UP FOR GRABS

The EU is all but inviting the US to claw back a share of Apple’s tax debt

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There could be more reluctant recipients for the billions in back-taxes that the European commission says Apple owes: Besides Ireland, which will appeal to avoid collecting the windfall, the EU all but invited its other members and the United States to claim their share of the €13 billion ($14.5 billion) sum.

“Other countries, in the EU or elsewhere, can look at our investigation. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally,” Margrethe Vestager, the European commissioner in charge of the findings, said in a statement.

This would entail examining how Apple invests in intellectual property in each jurisdiction.

The commission explained in a separate statement that the tax penalty to be recovered by Ireland would be reduced if US authorities “require” Apple to retroactively shift income, allocated for research and development costs over the 10-year period of the investigation, to its US parent company.

The company divides R&D costs and the revenues they generate between Apple Inc., in the US, and Apple Sales International, an Irish subsidiary. The idea is that each entity pays its share of the R&D costs, and therefore books the corresponding amount of revenue.

But a 2013 inquiry by a US senate committee quashed that premise. The committee found that almost all of the research work was done in the US, but a majority of the resulting revenues were being booked in Ireland, where we now know Apple enjoyed effective tax rates as low as 0.05% in 2011. The arrangement meant that Apple could keep the fruit of its R&D labors out of the US.

The US senate committee urged a rethink of US tax laws to end arrangements like Apple’s, but nothing was done. The European commission’s finding against the tech giant, however, could prompt action, because real money is finally in play.

“Europe’s just trying to get what they think they’re owed,” says Frank Clemente, executive director of Americans for Tax Fairness, an advocacy group. “The US can make a case that the money Europe is trying to collect is money [the US] is trying to collect, because frankly, it all flows from Cupertino.”

Apple could owe over $26 billion to the US tax authorities, of the $74 billion in earnings it shifted to Ireland between 2009 and 2012, according to the senate committee’s findings (pdf, p. 2). It’s not currently clear how much of the $14.5 billion the European commission is seeking could be claimed by US authorities.

But the obstacles to such a clawback loom large.The Internal Revenue Service has so far declined to challenge Apple’s cost-sharing system, but it is still auditing the company’s 2011 and 2012 tax returns. Absent IRS action, US lawmakers would need to reform arcane rules that make Apple’s deferral of taxes on foreign earnings legal, a move that would be opposed by lobbyists and advocates of low taxes. Even then, there’s the question over whether retroactively applied tax laws are constitutional (pdf).

“It’s all down to whether Congress acts,” says Clemente, the tax advocate. “The money’s not going to be paid next week. So there’s time.”

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