Apple’s official statement on the EU ruling against its Irish tax arrangements tells you all you need to know about what is at stake: You can have taxes or you can have jobs, but Apple is in no mood to deliver both.
After learning on Tuesday morning that the EU expects Apple to pay 13 billion euros—equal to 11 billion pounds or $14.5 billion—in back taxes, the company said, “It will have a profound and harmful effect on investment and job creation in Europe.”
That is not a threat, technically, but it will be seen as one by EU politicians who want to attract new companies to their countries.
In 1991, Apple struck a tax deal with Ireland that was aboveboard and legal. The Irish government provided Apple with a “comfort letter” that said the company would pay very low rates of tax if it based its European operations in Ireland.
In the 25 years since, Apple has created thousands of jobs in Ireland. By 2015, it had 5,000 employees in the country. Another 1,000 jobs are planned for the headquarters in the Irish city of Cork. This year, Apple will open its site near the town of Athenry, with another 200 jobs in the making.
The result of the deal between Apple and Ireland, intended or not, was pretty clear: Give us low taxes, and we will give you jobs. A note from a meeting between the government and an Apple tax adviser in 1990 said:
“Apple was now the largest employer in the Cork area with 1,000 direct employees and 500 persons engaged on a subcontract basis. It was stated that the company is at present reviewing its worldwide operations and wishes to establish a profit margin on its Irish operations.”
Apple is now the largest taxpayer in Ireland, so it has the kind of negotiating strength to get what it wants.
Apple has noted that its tax arrangements were agreed to repeatedly by Ireland’s government. The European Commission says that the agreements were legal, albeit mistaken. But Margrethe Vestager, the European Commission’s competition commissioner, made Apple’s Irish tax arrangements sound like a scam:
- Apple’s effective European tax rate was 1 percent on sales of 16 billion euros or more per year.
- It sank as low as 0.005 percent in 2014.
- Apple created a head office that did not exist: “This ‘head office’ had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter…The ‘head office’ did not have any employees or own premises.”
- The pact deprived other European countries of billions of euros in unpaid taxes.
Perhaps the most serious part of Vestager’s case against Apple is the way that it contradicts Apple’s long-standing assertion that it does not pay corporation taxes in the US because its foreign—i.e., non-American—revenues are reinvested in the foreign territories that earn them.
Apple’s annual report has said that “substantially all of the company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the US were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5 percent.”
That 12.5 percent rate appears to have been Irish mist. The European money was actually being funneled back to the US, Vestager says. Apple’s Irish operations had a cost-sharing agreement with the US headquarters in which they were allowed to use Apple’s intellectual property if, in return, they paid for the American R&D expenses to create that IP.
The commission statement says (emphasis added):
“Under this agreement, Apple Sales International and Apple Operations Europe make yearly payments to Apple in the US to fund research and development efforts conducted on behalf of the Irish companies in the US. These payments amounted to about US$ 2 billion in 2011 and significantly increased in 2014. These expenses, mainly borne by Apple Sales International, contributed to fund more than half of all research efforts by the Apple group in the US to develop its intellectual property worldwide.”
Critics may also ask how many more jobs would have been created in Europe if the money generated in Europe had actually stayed in Europe.
Vestager’s ruling will also be read as a threat by dozens of other international companies that previously used Europe’s flexible tax arrangements. The European Commission concluded in October that Luxembourg and the Netherlands granted tax advantages to Fiat and Starbucks. It is investigating Amazon and McDonald’s.
The ruling will be appealed, but it will be years before it is resolved. It won’t hurt Apple: 13 billion euros is roughly equivalent to only one month’s revenue, and Apple has always kept a massive amount of cash stashed in foreign countries because it does not want to move it into jurisdictions where it might be taxed.
The more immediate problem is whether global companies will even bother with Ireland in the future if they cannot get the tax breaks they want—and whether that, in the long term, will reduce the total tax take in Europe.
With that in mind, Apple published a longer statement on Tuesday morning reiterating the link between jobs and taxes:
“Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.”
“[W]e are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment.”