Apple’s €13 Billion Irish Tax Kerfuffle, Explained for Normal People

Apple is never too far away from the headlines and while most of the attention surrounds new products—or rumors about new products—on Tuesday it was in the news for a much different reason. The European Commission ruled that a tax deal made between the Irish government and Apple was illegal, and the iPhone maker is now on the hook for as much as €13 billion ($14.5 billion) in unpaid taxes.

So how has it ended up that the world's most valuable company owes a small country on the edge of Europe almost as much money in unpaid taxes than the gross domestic product of Zimbabwe?

Apple has a long history in Ireland. It first established a manufacturing base in Cork in 1980 employing just 60 people. The following decade saw its presence grow significantly and by 1990 its factory had grown from 44,000 square feet to 340,000 square feet, employing over 1,000 people.

With Ireland's single largest manufacturing facility at the time, Apple was in a strong position to strike a deal with the Irish government over how it would pay taxes, and in 1991 a tax advisor representing Apple and an official from the Irish Revenue met to negotiate "tax rulings" or agreements.

This was the start of Apple's complex and highly-involved tax relationship with Ireland, a relationship cemented 16 years later in 2007 with another tax ruling with the Irish government. These two rulings formed the basis of the EU's investigation into Apple, which found that Ireland made the deals with Apple to safeguard the jobs the company was providing in the country.

The deals with Ireland allowed Apple to pay far less tax on profits booked through its Irish subsidiaries than the 12.5 percent corporate tax rate.

Apple established two subsidiaries, Apple Sales International and Apple Operations Europe, both of which were incorporated in Ireland but were not tax-resident in the country. It was through these two companies (particularly Apple Sales International) which Apple booked the vast majority of it profits from across Europe.

Thanks to the deal with the Irish government, the European Commission writes that Apple was paying an effective corporate tax rate of just 0.005 percent by 2014, or to put it another way, for every €1 million Apple was earning in profits, it was paying just €50 in taxes.

This, according to the European Commission, was illegal, as it amounted to state aid, and that can only be provided in a very limited set of circumstances. "Ireland granted undue tax benefits of up to €13 billion to Apple. This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses," the ruling reads.

At a press conference on Wednesday, EU Competition Chief Margrethe Vestager made it clear that this was not a fine or a penalty; it was simply unpaid taxes which Apple now needs to pay.

Irish tax rulings to Apple are illegal state aid. Effective taxation as low as 0,005 pct. #Apple has to repay up to €13 billion unpaid tax.
— Margrethe Vestager (@vestager) August 30, 2016

However, Vestager added that while the headline figure of €13 billion was the maximum the Irish government could to reclaim, other countries in Europe which felt as if they had lost out on taxes due to all profits being funnelled through Ireland, could now seek to recoup those lost taxes.

"The tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market," Vestager said."This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland."

While this ruling looks bad for Apple, it is likely to be just round one of a long battle.

Both Apple and the Irish government have come out to strongly oppose the ruling and said they will be appealing the decision. TheIrish government said it "disagrees profoundly with the Commission's analysis. Ireland did not give favourable tax treatment to Apple."

Apple denies any wrongdoing, saying it "follows the law and pays all of the taxes we owe wherever we operate." CEO Tim Cook, in an open letter to the "Apple Community in Europe," warned that the decision taken by the EU will not only harm Apple, but the European economy as a whole. "Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe," Cook said.

The EU is obviously eager to protect the Single Market, and it's therefore no surprise to see it vigorously investigate situations where it sees one country within Europe seeking to gain an upper hand by offering one company a better deal. Ireland is already the focus of a lot of attention in Europe for its low 12.5 percent tax rate—the lowest of all EU states—but Vestager pointed out that this ruling was not an indictment of Ireland's tax system, but of this one single tax deal.