2011 paper by Edward Kleinbard, a University of Southern California professor and a former chief of staff of the congressional Joint Committee on Taxation.

Research suggests these distilleries produce potent blends. In 2007, foreign tax credits helped U.S. parent companies pay an average tax of just 3.3 percent on foreign income brought home, according to a 2012 paper by a pair of international tax specialists at the IRS and Congressional Budget Office.
Companies can’t claim refunds for their excess foreign tax credits, but they can apply the extra to other tax years—one year back, or 10 years forward.

Daniel Shaviro, a professor at New York University Law School, said that hitting the right mix to zero out taxes was “like making a blend of wine. Any time you’re going to pay U.S. tax, even at a reduced rate, you want to get your credits in there to get the mix just right so that the tax is zeroed out.”

Apple may get an opportunity to find the right mix next year. Chief Executive Officer Tim Cook said earlier this month that Apple would bring back several billion in untaxed offshore cash sometime in 2017. The company has about $232 billion in cash, with $214 billion of that held overseas.

Cook told the Washington Post last month that the company was waiting to repatriate until policy makers could agree on a lower tax rate. "We’re not going to bring it back until there’s a fair rate," he said. "There’s no debate about it.”

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