CUPERTINO — Regulators in the European Union warned Tuesday that Ireland’s tax breaks to Apple may amount to unlawful state aid, casting a cloud of uncertainty over Silicon Valley’s home away from home.
The European Commission found that Irish tax officials gave Apple special treatment over other companies, which in turn gave the country an unfair edge over the rest of the European Union in the fight to lure foreign firms to their soil. Although the group’s findings are still preliminary, Apple may have to pay vast sums of back taxes if the breaks granted to it by the Irish government are found to violate EU law.
“The Commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple,” Joaquín Almunia, vice-president of the European Commission, wrote in the 21-page report. “That advantage is obtained every year and ongoing, when the annual tax liability is agreed upon by the tax authorities in view of that ruling.”
With a corporate tax rate just a fraction of the U.S.’s, Ireland has long been a popular destination for valley companies looking to plant a flag overseas. Firms such as Apple, HP, Intel and Dell were among the first to set up shop there, followed by later generations of companies like Airbnb and Dropbox.
But European regulators are subjecting sweetheart tax deals to greater scrutiny, meaning multinational companies may be forced to pay more than the rates they’ve enjoyed. The European Commission also took aim at Luxembourg’s tax breaks to Italian carmaker Fiat SpA on Tuesday. Forecasting still more tax probes, federal tax expert Rebecca Wilkins said the scores of tech companies in Ireland seem like prime targets for investigators.
“This is just the tip of the iceberg,” said Wilkins, a senior counsel on federal tax policy at Citizens for Tax Justice.
EU regulators are scrutinizing tax rulings from the Irish government in 1991 and 2007 for Apple Operations Europe and Apple Sales International, two subsidiaries. At the heart of the inquiry is transfer pricing, or the rates that companies charge their subsidiaries for goods and services as they do business overseas. Companies sometimes try to concentrate their profits in one country over another to enjoy lower tax rates, said Caroline Chen, an assistant clinical professor at the Santa Clara University School of Law.
Examining an agreement struck between Apple and Ireland in 1991, the European Commission found that certain costs for the Irish subsidiary appeared to have been reverse-engineered to arrive at a desirable taxable income that did not have any economic basis. Ireland seemed to be “motivated by employment considerations” in its tax discussions with Apple, according to the report. The regulators note that Apple is the largest employer in the Irish city of Cork.
“If you think about it from an employment perspective and an economic perspective, then tell me, what government wouldn’t want Apple to have that type of presence in their country?” Chen said.
What’s more, Apple’s 1991 tax rate remained in place until 2007, far longer than most countries’ regulations allow, regulators wrote. That too appeared to grant an advantage to Apple, regulators concluded, as the company’s taxes remained unchanged as its sales skyrocketed. Both Apple and Ireland have a chance to respond to the report, and then after that response the EU body will issue its ruling, which can be appealed.
Apple insisted on Tuesday that it had been taxed fairly.
“Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government,” an Apple spokeswoman said in a statement. “Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.”
The Irish Department of Finance stood by its practices and said it had already supplied the European Commission with more information about its practices.
“Ireland is confident that there is no breach of state aid rules in this case,” a government statement reads.
The European Commission’s report draws heavily from the work of the U.S. Senate, where Apple’s tax practices have also come under scrutiny. Apple CEO Tim Cook defended the company’s practices at a hearing of the Senate’s Permanent Subcommittee on Investigations last year.
“They’re probably one of the most aggressive in sending profits off shore through all kinds of accounting and legal maneuvers,” Wilkins said.
Though Ireland’s tax rates have undeniably been a big draw for American firms, the scrutiny from the European Commission may not send tech packing from Dublin. Brian Caulfield, a Dublin-based partner at venture firm DFJ Esprit, said Ireland also appeals to American entrepreneurs with its shared language and friendly business environment.
“I don’t see a significant short term threat to Ireland’s relationship with Silicon Valley,” he said.