The European Commission on Tuesday came out with an official ruling in its investigation of Apple’s tax practices in the region. The verdict isn’t at all favorable to the iPhone maker and comes crashing in about a week before Apple’s iPhone 7 announcement party.
“Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules,” EU’s competition commissioner, Margrethe Vestage said in Brussels this morning, while delivering the verdict. “The Commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 percent on its European profits in 2003 down to 0.005 per cent in 2014.
The €13 billion ($14.5 billion) verdict against Apple is the largest ever recovery order issued by the Commission, The Register notes. That’s almost ten times bigger than the €1.4 billion ruling against Electricite de France last year.
The investigation, launched in 2014, discovered that Apple managed to route 90% of its overseas profits through its two Irish subsidiaries, including Apple Sales International and Apple Operations Europe. The EU found that the two incorporated companies were fantasy organizations, which “did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a ‘head office'” which the commission found only existed on paper.”
“[Profits] allocated to the “head offices” were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force,” the ruling says. “As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005 percent in 2014 on the profits of Apple Sales International.”
The Register further reports that critics of Apple’s tax deal in Ireland believe the country’s government made bespoke arrangements with Apple in 1991 and 2007 which allowed the iPhone maker to dodge a tax rate of 12.5% in Ireland and pay less than 1% on EU sales in some years.
Tim Cook argued that the corporation operates within the same tax structure as all other business in Ireland and that it has not received selective support.
The Commission launched similar investigations against Fiat and Amazon (Luxembourg), and Starbucks (the Netherlands) for their tax practices in those countries.
UPDATE: Tim Cook issued a lengthy response to the EU ruling, posting an open letter on Apple’s site in which the CEO explains Apple’s long business relationship with Ireland. He also said that he hopes the ruling will be reversed: “Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed.”