Apple warns of large tax bill if EU finds against it

Apple has warned that it could face a significant additional tax bill if the European Commission finds against it in an examination of its tax arrangements with Ireland.

In a regular US Stock Exchange filing, it says that the commission could ask Ireland to recover taxes for a period of up to 10 years, which would be a “material” amount for the company. It is the first time the company has outlined the potential financial costs of the investigation.

The European Commission launched a formal investigation last June and a letter to the Government, published last September, underlined that it believed that Ireland had given “selective” tax advantage to Apple via two deals struck in 1991 and 2007. Minister for Finance Michael Noonan said in November that he did not believe the Commission had a strong case, but the inquiry is proceeding. Apple says it believes that the Commission’s claims are “without merit”.

Material event

Under US securities rules, a material event is usually defined as 5 per cent of a company's average pretax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5 billion, and today's Financial Times quotes unnamed Brussels officials as saying that any ruling could set a new record for a state-aid investigation penalty by exceeding €1 billion.

The Apple statement in the 10-Q filing to the Securities and Exchange Commission said that “if the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid”.

It adds that while this amount “could be material” it is unable to estimate the impact. Earlier this week the company reported first-quarter revenues of $58 billion and net income of $13.6 billion.

The Government and Apple have strongly denied that any rules were breached in tax arrangements reached with Ireland. The issue first emerged in US Congressional hearings held in 2013 into the company’s tax arrangements, where the key role of Irish subsidiaries in funnelling tax earned outside the US was highlighted. The investigation rests on the level of profit declared in Ireland and on arrangements reached with the Revenue Commissioners on the level of costs that would be attributed to the Irish operation. In turn this affected the company’s tax bill here.

A final decision from Brussels, which is expected before the end of June, represents an important test case for Margrethe Vestager, the new competition commissioner. Her ruling will give an indication of her stance on tax planning by multinationals.

Tax breaks

The EU is also investigating tax breaks given to companies including Starbucks, Fiat and Amazon. Apple is also embroiled in its investigation into digital music licensing.

Separately yesterday, the Commission launched an inquiry to determine whether 11 member states, including the Republic, are paying illegal subsidies to electricity suppliers by granting them support to prevent blackouts.

The competition authorities will send out questionnaires to governments and companies in Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden. The inquiry, also led by Ms Vestager, is part of the EU’s attempt to forge a single European energy market – the so-called energy union – and it will investigate whether countries are unduly favouring homegrown utilities and technologies, rather than building cross-border interconnections. (Additional reporting: Copyright The Financial Times Limited 2015)