European Union: Apple owes Ireland nearly $15 billion in back taxes

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European Commissioner Margrethe Vestager gestures during a news conference on Ireland's tax dealings with Apple Inc at the European Commission in Brussels, Belgium August 30, 2016. REUTERS/Eric Vidal - RTX2NKZR

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HARI SREENIVASAN: The European Commission ruled today that Ireland must collect $14.5 billion in back taxes from Apple. The announcement fueled new tensions between the U.S. and Europe over the role of multinational corporations, how they are taxed and whether it should be considered a subsidy.

The antitrust regulator for the EU said Ireland had given Apple a sweetheart tax deal for well over a decade, with special laws that effectively allowed Apple to pay less than 1 percent corporate tax. The EU accused Apple of setting up two companies in Ireland with a head office that only exists on paper. The profits from European stores all go to the Ireland head office and are essentially untaxed.

Apple said it would appeal the decision and denied the characterization. In a statement, the company’s chief executive, Tim Cook, said the European Commission is trying to — quote — “rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.” The company has more than $200 billion in cash.

I spoke with Commissioner Margrethe Vestager, who announced the decision.

Ms. Vestager, thanks for joining us.

First off, what gave Apple an edge in Ireland that was unfair in the eyes of the EU?

MARGRETHE VESTAGER, European Commission: Well, we have a long longstanding prohibition of state aid, which means benefits, advantages to a selected company.

And that may come in any form, as a piece of land, a favorable loan, a grant or a tax benefit. And, of course, any member state can have their own tax legislation. We would never question that. But the thing is that you cannot give a specific company a benefit or an advantage which is not open to other companies.

HARI SREENIVASAN: Is there evidence that this was specific to Apple and not to all the other companies that are doing business in Ireland?

MARGRETHE VESTAGER: Yes, it is.

This arrangement is due to two things which are none of our concern, how Apple is organized and the Irish tax legislation. But the thing that is specific is two tax rulings — are two tax rulings that are directed specifically to Apple.

And tax rulings are, by nature, specific because they are directed from the government or from the authorities to a specific company. And this is only for them. It is not for other companies.

HARI SREENIVASAN: One of Apple’s concerns today, in a call with reporters, the CFO said the .005 percent effective tax rate that you cited this morning during your press conference, they said that — “I said it before. It’s a completely made-up number. We paid $400 million of taxes in Ireland during 2014. We’re one of the largest taxpayers in the country.”

MARGRETHE VESTAGER: Well, the thing is that it is important for profits to be paid where profits are made.

And what we have seen is that the Irish tax rulings allowed Apple to put the huge majority of their profits into a so-called headquarter or head office. This head office only existed on paper. It had no employees, no premises, no real activities, and it wasn’t taxed, not in Ireland, nor anywhere else.

And that, of course, then led to the result that Apple paid very, very, very little in taxes compared to their profits, in some years, as little as 0.005 percent.

HARI SREENIVASAN: Is this part of a broader effort to redefine how multinational corporations pay taxes? We have heard that you’re also going after McDonald’s and reportedly Amazon?

MARGRETHE VESTAGER: Well, the thing is that I do state aid control, and state aid control do not redefine taxation as such.

That, of course, takes the legislature to work. And that is why we have worked with the European Council, with the European Parliament in order to change legislation, to make transparency greater, to have country-by-country reporting, for tax authorities actually to know what other tax authorities are doing.

But it is for the legislature to change that. What I do is what we have a longstanding tradition of doing and a longstanding court practice of doing, which is to control state aid seen as specific advantages to specific companies.

HARI SREENIVASAN: Doesn’t this draw into conflict the role of the European Union or the Commission vs. countries and their sovereignty and how they’re able to lay out their tax laws?

MARGRETHE VESTAGER: Well, the sovereignty of the member state is protected by our treaty. And I, of course, respect that 100 percent. I have sworn to respect the treaty.

But the thing is that two things have to be in place at the same time, both upholding national legislation as tax legislation and, at the same time, the European legislation that we have made in common, that — the EU state aid rules.

And here we have a situation where you have Irish states — Irish tax legislation, but a breach of European state aid rules, because illegal state aid was handed out.

HARI SREENIVASAN: For the record, we did invite Apple. They didn’t have anybody available today.

But they did say in a statement that this could have a profound and harmful effect on investment and job creation in Europe. They employ about 6,000 people in Ireland. Do you expect that?

MARGRETHE VESTAGER: Well, the thing is that Europe is a wonderful place to do business.

It’s a single market with more than 500 million potential customers. It’s a place where you find research and development of highest quality. You find very skilled people, good people to employ, wonderful infrastructure.

So you’re more than welcome to come to Europe to do business. And I think you can have a very good business here. The thing is that what we don’t like so much is if you come to Europe for tax avoidance.

HARI SREENIVASAN: Is there a concern that this is — the uncertainty between how the EU rules on different laws inside member nations could create a climate where a company might not come to Europe; they might base themselves somewhere else?

MARGRETHE VESTAGER: I think there is an issue here also of corporate culture, because, if you’re in a country where the tax rate is 12.5 percent, as in Ireland, and you pay less than 1 percent, also substantially less than 1 percent, well, then I think you should also reconsider if everything is all right.

And 12.5 percent is, in the first place, a very low corporate taxation compared to other European member states.

HARI SREENIVASAN: Margrethe Vestager, thanks so much for joining us.

MARGRETHE VESTAGER: It was a pleasure. Thank you for having me.

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