The Apple case reflects a political tug of war over big profitable companies, their potential tax bounty and the rights to regulate them.

Share story

The European Union on Tuesday ordered Ireland to collect $14.5 billion in unpaid taxes from Apple, a record penalty that worsened tensions with the United States over the bloc’s crackdown on sweetheart deals with global multinationals.

Europe’s competition enforcer said Apple’s illegal deals with the Irish government allowed the technology giant to pay virtually nothing on its European business in some years. The arrangements enabled Apple to funnel profit from two Irish subsidiaries to a “head office” with “no employees, no premises, no real activities,” the commission said.

By doing so, Apple paid only 50 euros in taxes for every 1 million euros in profit during 2014.

As part of its ruling, Europe demanded that Ireland recoup 10 years’ worth of back taxes, some 13 billion euros ($14.5 billion), plus interest.

The amount is a drop in the bucket for Apple, whose cash pile tops $230 billion. Even so, the company described the order as a “devastating blow” to the rule of law. The U.S. Treasury Department said it jeopardized “the important spirit of economic partnership between the U.S. and the EU.”

Since taking over as competition commissioner, Margrethe Vestager has made tax avoidance a central focus, a campaign that has also ensnared Starbucks in the Netherlands, in Luxembourg and Anheuser-Busch InBev in Belgium.

Last year, the EU found the Netherlands gave Starbucks an illegal break on its tax bill, ordering the Dutch government to collect between $23 million and $34 million. The case is under appeal.

With Amazon, the European Commission has investigated the legality of a 2003 tax deal between the company and Luxembourg, where the company’s European head office is located and toward which it steered its Old World profits.

The tax structure approved by Luxembourg allowed the Amazon unit to report lower profits by paying royalties to other subsidiaries, reducing its European tax bill. Last year, however, Amazon said it began reporting sales in individual European countries.

The Financial Times reported in May that a decision in the Amazon case could be released after the end of the summer.

“If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase,” Amazon said in a securities filing. As of the end of June, Amazon, which is also fighting a big tax case in the U.S., had set aside $1.6 billion in tax contingencies.

Microsoft, which is not among companies targeted by the broad probe that ensnared Apple, disclosed last year that it faced “a number” of tax audits targeting European units. Its European tax structure is similar to Apple’s in that it assigns the rights to sell its products to an Irish subsidiary with affiliates in other tax havens, limiting the taxes paid on sales throughout Europe.

The U.S. Treasury, a vocal critic of these EU moves, has said Europe is overstepping its power, targeting U.S. companies and hurting global efforts to curtail tax avoidance.

The U.S. government is an unlikely advocate. Politicians have berated Apple for paying too little by setting up complex and opaque tax structures. Officials have hit back against corporate mergers that allowed companies to move their headquarters to places like Ireland to take advantage of lower tax rates.

But the positioning in the Apple case reflects a political tug of war over big companies, their potential tax bounty and the rights to regulate them.

“U.S. companies are the grandmasters of tax avoidance,” said Edward D. Kleinbard, a University of Southern California law professor and a former chief of staff to the congressional Joint Committee on Taxation.

“Nevertheless, because of the nature of U.S. politics,” he said, the Apple case “will be framed by the U.S. as Europe overreaching and discriminating against ‘our team.’ ”

Since early this year, Vestager, U.S. Treasury Secretary Jack Lew and their teams have met regularly to discuss Europe’s tax investigations. Lew visited Brussels in July to put forward the U.S. perspective.

U.S. law gives American companies credits for the foreign taxes they’ve paid, which they can use to reduce U.S. taxes — subject to certain restrictions.

The precise effect is unclear, but U.S. Treasury officials have voiced concern that if U.S. companies must pay large new tax bills to European governments, they may be able to use such credits — effectively transferring revenue from U.S. to European coffers.

The prospect that EU regulators might force U.S. multinationals to pay taxes to countries that helped them avoid taxes at home has prompted displeasure in Washington, D.C.

Last week, the Treasury Department released a report criticizing any moves to recoup back taxes from U.S. companies.

Politicians also chimed in after the Apple decision.

Sen. Charles Schumer, D-N.Y., called it a “cheap money grab” by the European Commission, “targeting U.S. businesses and the U.S. tax base.” Senate Finance Committee Chairman Orrin Hatch, said the decision “encroaches on U.S. tax jurisdiction.”

Apple and Ireland had similar defenses.

Tim Cook, chief executive of the technology company, said Europe’s ruling had “no basis in fact or in law” and called it an effort to “rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.” The company called the effective tax rate “a completely made-up number.”

The Finance Ministry of Ireland said the commission’s decision would undermine a continuing global tax overhaul and create business uncertainty. The ministry said taxes were a “fundamental matter of sovereignty.”

Ireland and Apple both said they intended to fight Europe’s decision, even though any appeal could take years.

The commission said the amount due in Ireland could be reduced if U.S. authorities decided Apple should have paid more tax in the United States. Other countries in the European Union could also potentially take a share.

“The ultimate goal should of course be that all companies, big or small, pay tax where they generate their profits,” Vestager, said at a news conference in Brussels on Tuesday. “We need a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.”

Although the United States appears to side with Apple and Ireland in this specific fight, the overall view is a bit more complicated.

A U.S. Senate committee said in 2013 that Apple had negotiated a special corporate tax rate of 2 percent or less in Ireland.

While the committee did not accuse Apple of breaking any laws, lawmakers criticized the “gimmicks,” “schemes” and complex corporate structures that allowed the company to sidestep taxes.

The public scrutiny and the emergence of previously confidential information about Apple’s tax arrangements, in part, helped spark Europe’s own investigation into the issue.

Apple and other companies have also faced criticism for keeping large reserves of cash overseas. The money is not taxed at home until it is brought back to the parent company in the United States.

Nonfinancial U.S. companies hold a combined $1.7 trillion in cash overseas, according to the credit rating agency Moody’s.

Just the international piece of Apple’s stash amounts to nearly $215 billion.

Ireland has faced broad scrutiny for its tax appeal.

In a matter separate from the Apple case, the U.S. Treasury has taken aggressive steps to curtail inversions, a tax move that has significantly benefited Ireland. Under those merger deals, a U.S. company would buy an overseas counterpart and shift its headquarters overseas to lower its taxes.

Ireland, with its low corporate tax rate, has been an especially big winner with inversions. Such financial maneuvers helped plump up the country’s economy, which grew at a breakneck 26.3 percent last year.

Ireland’s corporate tax rate, at 12.5 percent, is one of the lowest in the developed world. Other incentives and breaks allow companies to cut their bills even further.

While it is phasing out some of the more contested loopholes, Ireland has just introduced a new break for profit on intellectual property, a potentially huge benefit to large technology companies with troves of patents.

“Many member states are not unhappy about the European Commission’s investigations,” said Philipp Werner, a competition lawyer at Jones Day in Brussels. “They may help to close down tax havens.”