Apple loses $14B as Europe claws back tax

Apple’s iPhone 16 launch on Monday generated plenty of attention, but it didn’t quite blunt the edge of the $14.4 billion European Commission (EC) tax hammer that finally fell against the company and can no longer be appealed.

This concerns an EC decision in 2016 when the courts found Ireland had unlawfully provided Apple with state aid in the form of tax breaks. Apple has fought the decision — CEO Tim Cook once called it “total political crap” — but finally lost that battle Sept. 10. 

Apple’s Irish twist

The case relates to the way Apple was taxed in Ireland between 1991 to 2014.  Basically, Ireland enabled Apple to sell products across Europe, record those profits in Ireland, and then send those profits to head offices that existed only on paper, leaving almost no taxable profit in Ireland.

In a statement, the Court of Justice said: “Ireland granted Apple unlawful aid, which Ireland is required to recover.” During that time, the court decided Apple benefited from state aid as a result of those tax arrangements to the tune of $14 billion, which the company must now pay back. 

An Apple representative offered some pushback: “This case has never been about how much tax we pay, but which government we are required to pay it to. We always pay all the taxes we owe wherever we operate and there has never been a special deal.”

“As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International,” the European Commission explained when the case first hit court eight years ago.

It’s important to note that while Apple and Ireland agreed to the arrangement, Europe argued the deal did not match economic reality and constituted unlawful state aid. 

A complex web of tax arrangements

One way to understand the complicated arrangement is like this:

Apple had two entities incorporated but not tax resident in Ireland — Apple Sales International and Apple Operations Europe.

These two companies held the rights to use Apple’s intellectual property to sell and manufacture Apple products outside the US under a “cost-sharing” agreement with Apple Inc.

Ireland agreed that the two firms were required to make annual payments to Apple towards R&D, which meant (figuratively) that boat loads of cash went to the head offices of the two companies — offices that existed only on paper. 

To put some perspective around this, Apple Sales International recorded profits of $22 billion in 2011, but under the terms of the tax arrangements it had been given in Ireland only €50 million was subject to tax. 

That quantity of cash constituted around half of Apple’s R&D spending during that time and meant the vast majority of Apple’s European profits were effectively untaxed, or — as Apple prefers to put it — were taxed in the wrong jurisdiction. 

$3,000 each

Apple isn’t happy about the outcome of the case. “We are disappointed with today’s decision,” the company said. “There has never been a special deal.”

Apple was required to hand the cash over to an independent third-party-administered escrow account in 2016. That account now holds around €14 billion. With a population of 5.2 million, the cash hoard is the equivalent of €2,692 (about $3,000) for every man, woman, and child in Ireland. 

According to local reports, Ireland’s Tánaiste Micheál Martin says the money cannot be used for day-to-day spending and that his government will now consider “how to use these funds in the best interests of the Irish people.”

Apple isn’t the only big tech firm in the crosshairs. At a cost of $2.7 billion, Google also lost its final appeal against a European Union penalty for giving its own shopping recommendations an illegal advantage over rivals in search results.

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