(Bloomberg) The European Commission’s finding that Ireland must collect as much as an attention-getting 13 billion euros ($14.5 billion) in back taxes from Apple Inc. contained a second stunning number: 0.005 percent.
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With the world’s richest company vowing to appeal the finding—perhaps joined by Ireland’s government—the methods and data that the European Union regulators used will come under intense scrutiny, but largely behind closed doors at the EU’s General Court in Luxembourg. In the meantime, tax specialists say, the actual rate remains unknowable for the general public, and the basis for the minuscule figure that competition commissioner Margrethe Vestager cited will be something of a mystery.
“It’s plausible, but we can’t verify it,” said Michelle Hanlon, a professor of accounting and taxes at the Massachusetts Institute of Technology’s Sloan School of Management. Apple, like most multinational companies, doesn’t disclose a country-by-country breakdown of its profits or taxes paid.
‘Made-Up Number’
Apple’s chief financial officer, Luca Maestri, called the commission’s 0.005 percent rate “a completely made-up number.” Bloomberg News sent the company several questions aimed at clarifying and explaining its position. In response, Apple pointed to a Q&A it posted for shareholders that largely repeated its executives’ earlier remarks.
The commission, meanwhile, hasn’t revealed what numbers went into its calculation, but Vestager said Thursday that the math was based on figures Apple itself provided to regulators. “There are very little if any figures in the public domain,” she said. She added later: “It’s quite a good illustration of the fact that more transparency would be a good thing,” including country-by-country reporting for income, taxes paid and other information.
The commission found that Ireland provided Apple with selective tax treatment that let the iPhone maker skirt the nation’s 12.5 percent tax rate and gave it an unfair advantage over other companies for several years—a violation of the EU’s state-aid rules.
Irish Units
In questioning the commission’s finding, Apple has said it “paid $400 million in taxes in Ireland in 2014—considerably more than the commission’s figure suggests.” The EU says the 0.005 percent effective tax rate applies to the profits of Apple Sales International, an Irish unit which regulators say is “responsible for buying Apple products from equipment manufacturers around the world and selling these products in Europe” as well as in the Middle East, Africa and India. The commission also cited another unit, Apple Operations Europe, which it said was responsible for manufacturing certain lines of computers for the Apple group.
Apple has additional subsidiaries in Ireland that may have paid other taxes, but the investigation was not focused on them and can’t comment on them, commission spokeswoman Lucia Caudet said.
The commission sent its full decision in the case to Ireland on Wednesday. A non-confidential version of that decision will be published, but it’s not expected for at least several months. The timing of its publication will depend on how quickly EU regulators and Irish officials can agree on what sensitive items need to be removed from the full decision, Vestager said Thursday.
Senate Report
“If it was up to me, the non-confidential version would have been published yesterday because that is another way of enabling everyone to see how we decided and on what basis we made this decision,” she said.
Vestager cited one public source of information that EU regulators used: an investigation by a U.S. Senate panel that examined offshore tax avoidance by Apple, Microsoft Corp. and Hewlett Packard Enterprise Co.
In a May 2013 hearing, the Senate Permanent Subcommittee on Investigations revealed that an Apple subsidiary in Ireland paid just $10 million in taxes in 2011 on $22 billion in earnings, for an effective tax rate of about 0.05 percent. (That’s akin to paying $500 in tax on $1 million of income.) The subcommittee’s report said its calculations were based on non-public information that Apple had supplied in response to specific questions.
‘Awful’ Decision
One irony in the case is that U.S. policy makers took no action in response to that 2013 disclosure and others like it; President Barack Obama’s administration and members of the Republican-controlled Congress have been unable to agree on a plan. This week, however, both agreed that the EU’s back-taxes claim against Apple was inappropriate.
House Speaker Paul Ryan called the EU decision “awful” and said it “should be a spur to action” in the U.S. “What’s inappropriate is for, in the name of state aid, 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,” U.S. Treasury Secretary Jacob J. Lew said during an interview Wednesday with National Public Radio.
Apple has said it follows tax laws and has paid all taxes due in Ireland; there’s little reason to doubt that, said Douglas Shackelford, the dean of the Kenan-Flagler Business School at the University North Carolina.
‘Guesstimating’ Profit
“Apple has followed the letter of the law,” said Shackelford, an international tax scholar. “The EC is saying, ‘Yeah, but you violated the spirit of the law, and so we’re guesstimating what those profits were and how they should have been taxed.”
It’s clear that Apple practices effective tax avoidance. Like other multinationals, the company makes efforts to avoid the U.S. corporate income tax, which has a top statutory rate of 35 percent—the highest in the industrial world. Details that the company has released in public filings show that Apple’s foreign profits are taxed at a rate significantly below even Ireland’s 12.5 percent. In 2014, it reported a foreign effective rate of 6.4 percent.
Bob McIntyre, the director of Citizens for Tax Justice, a left-leaning research group and think tank, said that number indicates that the company has booked a large portion of its profits in tax havens.
“If you believe Apple’s annual reports, that most of its profit is earned in foreign countries, it would be impossible for them to get their rate that low unless almost all of the money is booked in tax havens,” McIntyre said.
‘Head Offices’
EU regulators say the company achieved its tax savings in Ireland by means of official rulings that allowed two of the company’s subsidiaries there, including Apple Sales International, to allocate their profit to a “head offices” that “existed only on paper and could not have generated such profits.”
“These profits allocated to the ‘head offices’ were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force,” according to the commission’s news release. It also notes that Apple changed its structure in Ireland in 2015.
Apple’s Maestri objected to the commission’s conclusion that most of one Irish unit’s profits were “taxed nowhere.” “These profits are taxed in the United States,” he said Tuesday.
However, under an unusual provision in the U.S. tax code, most such foreign profit for Apple would be taxed only when Apple decides it should be—by bringing the offshore earnings to America. As of last month, Apple had $232 billion in cash, with about $214 billion of that being held overseas.
Repatriation Planned
The company expects to repatriate billions of dollars to the U.S. next year, Chief Executive Officer Tim Cook said in an interview with Irish broadcaster RTE, which aired Thursday. He also continued his criticism of the commission’s finding, calling it “maddening and disappointing.”
Overall, U.S. multinationals have accumulated more than $2 trillion in offshore earnings that haven’t been repatriated, and U.S. policy makers are trying to reach agreement on a plan for taxing that income at a reduced rate to encourage companies to bring it home. Treasury officials have expressed concern that the EU’s actions against Apple and other companies might reduce potential tax receipts in the U.S. from such a move.
That’s one reason the appeals of the commission’s finding will be closely watched. But without public details on where Apple’s profits were booked or where its taxes were paid, there’s only so much an interested observer can learn for now, said Kimberly Clausing, an economics professor at Reed College who studies international taxation.
The 0.005 rate that the commission cited “is probably a fairy tale,” she said, “because the numbers Apple reports for its profits, its taxes paid and the countries where profits are generated are all a fairy tale, too.”
—With assistance from Alex Webb and Aoife White
