Apple's in a Cage Fight on Tax

Expect some unintended consequences following the EU's decision.
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The European Commission just turned taxation of multinational companies into a cage fight and put U.S. firms on notice that the old way of negotiating deals with individual countries is no longer a sure thing.

Expect some unintended, and unwelcome, consequences.

Overseas Treasure

Apple hoards its cash abroad because bringing it back to the U.S. would result in a big tax bill

Source: Bloomberg

Margrethe Vestager, Europe's top competition regulator, ordered Ireland on Tuesday to recoup as much as 13 billion euros ($14.5 billion) in back taxes from Apple. The EU commissioner decided that by giving the company a favourable tax deal that wasn't available to others, the government had provided illegal state aid.

Free Ride

Apple's corporate profits have ballooned overseas while the taxes it pays on them have not

Source: Bloomberg

Apple CEO Tim Cook says he's in the unusual position of being ordered to retroactively pay back taxes to a government that says the company doesn't owe. At least he can easily afford the demand: it's only a fraction of the $231 billion of cash the company has available, according to Bloomberg data. 

Vestager's decision will invariably be appealed by Ireland and Apple, something that will take years to play out. And the Commission could lose.

Some lawyers argue Vestager is stretching state aid rules -- designed to stop governments subsidizing favored industries -- by using them to enforce EU tax law. The commission doesn't have power to set member states' direct taxes like income tax or corporation tax.

It's not just Apple that's felt Vestager's wrath. Starbucks and Fiat have also been ordered to pay back taxes, as this chart shows.

Taxation Tussle

The European Commission has undertaken a series of cases that use competition law to argue that some member states are unfairly favoring some companies with tax deals.

Source: European Commission announcements

By stretching the definition of state aid law, the commission leaves itself open to accusations it's trying to sneak tax policy changes through the back door.

It's not even clear those efforts will succeed. Little case law yet exists to determine if the Commission is over-reaching. It will be up to the EU's General Court to decide.

In the meantime, there is the risk the uncertainty and political venom from the Commission's tax cases derail other promising, if incomplete, efforts to reform a broken international tax system.

In a sign of the ugly tone things are taking, the U.S. Treasury Department has accused the commission of seeking to become a “supra-national tax authority” that is unfairly targeting American companies.

The OECD has been working for three years to forge agreement among hundreds of countries on how to rein in various strategies used by international companies to shift profits to low or no-tax locations.

It's tedious, un-glamorous, difficult work done by some of the sharpest tax specialists in the world. Vestager's cases grab the headlines -- but the OECD's efforts arguably matter more.

Several lawyers told me on Tuesday they fear the confusion and uncertainty from the Commission's case against Apple will now slow the OECD's overhaul.

The OECD had persuaded countries to agree to 15 main principles on how to reduce profit shifting to avoid taxes. But the hard work of transposing those ideas into international tax treaties and national laws is still under way. The Commission's effort could lead some countries -- including the U.S. -- to put less effort into those much needed reforms.

That would be a real setback for anyone who believes that companies should pay tax somewhere (or anywhere, really) at a level commensurate with their earnings.

In the meantime, expect big corporations that have used aggressive tax minimization tactics to get more conservative to avoid getting caught up in any legal crossfire. If they do, it might not matter so much if a court reverses Vestager's decision in a few years' time.

--Gadfly's Elaine He contributed graphics.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Leila Abboud in Paris at

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    Edward Evans at

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