Apple tax: Why tech firm has been hit with £11bn bill

Company paid effective corporate rate of 1 per cent on its European profits in 2003 15 – falling to just 0.005 per cent in 2014

James Moore
Tuesday 30 August 2016 13:57 BST
EU orders Apple to pay up to 13 billion euros tax to Ireland

It’s a tax demand for the ages. The European Commission has ordered Apple to pay Ireland €13bn (£11bn) in back taxes after ruling that a so called 'sweetheart deal' struck between the two was illegal.

But the move could spark a damaging international trade spat. Here’s your cut out and keep guide to what could become a very taxing story...

Why has the Commission ruled in this way?

The European authorities accused Ireland of helping Apple to avoid tax by means of a sweetheart deal that is in breach of EU rules. Commissioner Margrethe Vestager, who oversees competition policy, said this allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003, falling to just 0.005 per cent in 2014.

How will the money be repaid?

That’s up to Ireland. It is in charge of recovering the money the EU says is due as a result of the deal breaking rules banning state aid to industry. It looks a bit like asking convicts to guard their own prison, but that’s the way these things are structured.

So Ireland will get a big bung?

Not just yet. Apple and Ireland have hotly denied the charges, and there will be appeal. This isn’t over, not by a long shot.

How does this compare to other rulings?

The EC has become much more aggressive in its approach to the agreements struck between multi national companies and EU member states. Previously it ordered the Dutch authorities to recover €30m (£26m) from Starbucks with a similar amount due to Luxembourg from Fiat Chrysler.

Both companies and countries have appealed. The Apple ruling dwarfs the biggest bill so far levied, which is €300m (£256m) that Swedish engineer Atlas Copco has been told to pay Belgium. It is not quite as much as the $19bn (£15bn) that had been predicted, but it’s fair to say this is a game changer.

Are there any more cases due?

Amazon and McDonald's are in the frame over deals struck with Luxembourg. It wouldn’t be at all surprising to see further probes opened if the EU finds anything it doesn’t like. Look for the bloc to seek out non US based companies in the future, to avoid accusations of unfairly targeting American businesses.

Can Apple afford such a thumping bill?

Are you kidding? This is one of the world’s richest companies. Apple reported it had cash equivalents (cash!) and marketable securities of a staggering $231.5bn (£176.7bn) in June. Some 92.8 percent of that enormous cash pile – $214.9bn (£164bn) – is parked in foreign subsidiaries doing nothing much more than earning a pitiful rate of interest.

Why is that?

US corporation tax is charged at a headline rate of 35 per cent and Apple has no interested in paying up. While few companies pay that rate – it can be chipped away at through allowances and other accounting wheezes – it is still far ahead of what most developed nations charge. The headline rate in the UK, by comparison, is just 20 per cent.

How will the US react to this?

Not well. America’s Treasury secretary Jack Lew last week accused the EU of trying to become a “supra-national tax authority”. He claimed US companies were being treated unfairly and that the EU was potentially undermining efforts to reform international tax rules so companies pay their share. He’s also worried that Apple will offset this bill against its US bill, potentially resulting in a huge transfer from US taxpayers to Irish taxpayers.

Hang on, didn’t the US criticise Apple’s avoiding tax at home?

Indeed so. A US congressional committee has previously accused Apple of using “sham” subsidiaries and “convoluted strategies to shift profits offshore”. There was bipartisan criticism of the company at a Senate committee hearing back in 2013 with Democrat Carl Levin, who chaired a grilling of Apple CEO Tim Cook, and Republican John McCain both weighing in. But at the same time, Tea Party poster boy Rand Paul accused the committee of “bullying” one of “America’s greatest success stories”.

So what is the politics this time around?

The Republican presidential candidate is Donald Trump, a bellicose nationalist who has aggressively advocated an “America First” trade policy. Mr Lew stepping up to the plate for Apple and other US companies in the EU’s cross hairs could be seen as an attempt by the Obama administration to shore up the flanks of Hillary Clinton and other Democrats against any potential charges of weakness by their opponents in the midst of a hotly contested election.

Does this mean Apple will quit Ireland?

There’s not much chance of that happening. Even if the EU manages to stamp out future deals like the one between Ireland and Apple, the Republic’s headline rate of corporation tax is still only 12.5 per cent. And as one loophole closes you can be sure clever accountants (mostly based in London) will be hard at work on finding others to exploit

How will this affect Britain?

To all intents and purposes Britain is a bystander. However, it would be playing a dangerous game were it to try to replicate Ireland’s tactics post Brexit. A trade war with the EU over future British tax policy might make The Sun happy, but the reality is that it is a battle Britain couldn’t win and would harm both sides.

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