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Apple hit with $14.5 billion (S$19.78 billion) Irish tax by EU

Just this Tuesday (30 August), the European Commission (EC) ordered Apple Inc. to pay Ireland an unpaid tax up to 13 billion Euros (S$19.78 billion).

The Commission stated that the company had received illegal state aid.

In response to the ruling, Apple in U.S. headquarter and Dublin replied that the US company tax treatment was already in line with Irish and EU law, and they will appeal against the decision.

Reuters reported on 30 August that Apple said the alleged illegal aid was part of the European Unions' drive in sweetheart tax deals, an offer commonly given by the smaller countries of the block to multinational corporations to attract jobs and investment.

U.S. Companies targeted?

A Spokesman from U.S. Treasury warned that the step taken by EC risks weakening the US investment in Europe and "the essential spirit of economic partnership between the U.S. and the EU."

Starbucks Corp. has earlier been instructed to pay up to 30 million euros to the Netherlands, and Amazon.com Inc. and McDonald's Corp are also being investigated by the Commission, which is the EU's executive arm.

EU Competition Commissioner, Margrethe Vestager has asked how people might think a setting that allows Apple Ireland to pay a tax rate, which was conducted in 2014, of only 0.005 percent was fair.

"The verdict given by the Irish Taxes have artificially reduced the tax burden Apple for more than two decades, in violation of EU state aid rules. Apple now has to pay compensations," said Vestager in a news conference.

Analysts said the size of the claims underscore the aggressive view of the Commission, but the lawyers said it was difficult to see whether a greater claim is still likely or not.because each case involves different circumstances and tax rules.

Apple, which has more than $239 billion (S$325 billion) in cash and market ready securities at the end of June 2016, might be able to drag this case for many years in the EU and possibly in the courts of Ireland.

Apple warned investors in July regulatory filing that the Commission's investigations can result in "material" liability for further tax payments, but they can not estimate the impact.

On Tuesday, the company said it expects to put "some amount of money" in an escrow account.

Tax experts said that the European Commission face a tough battle to convince the court to support its position.

While the European Union has found that certain tax rules are anti-competitive, they never before ruled whether countries have adopted tax regulations like with Apple, Starbucks and others. As a result, some lawyers and accountants said they doubted that this case would end up with Apple paying back any tax.

Tim Wach, managing director of global international tax advisors, Taxand, said, "I am not persuaded by the reasoning given by the European Union."

"Made up" arrangement

The EU ruling challenges the way the Irish agreed to tax profits of Irish-registered Apple subsidiaries, through which most of the non-US profits seeped.

Apple Inc. licenses the rights of the American design technologies to a subsidiary in Ireland, and then they hire contract manufacturers to make devices that they sell to Apple's retail subsidiaries throughout Europe and Asia.

Because production costs are a fraction of the price of retail sales and its subsidiaries were given a small operating margin, the Apple Ireland is very profitable. In 2011, it earned $22 billion (S$30 billion) after paying $2 billion (S$2.73 billion) to US progenitor in connection to the rights to Apple's intellectual property.

However, Irish tax authorities agreed only €50 million (S$75.96 million) of this amount is taxable in Ireland, said the European Commission. Under the terms of Apple tax deal, first agreed in 1991 and updated in 2007, Apple could allocate a portion of profits earned by the Irish operating unit for a "head office" that does not have any employees or have any location.

'The headquarters' does not have the operating capacity to handle and manage the distribution business, or other substantive business for that matter," said the Commission.

The Commission said that this agreement has no basis in tax law and not available to others, so it is represented by state aid.

Irish did not agree?

Irish Finance Minister Michael Noonan said he did not agree with the decision and to preserve the attractiveness of Ireland for the investment he would appeal.

"There is no economic basis for this decision. It's weird, and it's an exercise in politics by the Competition Commission," said Noonan.

"They do not have the responsibility for taxation, and they opened the back door through the state aid to influence tax policy in the European countries when European treaties say tax policy is a matter for the sovereign government," he added.

Low tax rates in Ireland has been the cornerstone of economic policy for decades, to attract investors from multinational companies that account for nearly one staff of 10 workers in the country.

For many technology companies like Google and Facebook, the main puller is that Ireland allows the company to adopt a tax structure which they pay much less than the headline rate of 12.5 percent. The companies say they followed all tax regulations and Apple said it was confident of winning the appeal.

CEO Tim Cook said, "The European Commission has launched an attempt to rewrite the history of Apple in Europe, ignore the tax laws of Ireland and upend the international tax system in the process," in a letter to customers posted on Apple's website.

"The profits of a company should be taxed in the country where the value is created," he added.

U.S. opposition

The U.S. Treasury Department published a white paper last week in which it said it was looking at the possible response to what it sees as an unfair targeting of the companies, which could result in extra taxes on U.S. arms in European companies.

The paper also noted that the European Union executive’s tax ruling could cost the U.S. exchequer money.

Under US tax law, profits of Apple Ireland are taxable if brought back to the United States - something that would have to be done if the company wants to use the money to pay dividends. But any tax paid in Europe decreases due taxes paid in the United States.

The Treasury said the Commission's approach is contrary to EU tax law and international treaties.

The Commission, which has also ruled European companies, including car maker Fiat and Swedish engineer Atlas Copco AB to pay the tax bills worth more than $350 million stated that the application of competition law to the tax follow EU law and treat all companies equally. However, the Netherlands, Belgium, and Luxembourg have appealed the EU ruling against their tax deals with multinational, Reuters reported.

Apple employs 5,500 people in the field of logistics and distribution in the city of Cork in Ireland, which is about a quarter of the are European-based Apple staff.

Previously the Commission has said that the Apple tax treatment has been "motivated by employment considerations.”

Apple said it had paid the Ireland’s rate of 12.5 percent of on all income that it generates in this country.

Apple Chief Financial Officer Luca Maestri denounced the effective tax rate quoted by Vestager as "completely made-up number."

Apple's stock price fell less than 1 percent; Reuters reported.

Bloomberg also pointed to important questions related to the European Commission's ruling on Apple's taxes in Ireland in its report here.

Using low tax to attract overseas investments is not uncommon, the Economic Development Board of Singapore refers to Singapore as  one of the lowest corporate tax rates in the world and states, "on top of a host of other tax schemes and incentives, Singapore is easily one of the best countries in Asia for companies to grow their businesses."