The Inside Story of Apple’s $14 Billion Tax Bill – Bloomberg
â€œThe Maxforceâ€ is the European Union team that ordered Ireland to collect billions of euros in back taxes from Apple Inc., rattled the Irish government, and spurred changes to international tax law. Youâ€™d think it might have earned the name by applying maximum force while investigating alleged financial shenanigans. It didnâ€™t. Itâ€™s just led by a guy named Max.
A European Commission official gave the nickname to the Task Force on Tax Planning Practices in honor of its chief, Max Lienemeyer, a lanky, laid-backÂ German attorney who rose to prominence vetting plans to shore up struggling banks during Europeâ€™s debt crisis. Since its launch in 2013, the Maxforce has looked at the tax status of hundreds of companiesÂ across Europe, including a deal Starbucks Corp. had in the Netherlands, Fiat Chrysler Automobiles NV’s agreement with Luxembourg, and –Â its largest case –Â Apple in Ireland.Â Â
Lienemeyerâ€™s team of 15 international civil servants pursued a three-year investigation stretching from the corridors of the European Commission, the EUâ€™s executive arm, to Ireland’s Finance Ministry and on to Apple’s leafy headquarters in Cupertino, California. Much of it outlined for the first time here, this story chronicles a growing clash between Europe and the U.S. and a shift in the EUâ€™s approach to the tax affairs of multinationals.
The Maxforce concluded that Ireland allowed Apple to create stateless entities that effectively let it decide how much — or how little — tax it pays. The investigators say the company channeled profits from dozens of countries through two Ireland-based units. In a system at least tacitly endorsed by Irish authorities, earnings were split, with the vast majority attributed to a â€œhead officeâ€ with no employees and no specific home base — and therefore liable to no tax on any profits from sales outside Ireland. The U.S., meanwhile, didn’t tax the units because theyâ€™re incorporated in Ireland.
In August the EU said Ireland had broken European law by giving Apple a sweetheart deal. It ordered the country to bill the iPhone maker a record 13 billion euros ($13.9 billion) in back taxes, plus interest, from 2003 to 2014. One example the Commission cites: In 2011, a unit called Apple Sales International recorded profits of about 16 billion euros from sales across Europe. But only 50 million euros were considered taxable in Ireland, leaving 15.95 billion euros of profit untaxed, the Commission says.
Though the EU says its goal is â€œto ensure equal treatment of companiesâ€ across Europe, Apple maintains that the Commission selectively targeted the company. With the ruling, the EU is â€œretroactively changing the rules and choosing toÂ disregard decades of Irish law,â€ and its investigators donâ€™t understand the differences between European and U.S. tax systems, Apple said in a Dec. 8 statement.
Apple, which has some 6,000 workers in Ireland, says its Irish units paid the parent company a licensing fee to use the intellectual property in its products. The Irish companies didn’t own the IP, so they donâ€™t owe tax on it in Ireland, Apple says, but the units will face a U.S. tax bill when they repatriate the profits. â€œThis case hasÂ never been about how much tax Apple pays, itâ€™s about where our tax is paid,â€ the company said.Â â€œWe payÂ tax on everything we earn.â€
Ireland on Nov. 9 appealed the Commissionâ€™s ruling at the EU General Court in Luxembourg, arguing it has given Apple no special treatment. Irish Finance Minister Michael Noonan has said he â€œprofoundly disagreesâ€ with the ruling and that Ireland strictly adheres to tax regulations. The government says Ireland has no right to tax non-resident companies for profits that come from activities outside the country.
â€œLook at the small printâ€ on an iPhone, Noonan said after the EU released its ruling in August. â€œIt says designed in California, manufactured in China. That means any profits that accrued didnâ€™t accrue in Ireland, so I canâ€™t see why the tax liability is in Ireland.â€
In the coming weeks, the EU is expected to publish details of the Maxforce investigation. At about the same time, Apple will likely lodge its own appeal in the EU court. Though Apple will have to pay its tax bill within weeks, the money will be held in escrow, and the issue will probably take years to be resolved.
This story is based on interviews with dozens of officials from the EU, Ireland, and Apple, though most didn’t want to speak on the record discussing sensitive tax matters. A Maxforce representative declined to make Lienemeyer available for an interview. Ireland’s Office of Revenue Commissioners (the equivalent of the American Internal Revenue Service) says it canâ€™t comment on specific companies.
Lienemeyer began assembling the Maxforce in late spring of 2013 with a mandate of scrutinizing tax policies across Europe in search of any favoritism. Direct subsidies or tax breaks to court a specific company areÂ illegal in the EU to prevent governments aidingÂ national champions. His first hire — the person who would oversee the Apple probe — was Helena Malikova, a Slovak who had worked at Credit Suisse Group AG in Zurich. He quickly added Kamila Kaukiel, a Polish financial analyst who had been at KPMG, and Saskia Hendriks, a former tax policy adviser to the Dutch government.
As the four initial members began their investigations, they got a head start from a U.S. Senate probe of the tax strategies of American multinationals. The Senateâ€™s Permanent Subcommittee on Investigations said Apple shifted tens of billions of dollars in profit into stateless affiliates based in Ireland, where it securedÂ a tax rate of less than 2 percent.
At 9:30 a.m. on May 21, 2013, senators gathered in Room 106 of the Dirksen Office Building. Included in the evidence presented that day was a 2004 letter from Tom Connor, an official at Irelandâ€™s tax authority, to Ernst & Young, Appleâ€™s tax adviser. Connorâ€™s question: A unit of the tech company hadnâ€™t filed a tax return; Was it still in business? E&Y responded two days later that the division was a non-resident holding company with no real sales. â€œThere is nothing to return from the corporation tax standpoint,â€ E&Y wrote. The Senate exhibits didnâ€™t include Connorâ€™s response if there ever was one.
At the hearing, Arizona Republican John McCain castigated Apple as â€œone of the biggest tax avoiders in America.â€ Democrat Carl Levin of Michigan peered over the glasses perched on the tip of his nose and said Apple uses â€œoffshore tax strategies whose purpose is tax avoidance, pure and simple.â€ Crucially, though, Levin told the crowded room that under U.S. law, there was little the panel could do to force Apple to pay more tax. Apple Chief Executive Officer Tim Cook passionately defended the companyâ€™s actions, telling the senators â€œWe donâ€™t depend on tax gimmicks.â€
The Senate revelations raised eyebrows at the Maxforceâ€™s office in Madou Tower, a 1960s high-rise in the rundown Saint-Josse neighborhood of Brussels. Three weeks after the Senate hearing, Lienemeyer’s team asked Ireland for details of Apple’s tax situation. The Irish tax authorities soon dispatched a representative carrying a briefcase filled with a bundle of bound pages. The Irish could have simply sent the material via e-mail, but they were cautious about sharing taxpayerâ€™s information with the EU and have a ground rule to avoid leaks: never send such documents electronically.
While the Irish government remained bullish in its public statements, saying Apple hadnâ€™t received any favors, behind the scenes tensions were rising. Through the summer of 2013, the Finance Ministry assured government ministers that the EU investigation would amount to nothing, according to people familiar with the discussions. But those assertions seemed less confident than earlier communications. There was a sense that Apple had worked out its Irish tax position in a vastly different era, and no one remembered many details of the negotiations decades earlier.
In 1980, the four-year-old company — the Apple III desktop had just been released — created several Irish affiliates, each with a different function such as manufacturing or sales, according to the Senate report. Under Irish laws dating to the 1950s designed to shore up the moribund post-war economy, as a so-called export company Apple paid no taxes on overseas sales of products made in Ireland.
To comply with European rules, Ireland finally ended its zero-tax policy in 1990. After that, Apple and Ireland agreed that the profit attributed to a key Ireland-based unit, the division discussed in Tom Connorâ€™s letter, be capped using a complex formula that in 1990 would have resulted in a taxable profit of $30 million to $40 million.
An Apple tax adviser â€œconfessed there was no scientific basisâ€ for those figures, but that the amounts would be â€œof such magnitude that he hoped it would be seen as a bona-fide proposal,â€ according to notes from a 1990 meeting with the Irish tax authority cited by the EU. The equation didnâ€™t change even as Apple began assembling the bulk of its products in Asia.
Ireland and Apple started to make changes a few months after the Maxforce began looking into their tax relationship. In October 2013, Finance Minister Noonan announced he would close the loophole that let stateless holding companies operate out of Ireland. And the EU says Apple changed the structure of its Irish units in 2015.
As the Maxforce stepped up its probe in June 2014, Irish Prime Minister Enda Kenny was wooing potential investors in California. At a San Francisco event to promote Irish entrepreneurs, Governor Jerry Brown quipped that he had thought Apple â€œwas a California company,â€ but according to tax returns, â€œtheyâ€™re really an Irish company.â€ News clips show Irish officials looking on stony-faced as the governor makes his jest.
With Lienemeyerâ€™s team digging further into the issue, Appleâ€™s concern deepened. In January 2016, CEO Cook met with Margrethe Vestager, the EU competition chief — and Lienemeyer’s ultimate boss — on the 10th-floor of the Berlaymont building, the institutional headquarters of the European Commission in Brussels.
Vestager, a daughter of two Lutheran pastors,Â has a reputation for being even-handed but tough, cutting unemployment benefits while advocating strict new rules for banks when she served as Denmark’s finance minister. While she has acknowledged that her team had little experience with tax rulings — in a November interview with France’s Society magazine, she said, â€œWe learned on the jobâ€ — Vestager says enforcement of EU rules on taxation is a matter of â€œfairness.â€
In the meeting with Cook she quizzed him on the tax Apple paid in various jurisdictions worldwide. She told the Apple executives that â€œsomeone has to tax you,â€ according to a person present at the meeting. In a Jan. 25 follow-up letter obtained by Bloomberg, Cook thanked Vestager for a â€œcandid and constructive exchange of views,â€ and reasserted that Appleâ€™s earnings are â€œsubject to deferred taxation in the U.S. until those profits are repatriated.â€
Subsequent correspondence became more heated. On March 14, Cook wrote to Vestager that he had â€œconcerns about the fairness of these proceedings.â€ The Commission had failed to explain fully the basis on which Apple was being investigated, and the body’s approach was characterized by â€œinconsistency and ambiguity,â€ Cook said.
Apple contended that the EU had backtracked on a 2014 decision recognizing that its two Irish subsidiaries were not technically resident in Ireland, and therefore only liable for taxes on profits derived from Irish sources. Now, Cook said, it seemed the Commission was intent on â€œimposing a massive, retroactive tax on Apple by attributing to the Irish branches all of Appleâ€™s global profits outside the Americas.â€
“There is no inconsistency,” an EU spokesmanÂ said in a Dec. 15 statement. Only a fraction of the profits of the subsidiaries were taxed in Ireland, the statement said. “As a result, the tax rulings enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules.”
Cook’s entreaties did little to sway Vestager, and in August she phoned Noonan to tell him the results of the Maxforce investigation: The Commission was going to rule against Ireland. Late in the afternoon of Aug. 29, Irish officials began hinting to reporters that Appleâ€™s tax bill amounted to billions and â€œcould be anything.â€ At noon the following day, Vestager told a packed press conference in Brussels that the Commission had decided Apple owed Ireland 13 billion euros.
Though that would be equivalent to 26 percent of the 2015 national budget, Ireland didn’t want the windfall, saying the ruling was flawed because the country hadnâ€™t given Apple any special treatment. The decision sparked a political crisis as left-leaning members of Enda Kennyâ€™s fragile minority administration saw a potential bonanza for taxpayers that the worldâ€™s richest company could well afford. Even as Noonan toured television studios vowing to appeal the decision, independent lawmakers demanded that Ireland take the money.
Facing a potential revolt that could bring down the government, Kenny and Noonan eventually bowed to demands for a review of the countryâ€™s corporate tax system. But they said they would fight the case, and on Sept. 7, Irish lawmakers overwhelmingly backed the motion for an appeal.
Officials from Lienemeyerâ€™s team and other EU offices say they have gathered tax information on about 300 companies, looking for what they deem to be favorable treatment by governments across Europe. While they don’t expect all of those to yield payoffs as hefty as that from their investigation of Ireland and Apple, they say a worrying number require the kind of maximum force that the Maxforce can apply.
“We focus on outliers where you’re looking at something that is off the radar screen,” Lienemeyer’s boss, 50-year-old Dutchman Gert-Jan Koopman, who is in charge of state-aid enforcement at the EU, said at a Brussels conference in November. “If you’re paying a fair amount of tax then there is absolutely nothing to worry about.â€
â€”With assistance fromÂ Stephanie Bodoni andÂ Aoife WhiteÂ
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