Photo: Margrethe Vestager – European Commissioner for Competition
Even if the tech giant wins its court appeals, it will have to pay the money—and more—to Washington
Apple’s €13 billion ($14.4 billion) tax fight with Europe is grinding through the courts. It could end up generating unwelcome headlines—for Apple and Brussels alike.
What was a story about the European Union hitting what it sees as an undertaxed technology giant has turned into a tussle for billions in tax revenue between Brussels and Washington. The shift is awkward for European officials, who are seeking to avoid a trade war with President Trump.
This week the iPhone-maker is in the European court arguing that judges should overturn the European Commission’s 2016 decision that a tax deal between Apple and Ireland was illegal under EU law. The ruling was a landmark in EU competition enforcer Margrethe Vestager ’s crackdown on multinational companies using complex structures to slash their taxes.
The record €13 billion bill for back taxes applied Ireland’s standard 12.5% tax rate to the international profits that flowed through Apple’s Irish companies between 2003 to 2014. The Cupertino-headquartered company previously paid barely any tax on its international sales, based on profit transfers signed off by Dublin. It reported an average overall 27% tax rate between 2003 to 2014—and an average foreign rate of 5%—but much of that tax was deferred rather than paid out. Before the 2017 U.S. tax reform, Washington would have collected the deferred tax on that offshore income only if it was moved home.
Ironically, Apple won’t actually benefit from a successful appeal. Mr. Trump’s tax reform means the company’s offshore cash pile was taxed in the U.S. at 15.5%. If Ms. Vestager’s decision stands, the €13 billion will be paid to Dublin. If the European court overturns her decision, though, those profits will be taxed at the higher rate and end up with the Internal Revenue Service. The judges will take months to rule on this case and it will be years before all appeals are exhausted.
A lingering political battle in Europe, with the associated accusations that Apple dodges taxes, could hurt the company’s slick consumer image. So could an investigation into an antitrust complaint Spotify has lodged against Apple, which Brussels is currently considering. Europe is an important market, accounting for roughly a quarter of Apple’s profits last year. A high-profile victory for Apple in the tax case may even give Ms. Vestager—the commissioner dubbed the EU’s “tax lady” by Mr. Trump—more ammunition for her crackdown.
Brussels plans to redouble its efforts to improve European governments’ tax takes. The incoming European Commission has made “(fair) taxation of big tech companies” a top priority and Ms. Vestager is leading the effort.
The EU has a three-pronged approach. It is working with the U.S., China and others on a project led by the Organization for Economic Cooperation and Development to overhaul the international corporate tax framework by the end of next year.
But if that OECD effort fails—and finding consensus will be challenging—Brussels plans to propose a new European digital tax. Past efforts for an EU-wide digital tax failed to garner the unanimous approval they required among European governments, but the new Commission aims to lower the voting threshold and push a new tax through.
Thirdly, EU competition enforcers continue to target companies like Apple that have what they consider to be sweetheart deals in Europe. Ikea, Nike and Finnish food-packager Huhtamäki are currently under formal investigation.
Next week the European court will rule on two other EU tax-recovery cases, Fiat’s appeal of a €23 million tax bill and Starbucks’s appeal of a €26 million one. Those rulings could indicate how the court will eventually decide in the Apple case.
Apple has nothing to gain from winning its European appeal—and possibly a public-relations battle to lose. Given Mr. Trump’s approach to international relations, though, a victory for Europe also could prove pyrrhic.