Apple-EU tax clash has others asking: Who's next?
SAN FRANCISCO — The European Union ruling that Apple must pay $14.5 billion in what it says are unpaid back taxes could be just the start of protracted tax battles between the EU and multinationals, say tax experts.
“This is a harbinger,” says Thomas Cooke, a professor at Georgetown’s McDonough School of Business. “There are many companies saying, ‘Are we next? And not just in Ireland?’ ”
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Sweetheart tax deals lavished upon tech giants and other U.S.-based companies by Ireland and Luxembourg have drawn the scrutiny of Europe's top regulators, leading to rulings or probes against at least six large multinationals. More are likely.
Tech heavyweights Google, Microsoft and Facebook, all of whom enjoy highly favorable tax deals in Ireland, Luxembourg and elsewhere, are “absolutely on the radar of the EU,” says Brad Badertscher, professor of accountancy in the University of Notre Dame’s Mendoza College of Business.
"This is a signal that this is not a tax haven," he says. "(The EU) is like secondary eyes looking over each government."
Google and Microsoft declined to comment.
The U.S. Treasury Department has opposed EU's action, saying unilateral moves to retroactively assess taxes are unfair and could undermine the "spirit of economic partnership" between the U.S. and EU.
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On Tuesday, White House press secretary Josh Earnest said the EU decision could have the effect of transferring of revenue from U.S. taxpayers to the EU. That’s because any tax payments Apple must pay in Europe could be deducted from its U.S. tax obligations. “That's the crux of our concerns about the fairness of this kind of approach,” he said.
The U.S. has been working with European officials on corporate tax avoidance, as well as pursuing its own actions.
The tax practices of Facebook, which has a new headquarters and data center near Dublin, are being scrutinized by the Internal Revenue Service. Last month, it sued the social-networking giant for documents on how it transferred assets to Ireland in 2010. IRS officials believe Facebook undervalued, by “billions of dollars,” some of the assets.
"We pay all taxes required by law everywhere we operate,” Facebook spokeswoman Bertie Thomson said in an email message.
The EU set off on its three-year probe of tax practices because, it says, tax deals like the one Apple experienced in Ireland put other companies at an unfair disadvantage, harming EU taxpayers and violating the economic union's rules on "state aid."
"Member states cannot give unfair tax benefits to selected companies," said EC Commissioner Margrethe Vestager on Tuesday.
Ireland has disputed the EU's findings and says it hasn't done tax deals.
According to the commission, Apple booked most of its product sales made in Europe, the Middle East, Africa and India through two Irish subsidiaries. It was able to avoid paying Ireland's 12.5% tax rate, which is already lower than elsewhere in Europe, by allocating most of those European profits to a "head office" located in no country. The result: a tax rate of 0.005% in 2014.
The country and others have been willing to agree to such slim tax rates to lure Apple and others to their cities, where they act as a hub for sought-after high-tech jobs.
Ireland, for example, relies upon Apple for tax revenue and the revenue it brings from hiring workers and investments in local facilities, says Badertscher. In Cork, Ireland, Apple employs 5,000, where it is the largest private-sector employer.
Apple, which says the EU's decision will have "serious, wide-reaching implications," is expected to fight the EU decision for years. For now, the action creates yet another fissure between EU members and its regulatory body. “One of the reasons the U.K. left the EU was because of the ever-increasing power of the EU, and this is another example of that power,” Badertscher says.
The ripples could extend to the U.S. if multinationals here decide the allure of offshore tax havens are worth it, Cooke says. “Congress might want to offer a (tax) incentive to bring business back to the U.S.,” he says. “But this being an election year, I wouldn’t expect anything until 2017 at the earliest, if that.”
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The tax bill charged to Apple, if finalized, would be the largest in a growing list of tax avoidance rulings made by the EU.
A ruling by the European Commission in October that a tax arrangement between Starbucks and the Netherlands was illegal is currently on appeal to the EU General Court, as is a similar ruling against Fiat in Luxembourg. Both companies owe $22 million-$33 million in back taxes, said the EU.
An EU investigation into tax agreements between Amazon and Luxembourg is still awaiting a final decision. It's also pursuing an investigation into Luxembourg's tax treatment of McDonald's and Belgium's of Anheuser-Busch InBev.
Amazon says it had received no special tax treatment from Luxembourg and is subject to the same tax laws as other companies operating there.
Contributing: Gregory Korte