apple 1 – eu 0

It was a win for Apple. A loss for the European Union. And a case study for the rest of us.

The news story itself is simple. In 2016, the European Commission ordered Apple to pay Ireland 13 billion euros ($14.9 billion) for ten years of back taxes. The Commission claimed Apple benefited from illegal state aid via two Irish tax rulings that artificially reduced its tax burden for over two decades, to as low as 0.005% in 2014.

Apple contested the order and Europe’s court of first instance in Luxembourg recently held in Apple’s favor, writing “The General Court annuls the contested decision because the Commission did not succeed in showing to the requisite legal standard that there was an advantage…” as defined in the EU competition rules. The ruling can still be appealed to the European Court of Justice, the EU’s highest court.

But the facts of the case are far from simple. They are a prime example illustrating how complex combinations of regulation, law, and politics allow market participants with the means to employ armies of lawyers, economists, accountants, trade negotiators, tax advisors and lobbyists to game the system to their advantage. Creating complex corporate tax structures designed to help multinationals reduce taxes is a major industry.

One might think Ireland, where Apple has its European headquarters, would want to gain nearly $15 billion. But Ireland took Apple’s side in this dispute! That is because Ireland, which already charges one of the lowest corporate tax rates in the world at 12.5%, regularly cuts special deals with companies to reduce rates further.

Ireland allows a write-off of 25% on research and development. Its so-called “Double Irish” tax avoidance method, written into Irish law, lets companies move revenue and profit around to, in a perfectly legal manner, reduce taxes. All you need is the ability to work the books to take advantage of the complexities of the law. And of course, Ireland has a well-educated English-speaking workforce and can both draw skilled labor from and freely export to all the 28 nations of the European Union.

The tax practices are controversial even in Ireland, which is running a Covid-19 related budget deficit. There was political opposition to the government’s decision to side with Apple in this case. But the Irish government believes the policy pays off. Apple has made Cork, Ireland its European home since 1980. The company employs about 6,000 people in Ireland, including logistics, distribution and customer support personnel.

And Apple is far from alone. Google, Facebook and Twitter have all made Ireland, an English-speaking country with a well-educated workforce, their base of operations for Europe. Their offices along the city’s canal in Dublin are now known as Silicon Docks.

Ireland may have allowed Apple to reduce its taxable income in Ireland from billions to millions. EU regulators said in 2011, for instance, Apple’s Irish subsidiary recorded European profits of $22 billion, but only about $57 million was considered taxable in Ireland. Still, Ireland figures the tax revenue it forgoes pays off in the long run.

Intel has been in Ireland since 1989. It has invested more than $15 billion in the country and employees 4,900 people. Microsoft employs 2,000 people at a campus in Dublin. Big pharma is in Ireland, including Pfizer and Amgen.

While it is discontinuing some of its more contested loopholes, Ireland has recently introduced a new break for profit on intellectual property, a potentially huge patoff for large technology companies with big patent portfolios.

After the favorable ruling, Apple released a statement saying, “This case was not about how much tax we pay, but where we are required to pay it. We’re proud to be the largest taxpayer in the world as we know the important role tax payments play in society. Apple has paid more than $100 billion in corporate income taxes around the world in the last decade and tens of billions more in other taxes.”

But it could have paid more.

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