Why is the EU demanding Apple pay $14.5 billion in Irish taxes?

The EU says the deal cut between Ireland and Apple should be considered illegal state aid.

First Look

A European Union commission has done a record-breaking audit on Apple Inc., ordering the tech giant to pay Ireland 13 billion euros ($14.5 billion) in back taxes in a controversial ruling.  

The government of Ireland denies any wrongdoing, but this is the latest in a series of revelations that suggest the nation's business-friendly tax policies could lend themselves too easily to tax evasion, a reputation Jason Walsh described for The Christian Science Monitor in 2013:

Ireland has a reputation as business-friendly jurisdiction and makes much of its educated and English-speaking workforce, but the since the 2007 crisis has gained an unwelcome reputation as an offshore tax haven without the warm climate.

Ireland's corporation tax rate of 12.5 percent is the second-lowest headline in Europe, with only Bulgaria and Cyprus's 10 percent rate lower. Taken on an average basis, Ireland remains at the lower-end of so-called "implicit" tax rates, a measurement of the actual taxes paid.

“U.S. companies are the grandmasters of tax avoidance,” Edward Kleinbard, professor at the University of Southern California and former chief of staff to the congressional Joint Committee on Taxation, told The New York Times. “Nevertheless, because of the nature of U.S. politics, [the Apple case] will be framed by the U.S. as Europe overreaching and discriminating against ‘our team.’ ”

Ireland struck two deals with Apple in 1991 and 2007 in an effort to keep the tech giant – and the hundreds of jobs it produced – inside the country, Fortune reported. These deals essentially allowed Apple to avoid paying the country's full corporate tax rate, which was already the lowest in the EU. 

The ruling is the latest from the EU competition commissioners who frown on the special deals giant companies can make with individual countries because they say it hurts the smaller companies who lack similar clout. The commission has found similar fault with deals between the Netherlands and Starbucks and Luxembourg and Fiat, Amazon and McDonald’s, Fortune reported. 

“When a government lets a company avoid paying its share, that company gains just as if it received a handful of cash," said Competition Commissioner Margrethe Vestager.

Representatives of the US tech industry are incredulous, and the US Treasury Department has voiced its disapproval, Bloomberg noted.

“We believe that retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules of individual member states,” the Treasury said in an email statement. “The commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU.”

Apple has already expressed confidence in an appeal.

"The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process," according to the company statement. "The Commission’s case is not about how much Apple pays in taxes, it’s about which government collects the money. It will have a profound and harmful effect on investment and job creation in Europe.”

The commission is not only standing by the ruling, but also noted in the decision that other countries lost taxes because the deal allowed Apple to record nearly all its profits through Ireland, Fortune reported.

“No rules have been changed — not one rule,” Ms. Vestager said at a news conference in Brussels. “This is a question of paying unpaid taxes.”

The commissioner invited other European nations to review their records with a view toward receiving a share of back-taxes.