Tax Analysts Blog

Can You Guess Who Will Pay Apple’s EU Tax Bill?

Posted on Sep 1, 2016

The European Union has ordered the government of Ireland to collect €13 billion in corporate taxes from Apple Inc. That’s roughly $14.5 billion given current exchange rates; one of the largest tax bills in human history. The determination comes as part of Brussels’ ongoing investigation of state subsidies that take the form of advance tax rulings. You can read the EU press release here. There are several aspects to this story that leave Americans scratching their head. Let’s review them.

1.            Ireland Doesn’t Want the Money

It’s the obligation of governments to impose tax and collect revenue. So you’d think Ireland would be happy about this. Except you’d be wrong.

Ireland vigorously opposes the EU state-aid probe and the findings related to Apple, released August 30 by European Commissioner Margrethe Vestager. Ireland does not want to collect the taxes in question. In fact, it plans to appeal the decision on the grounds that these taxes were never due in the first place. I’m sure Ireland has a few roads that need paving, or a few teachers who could use raises. But Ireland doesn’t want the money.

When’s the last time you heard of a sovereign nation insisting that it must not collect a boatload of tax revenue? Strange but true.

Why would a country turn away such a large economic windfall? In the case of Ireland, it’s the fear of losing foreign direct investment. What if other multinational corporations start to worry their tax incentives are also in jeopardy? They might take their business (and their jobs) elsewhere.

2.            What’s Up with the EU’s State-Aid Rules?

The European Commission says Ireland violated EU law when it gave Apple two advance tax rulings in 1991 and 2007. The advance rulings dictate how Apple’s various affiliates conduct their transfer pricing program (i.e., the prices a multinational firm charges itself on related-party transactions).

Ireland’s corporate tax rate is very favorable, at a mere 12.5 percent. (By contrast the U.S. corporate tax rate is 35 percent and abnormally high by global standards.) Yet Ireland’s low tax rate wasn’t sufficient to attract foreign capital. Companies wanted an even better deal.

The two advance rulings allowed Apple to achieve an effective tax rate that was much lower than Ireland’s statutory rate. According to the Commission, Apple’s effective tax rate dropped 1 percent in 2003, and a scant 0.005 percent in 2014. That’s as close to zero taxation as you’re going to find outside of a pure tax haven like the Cayman Islands (which doesn’t bother to impose a corporate tax).

The Commission examined those ridiculously low rates – as well as the secretive process by which the tax rulings were obtained – and determined that Ireland granted Apple a selective benefit that was not generally available to other taxpayers.  Apple and the Irish government maintain that the favorable terms permitted by the advance rulings were not necessarily unavailable to other taxpayers. The eventual fate of the appeal is likely to hinge on what exactly constitutes a “selective” tax benefit.

Prohibiting state aid makes sense, especially in the case of the EU which struggles to maintain competitive balances within its expansive single market. EU member states shouldn’t be selecting winners and losers in the private marketplace. Granting special tax breaks to some firms, but not others, is blatantly unfair and distorts commerce. It also opens the door to the worst kind of crony capitalism, which all nations would do well to avoid.

Most economists would agree that curtailing state aid is the correct policy. Yet we live in a world that’s awash in state subsidies of dubious merit. That’s true for America as well. U.S. state governments are rather skillful at wasting public funds on questionable tax incentives, but that’s a story for another day.



3.            A Portrait of Profit Shifting

So, if Ireland’s corporate tax rate is 12.5 percent, how did Apple get its effective rate down to almost zero? That’s the magic of transfer pricing. One of the Commission’s key findings is that a significant share of Apple’s European profits were never taxed anywhere. Not in Ireland, and not in the source country where the income was generated.

Most of the profits from Apple’s European operations were crammed into a wholly owned affiliate: Apple Sales International (ASI). ASI held the rights to commercially exploit Apple’s high-value intellectual property via a cost-sharing agreement with Apple’s parent company back in Silicon Valley. That means lucrative royalty payments from across Europe were funneled into ASI.

According to the Commission, ASI has no employees, no premises, and engages in no genuine economic activities. Its head office is not based in any country. It seems to exist solely for the purpose of sheltering income, but that’s perfectly legal. Such is the nature of transfer pricing.

According to U.S. congressional hearings, global profits in excess of $22 billion were shifted to ASI. Only a small fraction of those earnings were booked in Ireland; the rest were apparently never booked anywhere. That is what’s known as “stateless income” because no government gets to tax it. Stateless income is the holy grail of modern corporate tax planning. U.S.-based multinationals are very adept at this practice. They have every reason to be, given the way our tax code treats foreign-source income combined with our high marginal rate.

This gives rise to complaints that EU officials – and Vestager in particular – are unfairly targeting U.S. companies. In 2014 the Commission went after Starbucks, which was found to have received illegal state-aid from the Netherlands to the tune of roughly €30 million. Cases against Amazon and McDonalds are pending. Some politicians in Washington are complaining that the EU is picking on American firms. I prefer to think the EU is simply pursuing those taxpayers most proficient at crossborder profit shifting … and they happen to have American parent companies.

But let’s be clear. The occurrence of stateless income does not necessarily mean the taxpayer in question has failed to comply with its legal obligations. Apple goes to some length to explain that it has done nothing wrong. You can read the company’s press release here.

Strictly speaking, Apple is faultless. That’s true even if we accept the Commission’s conclusion regarding state aid. Remember, it’s the EU member state that erred in authorizing the illegal state aid, not the taxpayer that erred in accepting the favorable treatment. That said, it’s the taxpayer who gets stuck with the bill and the government that gains billions of euros in tax revenues.

In other words, the ‘wrongdoer’ is excessively rewarded. You’re not alone if that strikes you as a bizarre outcome.

4.            Apple Doesn’t Care

Apple contested the Commission’s determination, and will support Ireland in its expected appeal. But don’t be too surprised if the company’s tax department, at least privately, is ambivalent over the outcome. That’s because the company won’t bear the economic cost of the tax bill. Instead, it will be the U.S. federal government that will ultimately pay Apple’s Irish tax bill. People outside the narrow community of tax professionals find this perplexing.

The U.S. tax code allows businesses to offset taxes paid to foreign governments by claiming a dollar-for-dollar credit against their domestic tax burden. The foreign tax credit is not a controversial idea in tax policy circles; it’s how we alleviate double taxation. The credit has been around for many decades.

Thus far I haven’t encountered any academics or tax policy wonks who think Apple’s Irish tax payments won’t be creditable under applicable U.S. law. That means when Tim Cook writes a check to the Irish government, the company will be able to offset its future U.S. tax liability by an identical amount. Economically it’s a wash from Apple’s perspective.

Given how the foreign tax credit operates, you can understand why Apple wouldn’t care all that much about the outcome of the dispute – apart from any reputational damage that might result from adverse headlines. And there will be plenty of those.

The popular media is already botching their reporting, suggesting Apple failed to pay “back taxes.”  Not so. You owe back taxes only where the government assesses a tax and you fail to pay it. As far as these EU state-aid cases are concerned, there is no deficiency to speak of. The governments maintain that the companies in question are fully compliant.

Who does care about the outcome? That would be U.S. Treasury Secretary Jacob Lew. He understands that Uncle Sam picks up the tab (all $14.5 billion of it) if the Commission’s determination isn’t reversed. That’s why his staff released a detailed White Paper on August 24 – just days before the Commission’s determination was released – explaining why Brussels should refrain from proceeding against Apple or other U.S. multinationals that obtain similar advance rulings.

The White Paper reads like an advocacy piece, which is exactly what it is. You can read it here. This is a huge issue for Treasury. Remember, Apple is just the tip of the iceberg. Legions of other U.S. multinationals obtained similar advance rulings from Ireland, Luxembourg, the Netherlands, and other EU member states. This could get really expensive, even by Washington standards.  

5.            Are Tax Incentives Worth the Trouble?

There’s little doubt the Irish government wants to attract foreign capital. Who can blame them? But Apple wasn’t going to invest in the Irish economy just because management happens to enjoy a pint or two of Guinness. There has to be financial incentives on offer; the more generous the better.

Call me cynical, but Ireland’s protocols for obtaining advance tax rulings are best understood as a delivery mechanism for distributing those subsidies in an orderly manner. I get all that, although the purist in me would prefer it if the process were more transparent. In Europe, these advance rulings are kept secret; in America they’re made public. (Note: Tax Analysts brought the FOIA lawsuit that resulted in IRS private letter rulings being publicly disclosed, and the country is better off for it.)

Still, there’s one burning question that tends to get lost in the discussion: Are corporate tax incentives an appropriate use of public funds? Stated differently, what kind of bang for the buck did Ireland get by foregoing all that tax revenue? NYU law professor Daniel Shaviro recently took a stab at trying to answer that question. His analysis is noteworthy.

Apple brags about having 6,000 jobs in Ireland. That translates to 60,000 job-years (an annualized concept) for the 10-year period at issue in the Commission’s report. Let’s assume the Commission’s determination ($14.5 billion) is accurate regarding the net under-taxation of Apple’s profits for the same time period. Divide the revenue figure by the employment figure and you get … wait for it … $240,000 per job, per year. That eye-popping figure is a reasonable approximation of how much Ireland paid (per job) to stimulate the local economy. That’s a rotten deal by any objective standard.

I encourage other interested parties to attempt their own calculations, but I think you’ll find Shaviro’s calculations reliable, given his assumptions. (His blog “Start Making Sense” can be found online at

 Don’t feel bad for Ireland. Their revenue agency will soon be able to collect an enormous sum from Apple. Don’t feel bad for Apple, either. The company shall be made whole via the foreign tax credit. When the dust settles, you’ll find that the U.S. government picked up the tab, and in so doing subsidized employment in the Irish tech sector to the tune of $240,000 per job, per year. Money well spent? I don’t think so.

For more tax talk, follow me on Twitter @RobertGoulder

Read Comments (10)

Edmund DantesSep 2, 2016

Your analysis of the "cost" to Ireland of those 6,000 Apple jobs is wrong. It relies entirely upon the unproven assumption that Apple would have located in Cork in the absence of the tax advantages. Beyond that, the Commission's $14 billion calculation is highly suspect as well.

The better assumption is that without the low tax rate, Apple locates its facility in Luxembourg or the Netherlands. Ireland gets no jobs at all. It gets no tax revenue from Apple ever. But that would be preferred because they didn't give up phantom income? I don't think so.

Bob GoulderSep 2, 2016

Edmund: Thank you for your comment. Valid point re: assumptions. When one ponders the numerator (foregone revenue) and the denominator (jobs created), it is bit of apples-&-oranges. A better yardstick would be helpful. Without those two advance tax rulings, would Apple have stayed in Ireland beyond the early 1990s? Very likely not. I'm sure company was knocking on other doors in search of the best deal available - why wouldn't they shop around. As you suggest, Netherlands & Luxembourg come to mind. A crude metric, perhaps, but the same methodology I've seen used when people critique (pro or con) the tax subsidies granted by the U.S. states (e.g., Tesla & Nevada). There is some cost to the public fisc of not charging firms the rack rate, I don't think we can assume that cost is zero because the firm otherwise would have moved elsewhere. Thanks again for reading and for commenting.

Daniel ShaviroSep 2, 2016

Bob, I'm not sure I agree that Apple doesn't care. This would imply that they shouldn't have bothered with the foreign tax savings to begin with. What you say is right on line with my general analysis of foreign tax credits, i.e., that they can make U.S. companies indifferent to foreign tax liabilities. This can happen either in the absence of deferral or under "new view" conditions. But if the companies have reason to believe that they can permanently escape repatriation at the current U.S. rate, then they are foreign tax cost-conscious.

Bob GoulderSep 2, 2016

Well said, professor. And thanks for commenting. Tim Cook's charm offensive this week suggests the company does care quite a bit. I'm wondering how much of that is attributable to: (1) reputational concerns w/r/t the Apple brand; versus (2) drawing a line in the sand that Vestager's efforts go no further; versus (3) fears that creditability isn't a 100% lock.

Separately, here's a related thought experiment: If the BEPS project had taken place 10 years earlier and all multinationals (here, Apple) were already on-board with Country-by-Country reporting ... would any of this be happening w/r/t favorable advance rulings? Stated differently, do you think the information sharing from CbC reporting will have a curative influence on profit shifting and all that it entails? I'm hopeful (perhaps naively) that it might. Our friend Lee Sheppard is less optimistic. She's previously argued (paraphrasing her) that so long as we have separate entity accounting nothing will change. Your thoughts?

Mike55Sep 6, 2016

Great article! Just to clarify though..... I think it's unlikely that Apple will be made whole via FTCs. Your article assumes the state aid payment will be made directly by Apple U.S. However, if I understand the EC's press release correctly,* the bottom tier Irish entity was deemed the beneficiary of "state aid" and will thus need to pay the "tax."

If one of Apple's CFCs is indeed required to make the payment, then Apple's $14.5B of FTCs must be obtained via Sec. 902 or Sec. 960. As a result, Apple is on the hook for at least $5B of the $14.5B (thanks to Sec. 78), and probably a lot more (assuming their regarded Irish CFC has a boatload of accumulated E&P that's never been taxed).

*I acknowledge that I might have misinterpreted the EC release, meaning you could very well be right and I could very well could be wrong.

Bob GoulderSep 7, 2016

Mike55: Thank you for your comment. You've raised a great issue: Who is the taxpayer(s) at issue? Indeed, this might be something that Cook & Vestager disagree on, judging from their recent statements to the press. Looking at the EU documents, one might conclude the proper focus is on their two affiliates: Apple Sales International (ASI) and Apple Operations Europe (AOE). They seem to the technical recipients of the royalty income resulting from the Apple cost-sharing agreement. And presumably they are the entities benefiting from the exceptionally low-tax rates referenced in my post. How then, does their subsequent payment of a foreign tax to the Irish revenue body affect Apple Inc (the US parent)? I might be addressing that soon in a separate piece. I think your take sounds correct w/r/t treatment of CFCs. For those readers interested in further analysis of this issue, I can recommend a piece that recently ran in Tax Notes International by author Andrius Bielinis, who works for Clifford Chance LLP in Germany.

Edmund DantesSep 7, 2016

Mr. Goulder, thanks for your replies and expressions of support. Christopher Bergin used to engage the commenters, and I always enjoyed that. BTW, why has he stopped blogging? Is he OK? Going into retirement?

Bob GoulderSep 7, 2016

Edmund. Have no worries, sir. Chris Bergin took some time off but is now back in the game, and shall soon be returning to this space. Thanks for the note.

W A KirchdorferSep 12, 2016

Speaking of Apples and Oranges, I went to my spreadsheet, and based on 6000 jobs created directly by Apple, at $80,000 per year ea, and based on Irish wh tax, Soc Sec tax Unemployment tax, Work Conp, etc. I come up with about $1,920,000,000 in Irish payroll tax collections from Apple over 10 Years.

Assuming that every well paid job, over time, creates about six other jobs in the community (six times jobs multiplier) because of the wages and taxes being spent there, I then came up with 36,000 add'l jobs with another $5,760,000,000 in payroll taxes generated for Ireland over 10 years.

Then I added a guesstimated Sales tax and VAT tax bounty of $2,000,000,000 over ten years.

Total over ten years: $9,860,000,000 in such taxes, both generated directly by Apple Wages, and by other wages (and taxes) created in consequence of Apple's existence there.

I promise that I can back up my estimates with calculations and even better estimates. Yes, it's Apples and Oranges, and it's not a legalistic, tax-accounting argument, but does it not reasonably somewhat defuse the idea that "Ireland gave up so much", when it indeed gained so much from Apple's presence there?

I understand fully that paying the various legally required payroll related taxes cannot offset in, general, a legally required corporate income tax, but I also understand the political thought process that goes into this decision making.

The proposition is different when you are looking into the future, as a politician. Ireland's political/financial choice, at the time, was not "we must receive 12.5% of something", but rather it was "please, let's not receive 12.5% of nothing". "Better something than nothing" is a "way different decision". Politics involves compromise.

Somehow I come down at the side of "A state, if it's worth being called a state", ought to have the kind of freedom to make these types of decisions, and a business ought to be able to rely on it.

There is more at stake than just Apple, so it could be that Ireland decides to leave the EU if this is not settled amicably. The EU is going after the deep pockets, but the deep pockets tend to have deep defenses.
I have often thought that the EU is too harsh and unforgiving in its directives, and that this could cause its early demise.

When it comes to "harmonization" and "equalization", I think that corporate income taxes should come down to Ireland's rate, worldwide. Meanwhile though, many governments keep insisting on getting 40% of nothing. After a fashion, depending on the circumstances.

Thanks for reading and disagreeing.

Bob GoulderSep 12, 2016

W.A.K.: Thanks for these comments.

The exercise you've undertaken here, spreadsheet and all, serves a valuable purpose. On the one hand, the 13 billion euros -- roughly 14.5 billion dollars -- that Ireland "gave" Apple in state aid is a considerable sum of money. (I've since heard the actual payment might be closer to 19 billion euros with interest !). According to The Economist, that's more than Ireland spends on its national health program in a year. So you can imagine the talking point: Just tax Apple as you should have in the first place, and everybody in the country gets free health care for a full year. Of course, the reality is far more complex.

Without the tax abatements reflected in the two advance rulings, it's doubtful that Apple stays in Cork. (See Edmund Dante's comment, above). So then, how legit is the estimate of foregone revenue? Is it more perception than reality? The European Commission doesn't seem bothered by any of this line of reasoning - for better or worse. And I don't expect the EU courts will be either, based on prior case law. Their analysis looks only at the economic activity that's taking place in an EU member state (regardless of what inspired it), and whether there was a selective treatment.

I think your comment does a nice job of outlining the many fiscal benefits that countries derive from having foreign multinationals invest in their local economies. After all, no government (federal or state) is going to bid against their own self-interest. I can sit here and criticize Ireland (re: Apple) or Nevada (re: Tesla) or Alabama (re: Mercedes) for being overly generous in doling out tax abatements to the private sector -- but at the end of the day there's some degree of folly in me thinking those governments can't make rational decisions for themselves. In short, there are sound reasons why nations/states offer so many tax incentives to private enterprises - the governments think they benefit in the long run. Nobody is putting a gun to Ireland's head and making them issue these advance tax rulings. Although I do think the process should be more transparent. From where I sit the most sinister aspect of the whole arrangement is that it's done in complete secrecy. (Our favorite motto: No Secret Law).

As an aside (and because football season just started) this discussion reminds me of some of the arguments one hears about cities and counties throwing millions of dollars into privately owned sport stadiums. Not exactly the same as tax abatements, but they're analogous. For instance, casino owner Sheldon Adelson seeks $750 million in public funds to build a state-of-the-art NFL stadium in Las Vegas, which would lure the Oakland Raiders franchise to relocate. Now, we all know Adelson is not poor, he's worth like $30 billion per Forbes. But if the city elders in Las Vegas want to make that deal, that's their call and presumably they'd only so if they thought having an NFL team was worth it in the long run. That is to say, they think they'll get the $750 million back in the long run.

I suspect the folks running the city government out there are mulling over spreadsheets much like the one you've prepared w/r/t Apple & Ireland.

Thanks again for reading and commenting.

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