A look at what will happen next in the world economies
Wednesday, November 26, 2014
EU Believes Apple, Fiat Tax Deals Broke Rules
After a crisis, countries look for additional tax and tighten loop holes. Aivars Lode
By Tom Fairless
BRUSSELS—European Union regulators explained why they think tax deals granted to Apple Inc. in Ireland and Fiat SpA in Luxembourg constituted illegal state support—the next stage of an investigation that could result in the companies paying huge sums in extra taxes to the governments concerned.
In documents released Tuesday, the EU laid out the reasoning behind its decision to open formal tax investigations in June. While the probes are in their early stages, a final ruling against the tax deals could result in back taxes being owed by Apple, Fiat, Starbucks Corp. and potentially other companies.
The announcements are likely to set off alarms for a swath of multinationals and funds operating in Europe, particularly those that, like Fiat, arrange their financing and treasury operations through Luxembourg, experts said.
"Taxpayers across Europe will be reviewing their affairs carefully in the light of this development to make sure they are robust to challenge," said Neal Todd, a partner with Berwin Leighton Paisner LLP in London.
In a hard-hitting letter to the Irish government published Tuesday, the European Commission, the 28-member bloc's central antitrust authority, said it had reached the "preliminary view" that tax deals struck with Apple in Ireland in 1991 and 2007 constituted state aid.
"The commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple," the letter said.
A spokesman for Apple said the company had "received no selective treatment from Irish officials over the years," and that its tax payments "in Ireland and around the world have increased tenfold" since 2007. "We're subject to the same tax laws as the countless other companies who do business in Ireland," the spokesman said.
At issue are the tax rulings, or so-called comfort letters, sent by governments to multinationals to give clarity on how a specific tax will be calculated. These would be illegal if they gave selective advantages to some companies.
The commission said it had specific doubts—based on an analysis of exchanges between representatives of Apple and the Irish tax authorities—about the methods used to calculate taxes payable by two of Apple's subsidiaries in Ireland: Apple Operations Europe and Apple Sales International.
AOE manufactures personal computers and provides other services to Apple subsidiaries in Europe, the Middle East and Africa, and ASI procures finished Apple products from third-party manufacturers and sells them to overseas distributors.
In its letter, the commission said the costs attributed to AOE appear to have been "reverse engineered" to arrive at a specific taxable income. The regulator also says that excerpts from conversations between Apple and the Irish authorities indicate the reduction of Apple's tax rate after a certain threshold "would have been motivated by employment considerations."
Apple employs more than 4,000 people in Cork, Ireland, where all its Irish subsidiaries are based.
Apple set aside about $12 billion for U.S. federal and state income taxes in fiscal 2013, on sales of $62.7 billion in the Americas, according to a filing with the U.S. Securities and Exchange Commission. The company, which doesn't break down revenue by country, set aside just $1.1 billion for foreign income taxes over the same period, on sales outside the Americas of about $88 billion. It reported foreign pretax earnings of $30.5 billion that fiscal year.The Cupertino, Calif.-based company paid less than €20 million ($25.4 million) in taxes in Ireland for each of the years 2010-2012 through the two Irish subsidiaries that the commission has focused on, according to the commission's letter.
Apple could be asked to pay up to $200 million in back taxes, said Heather Self, a tax partner at Pinsent Masons LLP in London. She said the company could also agree to pay a smaller amount to settle—or pay nothing if Ireland offers a robust defense.
The commission doesn't fine countries for providing illegal state aid.
An Irish government spokesman referred to previous comments saying Ireland was "confident that there is no breach of state-aid rules" in the Apple case.
That investigation is potentially more significant than the Irish probe due to the large number of funds and other companies that are based in Luxembourg and could be affected by future investigations, experts said. The EU's probe has also spread to Amazon.comInc.'s operations in Luxembourg and other companies operating there, according to a person familiar with the matter.In a parallel development, the commission also published its letter to Luxembourg's government on Tuesday, saying it had reached the "preliminary" conclusion that a tax decision concerning Fiat amounted to state support for the car maker, and the regulator had "doubts" about the deal's conformity with EU law.
The EU's state-aid rules are meant to prevent governments from offering sweetheart tax or subsidy deals to companies that distort competition inside the bloc.
The EU has also said that it was seeking information from the governments of Belgium and the U.K. in separate tax enquiries. The EU said the documents requested from the U.K. related to its overseas territory of Gibraltar.