NEW YORK • Europe's antitrust enforcer's order for Ireland to claw back billions of dollars from Apple over illegal tax breaks will ramp up transatlantic tensions over how much global companies should pay to countries where they do business, market watchers say.
The decision by Ms Margrethe Vestager, the European Union Commissioner for Competition, is the culmination of a two-year investigation into whether Ireland gave preferential treatment to Apple, part of a broader crackdown on corporate tax avoidance.
The clawback from Apple, which covers 10 years of back taxes of up to €13 billion (S$19.8 billion), is the largest of its kind since the European Commission (EC), the executive arm of the 28-member union, started going after member states that favoured selected companies.
The European Commission has aggressively sought to stamp out sweetheart tax deals that countries strike with multinationals... But US officials have warned that the EC is overstepping its power, given that taxes are typically left to national governments to oversee and European officials should not retroactively issue penalties in past-tax rulings.
The ruling adds to a strained relationship between the United States and the EU over who has the right to regulate tax payments by some of the world's largest companies.
The EC has aggressively sought to stamp out sweetheart tax deals that countries strike with multinationals. Along with Apple, the campaign has also ensnared Starbucks in the Netherlands, Amazon in Luxembourg and Anheuser-Busch InBev in Belgium.
But US officials have warned that the commission is overstepping its power, given that taxes are typically left to national governments to oversee and that European officials should not retroactively issue penalties in past-tax rulings.
They also emphasised that such cases undermine efforts to overhaul global policies and create measures to curtail tax avoidance.
"US companies are the grandmasters of tax avoidance," said Professor Edward Kleinbard of the Gould School of Law, University of Southern California, who is a former chief of staff to the congressional Joint Committee on Taxation.
"Nevertheless, because of the nature of US politics," he said, the Apple case "will be framed by the US as Europe overreaching and discriminating against 'our team' ".
Since early this year, Ms Vestager and US Treasury Secretary Jacob Lew, and their teams have met regularly to discuss Europe's state-aid tax investigations. Mr Lew visited Brussels in July to put forward the US perspective.
Just last week, the Treasury Department released a report criticising any efforts to claw back taxes from US companies. The document repeatedly claimed that the EC did not have the right to undertake the tax clawbacks and that they could harm US efforts to collect taxes from domestic companies with vast international operations.
"That outcome is deeply troubling as it would effectively constitute a transfer of revenue to the EU from the US government and its taxpayers," Mr Robert Stack, a senior Treasury official, said in the report.
The EC denies these claims, saying it is relying on a history of using state-aid rules related to corporate tax issues. The Brussels-based agency also says it has the right to act when certain companies are provided with an unfair advantage - either through tax breaks or other incentives - and that Apple's operations are based in Ireland, therefore falling under its jurisdiction.
"No rules have been changed - not one rule," Ms Vestager said at a news conference in Brussels yesterday. "This is a question of paying unpaid taxes."
In the Apple case, the antitrust commission said the tech giant's deals with Ireland allowed the company to allocate profits from two Irish subsidiaries to a "head office", but it could not have generated such profits since it had few operations and little distribution or substantive business.
By doing so, the commission said, Apple could effectively lower its tax rate on European profit to just 0.005 per cent in 2014. Ms Vestager said that amounted to roughly €50 for every €1 million in Apple's European profit.
"The so-called head office had no employees, no premises, no real activities," Ms Vestager said.
Apple defends its tax practices, saying it follows the law and pays all of its taxes.
"The commission's case is not about how much Apple pays in taxes, it's about which government collects the money," the company said in a statement. "It will have a profound and harmful effect on investment and job creation in Europe."
Ireland has broadly faced scrutiny for its tax strategies to attract large multinationals. Its corporate tax rate, at 12.5 per cent, is one of the lowest in the developed world. Other incentives and breaks allow companies to cut their bill even further.
NEW YORK TIMES