Apple offices in Cork, Ireland

Apple allocated almost all profits to untaxed non-tangible HQ, Commission says

EU Competition Commissioner Margrethe Vestager says Apple allocated almost all the profits it made in Europe and other regions to untaxed non-tangible headquarters in Ireland.

BRUSSELS, BELGIUM (REUTERS) – The European Commission on Tuesday (August 30) ordered Apple Inc. to pay up to 13 billion euros in taxes plus interest that it said Ireland should have levied on the iPhone maker in an omission that the Commission said represented illegal state aid.

The ruling is part of a drive against what the EU says are sweetheart tax deals that usually smaller members offer multinationals in order to lure jobs and investment away from other EU members.

EU Competition Commissioner Margrethe Vestager said that, under a tax ruling Apple signed with the Irish government, most of the company’s profits in Europe and other regions were allocated to an untaxed non-tangible head office, while a part of the profits from its Irish unit Apple Sales International was attributed to the company’s Irish branch.

“The so-called head office had no employees, no premises, no real activities. Only the Irish branch of Apple Sales International had any resources and facilities to sell Apple products. But, under the tax ruling, the so-called head office was attributed almost all of the company’s profits. In fact, due to Apple’s set up, it was attributed almost all of the profits that Apple made from selling products throughout Europe, the Middle-East, Africa and India,” Vestager said.

Apple and Ireland said the company’s tax treatment was in line with Irish and EU law and said they would appeal the decision.

But Vestager questioned how anyone might think an arrangement that allowed Apple to pay a tax rate of 0.05 percent, as Apple’s main Irish unit did in 2011, was fair.

“In 2011, Apple Sales International made a profit of 16 billion euros. Less than 50 million euros were allocated to the Irish branch, the rest, the huge majority was allocated to the so-called head office where they remained untaxed. This means that Apple’s effective tax rate in 2011 was 0.05 percent,” Vestager said.

The commission said this tax rate was even brought down to 0.005% in 2014.

Vestager said tax rulings should not be used to avoid tax on actual economic activity.

“This selective tax treatment of Apple in Ireland is illegal under EU state aid rules. It gave Apple a significant benefit compared to other businesses. Tax rulings cannot endorse a methodology or a method to calculate taxable profits of a business that fails to reflect economic activity or the reality for that matter,” she said.

The EU’s ruling challenges the way that Ireland agreed to tax the profits of Irish registered Apple subsidiaries, through which most of the iPad maker’s non-U.S. profits flowed.

Apple Inc. licences the rights to technology designed in the United States to Irish subsidiaries. These then hire contract manufacturers to make devices which they sell to Apple retail subsidiaries around Europe and Asia.

The Apple case is likely to drag out for years in EU and possibly Irish courts. With no clear precedents, legal experts said it was impossible to know if Apple, which had a cash pile of over $200 billion at the end of June, would end up paying any money.