Apple’s $14.5 billion EU tax bill highlights overseas earnings hoard

Reporting from Washington —  European regulators have given Apple Inc. a new moniker to accompany its hard-earned titles of computer pioneer, high-tech design icon and world’s most valuable company: multibillion-dollar tax cheat.

The European Union on Tuesday ordered Ireland to send the Cupertino, Calif., company a bill for up to $14.5 billion in back taxes, plus interest.

A two-year EU investigation determined that Ireland and Apple struck an illegal deal that allowed the technology giant to pay virtually no taxes from 2003 to 2014 on profits for sales throughout the 28-nation region.

“They put as much energy into tax avoidance policies as they did into industrial design,” Edward Kleinbard, a USC professor and former chief of staff to Congress’ Joint Committee on Taxation, said of Apple.

The ruling marked the biggest step yet in Europe’s controversial efforts to crack down on multinational corporations that channel profits through foreign subsidiaries to avoid or reduce their tax bills.

Ireland, however, has no interest in enforcing the ruling, which could make the nation less attractive as a corporate location, said Brad Badertscher, a professor at the University of Notre Dame’s Mendoza College of Business. Apple has 6,000 employees there in two subsidiaries.

“Ireland needs Apple more than Apple needs Ireland,” he said.

Ireland’s finance minister, Michael Noonan, said Tuesday he would seek approval from his government’s cabinet to appeal.

Apple could become a poster child for tax reform and an issue in the U.S. presidential campaign. American companies are holding more than $2 trillion in foreign earnings overseas to avoid paying higher U.S. taxes.

Europe’s Apple order drew bipartisan criticism in the U.S. as a unilateral step outside the bounds of international tax treaties. But there’s no agreement between Republicans and Democrats on how to overhaul the tax code to reduce the incentives for U.S. companies to engage in offshore accounting maneuvers.

Obama administration officials have criticized the EU’s push to collect additional taxes from U.S. companies.

That effort led to an order last year for the Netherlands to collect $34 million in back taxes from Starbucks Corp.; Amazon.com Inc. and McDonald’s Corp. are under investigation for tax breaks from Luxembourg.

European officials said “selective tax treatment” of some companies gives those firms an unfair advantage over others.

“Member states cannot give tax benefits to selected companies — this is illegal under EU state aid rules,” said Margrethe Vestager, the top competition official for the European Commission, the EU’s executive body.

The tax deal with Ireland allowed Apple to have an effective corporate tax rate of 1% in 2003. By 2014, the rate had fallen to 0.005%, meaning Apple paid just $50 on every $1 million in profit, the commission said.

Ireland is an attractive location for foreign subsidiaries because its 12.5% corporate tax rate is one of the lowest in the developed world.

Conversely, the U.S. corporate tax rate of 35% is the highest among the 35 members of the Organization for Economic Development and Cooperation, although many companies pay less because of loopholes and accounting maneuvers.

But a 2013 investigation by a U.S. Senate panel said that Apple had made a deal with Ireland to lower its corporate tax rate even further than the official rate.

The deal was one component of a strategy involving an elaborate web of offshore subsidiaries that allowed Apple to avoid paying at least $15 billion in U.S. taxes on $44 billion in foreign income from 2009 through 2012, according to a bipartisan report by the Senate’s Permanent Subcommittee on Investigations.

The U.S. report triggered the European investigation.

In 2013, the Senate panel called Apple Chief Executive Tim Cook to a high-profile hearing in which he insisted the company’s tax arrangements were legal and fair.

On Tuesday, Cook again defended the company’s operations in Ireland, which date to the opening of a factory in Cork in 1980.

“In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe,” Cook said in a letter posted on Apple’s website. “We never asked for, nor did we receive, any special deals.”

Cook said he was confident that the ruling would be reversed after an appeal by Ireland. Apple stock declined 0.8% on Tuesday.

The tax bill is a significant amount but wouldn’t be a major hit to Apple, which had more than $230 billion in revenue last year.

Technology analysts said the industry is more focused on the effects of the ruling, if it withstands the expected appeal, on Apple and other multinational tech companies that use Ireland as a European base.

“It’s a slippery slope, not just from an EU perspective, but in terms of how companies structure their taxes through Ireland,” said Daniel Ives, senior vice president of finance and corporate development at Synchronous Technologies, a mobile tech company. “It could have broad ramifications.”

Ireland still is required to collect the back taxes from Apple while it appeals to EU courts. The money would be held in escrow until a ruling is made, the European Commission said.

Any taxes ultimately recovered from Europe would be money that could have been collected by the United States when — and if — Apple decided to bring its offshore earnings home.

While declining to discuss the Apple case specifically, White House Press Secretary Josh Earnest said the Obama administration was concerned that such back tax payments “are merely a transfer of revenue from U.S. taxpayers to the EU.”

The U.S. Treasury Department issued a report last week critical of the European Union’s tax investigations, saying they could harm cross-border investment in addition to costing Washington tax revenue.

But Kleinbard said the EU has the best claim to Apple’s tax money because it comes from European sales.

“There’s this gigantic pot of money of over $2 trillion in offshore profit and the U.S. Treasury is trying to bully itself to the front of the line,” he said.

Republican presidential nominee Donald J. Trump wants to lower the U.S. corporate tax rate to 15% and allow companies a one-time chance to bring back foreign earnings and pay just a 10% tax.

Companies are required to pay the 35% U.S. tax on money earned anywhere in the world once it’s brought home — a move called repatriation — minus any taxes paid in the nation where it was earned.

Democratic presidential nominee Hillary Clinton has suggested money from a one-time repatriation could be used to fund U.S. infrastructure investments.

Times staff reporters Tracy Lien and Michael A. Memoli contributed to this report.

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UPDATES:

3:15 p.m.: This article was updated with additional comment and detail.

9:10 a.m.: This article was updated with reaction from Rep. Kevin Brady and Sen. Ron Wyden and with Apple’s stock price.

7:55 a.m.: This article was updated with Times staff reporting and with background and reaction from Apple, the Irish finance minister and the U.S. Treasury Department.

This article was originally published at 3:55 a.m.