Apple must repay $14.5 billion in underpaid taxes in Ireland

Two Irish tax rulings constituted illegal state aid, the European Commission has ruled

Apple's tax benefits in Ireland are illegal, and the company will have to pay up to €13 billion (US$14.5 billion) in back taxes, plus interest.

That's the verdict European Commissioner Margrethe Vestager delivered Tuesday, wrapping up a two-year investigation of the company's tax affairs stretching back to 2003.

The investigation found that Apple's effective tax rate on profit reported in Ireland was just €500 per million euros in profit, falling to €50 per million in 2014.

"I would have a feeling if my effective tax rate were 0.05 percent, falling to 0.005 percent. I would feel that maybe I should have another look at my tax bill," she said.

The Commission looked into tax rulings granted by the Irish government to two Apple subsidiaries, Apple Operations Europe, which makes some Apple computers, and Apple Sales International, which resells the company's products throughout Europe, the Middle East, Africa and India.

The latter accounts for almost all the unpaid taxes Ireland now needs to recover, Vestager said.

Vestager said that the Irish tax authorities had allowed Apple to split profit from the two companies, which were subject to normal taxes, with "head office" companies that were subject to no taxes, either in Ireland or elsewhere.

"Splitting the profits did not have any factual or economic justification. The so-called head office had no employees, no premises, no real activities," she said. Those head-office companies were allocated almost all the profits.

This selective tax treatment in Ireland is illegal under European Union state aid rules, she said, and distorts competition.

To restore fair competition, Ireland must recover up to €13 billion in back taxes from Apple for the period from 2003 to 2014.

"It is for the Irish authorities to determine the exact amount and the modalities of payment," she said.

Apple will have to pay up even if the ruling is appealed, with the money going into an escrow account, she said.

Should the U.S. government decide to change its tax rules so that Apple owes more tax in the U.S. on its EU profits, then the sum to be repaid in Ireland could be reduced by a corresponding amount, she said.

Apple is not the only company in the Commission's sights: It has also issued tax rulings against Starbucks and Fiat, and is still investigating and McDonalds in Luxembourg, Vestager said.

"All companies, big or small, should pay taxes where they make their profits. We need changes in corporate philosophies, and we need changes in legislation to address loopholes and to ensure transparency," she concluded.

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