Apple Avoided Billions in Taxes, European Regulator Says

Apple saved billions of dollars in taxes from special deals it cut with Ireland, Europe’s antitrust regulator said on Tuesday.

In a 21-page document released this morning, the European Commission outlined its argument that Apple benefitted from agreements with the Irish government that ultimately allowed the Cupertino-based company to alleviate its tax burden.

Authorities could direct the Irish government to collect back taxes from Apple amounting to billions of dollars. “The Commission wishes to remind Ireland … all unlawful aid may be recovered from the recipient,” Joaquin Almunia, the Commission’s vice president, wrote in the report.

Apple’s deals with Ireland appear to constitute unlawful “state aid,” or government support that gives a company an advantage over its competitors.

In 1990, after a series of meetings, the Irish tax authority and Apple arrived at an approach for calculating the company’s liability in Ireland that appeared to be “reverse-engineered” to limit its taxable income to around $28-$38 million, the investigators noted. As the value of local manufacturing activity rose above a certain threshold, the rate fell — an arrangement that the European Commission observes “would have been motivated by employment considerations.”

“The implication being, because Apple was providing employment to Ireland, the Irish government gave them a better deal than it would other taxpayers based on normal tax principles,” Martin A. Sullivan, a former Treasury Department economist, said in an interview with Re/code following the report.

Those terms remained in place for 15 years, as Apple lifted itself from the brink of bankruptcy to a company whose market cap exceeded tech giants such as Google, Microsoft, and Cisco.

In 2007, Irish tax authorities arrived at a new approach, which the European Commission report says continues to give Apple special treatment because it doesn’t take sales into account. As Apple Sales International’s income rose by 415 percent in a three-year period, from 2009 to 2012, the operating costs on which Apple was taxed rose just 10 to 20 percent, according to the report.

In 2011, Apple’s international sales unit reaped revenues of $47.5 billion, but paid taxes on less than 0.2 percent of sales, the European Commission investigation found.

Apple issued a statement saying that the company’s tax payments in Ireland and around the world have increased tenfold since the 2007 introduction of the iPhone. The company rejected the notion that it was the beneficiary of any sweetheart deals.

“Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government,” the company said. “Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.”

The European Commission’s preliminary findings were the result of an investigation launched in June 2013 to determine whether the tax policies of certain nations allowed giant corporations like Apple to exploit the “technicalities” of the system to reduce their tax burdens.

At that time, the regulator said it would focus on Ireland, the Netherlands and Luxembourg and their tax dealings with Apple, Starbucks and the finance arm of Italian automaker Fiat.

“In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes,” said the European Commission antitrust head Joaquin Almunia in initiating the probe.

Although it’s hardly unusual for corporations to take steps to minimize their tax burdens, Apple has attracted scrutiny since a New York Times investigation in 2012. The published account highlighted such strategies as the “Double Irish,” which reduces taxes by routing profits through Irish subsidiaries.

Ireland has a corporate tax rate of 12.5 percent — lower than other European countries, including France at 33 percent and the U.K. at 23 percent.

CEO Tim Cook defended the company’s practices in testimony before a 2013 Senate subcommittee hearing, where he said that “Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad.”

At the time, Cook said that about 61 percent of the company’s revenue came from international operations. He argued that U.S. tax law discourages returning these funds to the U.S., because it is taxed at a 35 percent rate.

As of the end of the company’s most recent quarter, Apple had $137.7 billion of cash and cash equivalents offshore — or about 84 percent of its total of $164.5 billion, according to Bernstein Research.

The European Commission initiated a process that could lead to the repayment of 10 years of back taxes. The inquiry could take a year or more to complete.

This article originally appeared on Recode.net.