Apple's Surprise Tax Bill

This is a follow-up to the series I did on Apple, in which I highlighted how Apple has dodged taxes on worldwide earnings through complex tax avoidance schemes.


August 31, 2016

Yesterday, the European commission handed Apple a bill for $14.5 billion in back taxes plus interest. The commission ruled that Apple gained unfair advantage over its competitors in recent years, thanks to sweetheart deals that it made with the Irish government. (To be precise, the commission did not hand Apple the bill. Rather, it ordered Ireland to recover the "state aid" it gave to Apple.)

This ruling does not go to the heart of the matter. It attempts to use the logic of capitalism and unfettered competition in order to redress a moral wrong. The moral wrong, as I and many others have suggested, is that Apple enjoyed the benefits of society, including such basic things as an educated workforce, a healthcare system for its workers and customers, and the legal system that protects its intellectual property, without contributing its fair share of the taxes that are necessary for this society to function.

Instead of saying that Apple needs to contribute to society, the European commission has only said that Apple's deal with Ireland gave it an unfair advantage over other companies. In other words, there would have been nothing wrong with the tax breaks if they had been made available to every multinational corporation.

I cannot begin to express how bankrupt the commission's position is. Apple is going to appeal this ruling, and they are going to win.

Apple is already positioning itself as the victim. Tim Cook, Apple's CEO, wants you to believe he is Luke Skywalker in The Empire Strikes Back, battling the combined destructive power of the nations of the European Union. He is nothing of the sort. Apple has far more firepower than the Rebel Alliance ever dreamed of.

Apple has already succeeded in getting nations fighting amongst themselves. Downing Street has extended an invitation for Apple to quit the salubrious technology dens of Cork, Ireland and come to the UK. Meanwhile, the US has protested the decision and threatens a tit-for-tat response against European companies operating in the States.

All of this plays directly into the hands of multinational corporations, who for years have arbitraged tax and other regulations, threatening to "pull out" of countries that do not adopt the most relaxed regulations around. This is not competition, this is bullying.

Let's look at statements made yesterday by European Competition Commissioner Margrethe Vestager, who announced the ruling, and by Tim Cook, CEO of Apple.

Let's start with Vestager:

The European Commission has today adopted a decision that Apple's tax benefits in Ireland are illegal. Two tax rulings granted by Ireland have artificially reduced Apple's tax burden for over two decades, in breach of EU state aid rules. ... This decision sends a clear message: Member States cannot give unfair tax benefits to selected companies. No matter if they are European or foreign, large or small, part of a group or not. This has been long confirmed by the EU courts and the Commission's case practice. EU state aid rules have been in force since 1958 and apply to all companies that choose to operate in the EU Single Market. State aid rules ensure that companies can compete on equal terms, also as regards taxation in each Member State. And these rules protect European taxpayers.

Vestager bases the Commission's decision on "fair competition." She is saying two things, that companies must compete fairly with each other for customers, and that countries in the EU must compete fairly with each other for investment from companies. She is arguing that Ireland did not compete fairly with other EU nations, and that Apple therefore received an unfair advantage over its competitors.

She ends with the statement that the rules "protect European taxpayers."  This is an appeal for popular support. The problem with this appeal, in my opinion, is that it is made to taxpayers. The European Commission is completely immersed in the neoliberal mindset that has, since the time of Thatcher and Reagan, made governments accountable to their taxpayers instead of their citizens. This means citizens who are too poor to pay taxes do not count, that rich people do, and that large corporations have more influence over government policy than voters do.


The EU turns up the heat. (Yes, I'm aware these aren't apples.)


This is part of Cook's response, in a public letter addressed to Apple customers:

Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.

Where to start? Well, let's consider for a moment that the letter is addressed to Apple's customers. Apple knows that its customers are more loyal than its investors. It also knows that it has more customers than investors. Addressing the letter, ostensibly, to customers is Apple's own attempt to drum up popular support.

Cook claims Apple has been specifically targeted by the EU. This is incorrect. The European Commission is also investigating the tax deals of Amazon and McDonald's in Luxembourg.

Cook claims that "investment and job creation" in Europe will suffer. This is a threat. He is saying that Apple will take its ball and go home. It is an idle threat. Apple is not going to abandon the European market to other cellphone manufacturers.

Looking up at the Blarney Stone, just five miles from Cork.

This part of Cook's statement is also specious because the corporate entity in question, Apple Sales International, contributes no economic value at all. It exists solely to siphon profits off other Apple subsidiaries so that they have no taxable income, and then attribute substantially all of those profits to its parent company, Apple Operations International, which has no employees, is not located in any state, and does not even file a tax return.

Elsewhere in his statement, Cook says:

We have operated continuously in Cork ever since, even through periods of uncertainty about our own business, and today we employ nearly 6,000 people across Ireland. The vast majority are still in Cork — including some of the very first employees — now performing a wide variety of functions as part of Apple’s global footprint. Countless multinational companies followed Apple by investing in Cork, and today the local economy is stronger than ever.

I'm not sure what "periods of uncertainty about our own business" Cook can possibly be referring to. Apple has gone from strength to strength since it set up shop in Cork.

Note how Cook makes a point about the fact that some of the very first Apple employees in Ireland are still in Cork. This makes it seem like Apple is interested in their welfare. These are the same people who will lose their jobs if Apple pulls out of Ireland. Apple uses the employees as pawns in its brinkmanship with the EU, yet wants us to hear all about its loyalty to them. Cook wants it both ways. 

Cook also claims the ruling is made based on "laws that never existed." Vestager already beat him to that punch, however, by pointing out that "EU state aid rules have been in force since 1958. The tax deals between Apple and Ireland were dated 1991 and 2007. Both Cook and Vestager are arguing about the laws that were in place. They are conveniently picking and choosing which laws they invoke.

Cook says that "countless multinationals" have followed Apple into Cork. He wants us to believe that they did so because Apple showed them what a great place Ireland is to make things. This is not the case. Those multinationals followed Apple's lead because they saw what a great place Ireland is to avoid taxes.


"Countless" corporations followed Apple's lead to the tax haven of Cork. It's their taxes that are uncounted.


And this is why I think Apple will win its appeal. Apple may have made a sweetheart deal with Ireland, but nothing has prevented other companies from getting the same deal. When the European Commission bases its case on the suggestion that Apple got a deal no one else did, they are exposing themselves horribly. The EC was not at the table when the deal was made. Apple was. And Apple will, I suspect, have reams and reams of details about the deal that will show it wasn't an exclusive deal.

I think the tax arrangements of Apple in Ireland are wrong. But it isn't because they are a special deal. It's because they are wrong.

Correction (September 6, 2016): I have updated the paragraph beginning "This part of Cook's statement ..." to clarify that it is Apple Operations International, not Apple Sales International, that has no employees. This does not change the point I was making. Tim Cook wants people to believe that Apple is in Ireland in order to create economic value. Let's be perfectly clear: According to Fortune, in 2011, Apple Sales International recorded $22 billion in pretax earnings on Apples overseas sales, and paid tax at a rate of 0.05%. That's why Apple is in Ireland.


Update: September 1, 2016

The day after I posted this, Apple's CEO Tim Cook announced unspecified plans for Apple to repatriate some of its overseas earnings. In an interview with Irish television network RTE, he indicated that the company had made a provision for "several billion dollars" in US taxes next year:

... we provisioned several billion dollars for the US for payment as soon as we repatriate it and right now I forecast that repatriation to occur next year.

It will be interesting to see if this gesture is successful in appeasing tax regulators. It cannot hurt. However, according to Apple's annual report, (p. 29), the company owes $24.1 billion in unpaid income taxes. This suggests that it will take much more than "several" billion dollars of tax payments to catch up.

Asked if Apple pays its fair share of taxes, Cook pointed out that Apple's effective tax rate is 26% and that this seemed reasonable to him. But as any first-year accounting student knows, an expense is not the same thing as a payment. Apple's 26% tax rate includes taxes that have never been paid and that can be deferred indefinitely under US tax law. Today's announcement by Cook might be a sign that negative press coverage about unpaid taxes is hurting Apple's brand.


Photo of the Blarney Castle, looking up at the Blarney Stone, taken in Ireland in 2013.

Photo of roasting vegetables taken in Edmonton in 2012.

Photo of Cork taken in 2013.