The Inside Story of Apple's $14 Billion Tax Bill
The Inside Story of Apple's $14 Billion Tax Bill
The iPhone came out in 2007. So why was Apple still
paying taxes like it was 1990?
by Gaspard Sebag, Dara Doyle, and Alex Webb December 15,
2016, 9:01 PM PST December 16, 2016, 8:24 AM PST
“The Maxforce” is the European Union team that ordered
Ireland to collect billions of euros in back taxes from Apple Inc., rattled the
Irish government, and spurred changes to international tax law. You’d think it
might have earned the name by applying maximum force while investigating
alleged financial shenanigans. It didn’t. It’s just led by a guy named Max.
A European Commission official gave the nickname to the
Task Force on Tax Planning Practices in honor of its chief, Max Lienemeyer, a
lanky, laid-back German attorney who rose to prominence vetting plans to shore
up struggling banks during Europe’s debt crisis. Since its launch in 2013, the
Maxforce has looked at the tax status of hundreds of companies across Europe,
including a deal Starbucks Corp. had in the Netherlands, Fiat Chrysler
Automobiles NV's agreement with Luxembourg, and -- its largest case -- Apple in
Ireland.
Lienemeyer’s team of 15 international civil servants
pursued a three-year investigation stretching from the corridors of the
European Commission, the EU’s executive arm, to Ireland's Finance Ministry and
on to Apple's leafy headquarters in Cupertino, California. Much of it outlined
for the first time here, this story chronicles a growing clash between Europe
and the U.S. and a shift in the EU’s approach to the tax affairs of
multinationals.
The Maxforce concluded that Ireland allowed Apple to
create stateless entities that effectively let it decide how much -- or how
little -- tax it pays. The investigators say the company channeled profits from
dozens of countries through two Ireland-based units. In a system at least
tacitly endorsed by Irish authorities, earnings were split, with the vast
majority attributed to a “head office” with no employees and no specific home
base -- and therefore liable to no tax on any profits from sales outside
Ireland. The U.S., meanwhile, didn't tax the units because they’re incorporated
in Ireland.
“I can’t see why
the tax liability is in Ireland.” —Irish Finance Minister, Michael Noonan
In August the EU said Ireland had broken European law by
giving Apple a sweetheart deal. It ordered the country to bill the iPhone maker
a record 13 billion euros ($13.9 billion) in back taxes, plus interest, from
2003 to 2014. One example the Commission cites: In 2011, a unit called Apple
Sales International recorded profits of about 16 billion euros from sales
outside the U.S. But only 50 million euros were considered taxable in Ireland,
leaving 15.95 billion euros of profit untaxed, the Commission says.
Though the EU says its goal is “to ensure equal treatment
of companies” across Europe, Apple maintains that the Commission selectively
targeted the company. With the ruling, the EU is “retroactively changing the
rules and choosing to disregard decades of Irish law,” and its investigators
don’t understand the differences between European and U.S. tax systems, Apple
said in a Dec. 8 statement.
Apple, which has some 6,000 workers in Ireland, says its
Irish units paid the parent company a licensing fee to use the intellectual
property in its products. The Irish companies didn't own the IP, so they don’t
owe tax on it in Ireland, Apple says, but the units will face a U.S. tax bill
when they repatriate the profits. Apple expects to pay about 26 percent of its earnings
in tax for the most recent fiscal year and has set aside some $32 billion to
cover taxes it says it will face should overseas income be returned to the U.S.
“This case has never been about how much tax Apple pays, it’s about where our
tax is paid,” the company said. “We pay tax on everything we earn.”
Ireland on Nov. 9 appealed the Commission’s ruling at the
EU General Court in Luxembourg, arguing it has given Apple no special
treatment. Irish Finance Minister Michael Noonan has said he “profoundly disagrees”
with the ruling and that Ireland strictly adheres to tax regulations. The
government says Ireland has no right to tax non-resident companies for profits
that come from activities outside the country.
“Look at the small print” on an iPhone, Noonan said after
the EU released its ruling in August. “It says designed in California,
manufactured in China. That means any profits that accrued didn’t accrue in
Ireland, so I can’t see why the tax liability is in Ireland.”
In the coming weeks, the EU is expected to publish
details of the Maxforce investigation. At about the same time, Apple will
likely lodge its own appeal in the EU court. Though Apple will have to pay its
tax bill within weeks, the money will be held in escrow, and the issue will
probably take years to be resolved.
This story is based on interviews with dozens of
officials from the EU, Ireland, and Apple, though most didn't want to speak on
the record discussing sensitive tax matters. A Maxforce representative declined
to make Lienemeyer available for an interview. Ireland's Office of Revenue
Commissioners (the equivalent of the American Internal Revenue Service) says it
can’t comment on specific companies.
“Inconsistency and
ambiguity” —Tim Cook on the EU investigation
Lienemeyer began assembling the Maxforce in late spring
of 2013 with a mandate of scrutinizing tax policies across Europe in search of
any favoritism. Direct subsidies or tax breaks to court a specific company are
illegal in the EU to prevent governments aiding national champions. His first
hire -- the person who would oversee the Apple probe -- was Helena Malikova, a
Slovak who had worked at Credit Suisse Group AG in Zurich. He quickly added
Kamila Kaukiel, a Polish financial analyst who had been at KPMG, and Saskia
Hendriks, a former tax policy adviser to the Dutch government.
As the four initial members began their investigations,
they got a head start from a U.S. Senate probe of the tax strategies of
American multinationals. The Senate’s Permanent Subcommittee on Investigations
said Apple shifted tens of billions of dollars in profit into stateless
affiliates based in Ireland, where it paid an effective tax rate of less than 2
percent.
At 9:30 a.m. on May 21, 2013, senators gathered in Room
106 of the Dirksen Office Building. Included in the evidence presented that day
was a 2004 letter from Tom Connor, an official at Ireland’s tax authority, to
Ernst & Young, Apple’s tax adviser. Connor’s question: A unit of the tech company
hadn’t filed a tax return; Was it still in business? E&Y responded two days
later that the division was a non-resident holding company with no real sales.
“There is nothing to return from the corporation tax standpoint,” E&Y
wrote. The Senate exhibits didn’t include Connor’s response if there ever was
one.
At the hearing, Arizona Republican John McCain castigated
Apple as “one of the biggest tax avoiders in America.” Democrat Carl Levin of
Michigan peered over the glasses perched on the tip of his nose and said Apple
uses “offshore tax strategies whose purpose is tax avoidance, pure and simple.”
Crucially, though, Levin told the crowded room that under U.S. law, there was
little the panel could do to force Apple to pay more tax. Apple Chief Executive
Officer Tim Cook passionately defended the company’s actions, telling the
senators “We don’t depend on tax gimmicks.”
The Senate revelations raised eyebrows at the Maxforce’s
office in Madou Tower, a 1960s high-rise in the rundown Saint-Josse
neighborhood of Brussels. Three weeks after the Senate hearing, Lienemeyer's
team asked Ireland for details of Apple's tax situation. The Irish tax
authorities soon dispatched a representative carrying a briefcase filled with a
bundle of bound pages. The Irish could have simply sent the material via
e-mail, but they were cautious about sharing taxpayer’s information with the EU
and have a ground rule to avoid leaks: never send such documents
electronically.
While the Irish government remained bullish in its public
statements, saying Apple hadn’t received any favors, behind the scenes tensions
were rising. Through the summer of 2013, the Finance Ministry assured
government ministers that the EU investigation would amount to nothing,
according to people familiar with the discussions. But those assertions seemed
less confident than earlier communications. There was a sense that Apple had worked
out its Irish tax position in a vastly different era, and no one remembered
many details of the negotiations decades earlier.
In 1980, the four-year-old company -- the Apple III
desktop had just been released -- created several Irish affiliates, each with a
different function such as manufacturing or sales, according to the Senate
report. Under Irish laws dating to the 1950s designed to shore up the moribund
post-war economy, as a so-called export company Apple paid no taxes on overseas
sales of products made in Ireland.
To comply with European rules, Ireland finally ended its
zero-tax policy in 1990. After that, Apple and Ireland agreed that the profit
attributed to a key Ireland-based unit, the division discussed in Tom Connor’s
letter, be capped using a complex formula that in 1990 would have resulted in a
taxable profit of $30 million to $40 million.
An Apple tax adviser “confessed there was no scientific
basis” for those figures, but that the amounts would be “of such magnitude that
he hoped it would be seen as a bona-fide proposal,” according to notes from a
1990 meeting with the Irish tax authority cited by the EU. The equation didn’t
change even as Apple began assembling the bulk of its products in Asia.
Ireland and Apple started to make changes a few months
after the Maxforce began looking into their tax relationship. In October 2013,
Finance Minister Noonan announced he would close the loophole that let
stateless holding companies operate out of Ireland. The EU said Apple changed
the structure of its Irish units in 2015, which the company says it did to
comply with the shift in Irish law.
As the Maxforce stepped up its probe in June 2014, Irish
Prime Minister Enda Kenny was wooing potential investors in California. At a
San Francisco event to promote Irish entrepreneurs, Governor Jerry Brown
quipped that he had thought Apple “was a California company,” but according to
tax returns, “they’re really an Irish company.” News clips show Irish officials
looking on stony-faced as the governor makes his jest.
Enforcement of EU
rules on taxation is a matter of “fairness” —EU competition chief, Margrethe
Vestager
With Lienemeyer’s team digging further into the issue,
Apple’s concern deepened. In January 2016, CEO Cook met with Margrethe
Vestager, the EU competition chief -- and Lienemeyer's ultimate boss -- on the
10th-floor of the Berlaymont building, the institutional headquarters of the
European Commission in Brussels.
Vestager, a daughter of two Lutheran pastors, has a
reputation for being even-handed but tough, cutting unemployment benefits while
advocating strict new rules for banks when she served as Denmark's finance
minister. While she has acknowledged that her team had little experience with
tax rulings -- in a November interview with France's Society magazine, she
said, “We learned on the job” -- Vestager says enforcement of EU rules on
taxation is a matter of “fairness.”
In the meeting with Cook she quizzed him on the tax Apple
paid in various jurisdictions worldwide. She told the Apple executives that
“someone has to tax you,” according to a person present at the meeting. In a
Jan. 25 follow-up letter obtained by Bloomberg, Cook thanked Vestager for a
“candid and constructive exchange of views,” and reasserted that Apple’s earnings
are “subject to deferred taxation in the U.S. until those profits are
repatriated.”
Subsequent correspondence became more heated. On March
14, Cook wrote to Vestager that he had “concerns about the fairness of these
proceedings.” The Commission had failed to explain fully the basis on which
Apple was being investigated, and the body's approach was characterized by
“inconsistency and ambiguity,” Cook said.
Apple contended that the EU had backtracked on a 2014
decision recognizing that its two Irish subsidiaries were not technically
resident in Ireland, and therefore only liable for taxes on profits derived
from Irish sources. Now, Cook said, it seemed the Commission was intent on
“imposing a massive, retroactive tax on Apple by attributing to the Irish branches
all of Apple’s global profits outside the Americas.”
"There is no inconsistency," an EU spokesman
said in a Dec. 15 statement. Only a fraction of the profits of the subsidiaries
were taxed in Ireland, the statement said. "As a result, the tax rulings
enabled Apple to pay substantially less tax than other companies, which is
illegal under EU state aid rules."
Cook's entreaties did little to sway Vestager, and in
August she phoned Noonan to tell him the results of the Maxforce investigation:
The Commission was going to rule against Ireland. Late in the afternoon of Aug.
29, Irish officials began hinting to reporters that Apple’s tax bill amounted
to billions and “could be anything.” At noon the following day, Vestager told a
packed press conference in Brussels that the Commission had decided Apple owed
Ireland 13 billion euros.
Though that would be equivalent to 26 percent of the 2015
national budget, Ireland didn't want the windfall, saying the ruling was flawed
because the country hadn’t given Apple any special treatment. The decision
sparked a political crisis as left-leaning members of Enda Kenny’s fragile
minority administration saw a potential bonanza for taxpayers that the world’s
richest company could well afford. Even as Noonan toured television studios
vowing to appeal the decision, independent lawmakers demanded that Ireland take
the money.
Facing a potential revolt that could bring down the
government, Kenny and Noonan eventually bowed to demands for a review of the
country’s corporate tax system. But they said they would fight the case, and on
Sept. 7, Irish lawmakers overwhelmingly backed the motion for an appeal.
Officials from Lienemeyer’s team and other EU offices say
they have gathered tax information on about 300 companies, looking for what
they deem to be favorable treatment by governments across Europe. While they
don't expect all of those to yield payoffs as hefty as that from their
investigation of Ireland and Apple, they say a worrying number require the kind
of maximum force that the Maxforce can apply.
"We focus on outliers where you're looking at
something that is off the radar screen," Lienemeyer's boss, 50-year-old
Dutchman Gert-Jan Koopman, who is in charge of state-aid enforcement at the EU,
said at a Brussels conference in November. "If you're paying a fair amount
of tax then there is absolutely nothing to worry about.”
—With assistance from Stephanie Bodoni and Aoife White
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