Why Apple Was Taxed $14.5 Billion for Ireland, Which Doesn't Want the Money

— -- The staggering result of three-year investigation into Apple’s tax dealings in Europe was announced today: an order from the European Union to pay $14.5 billion in back taxes to the government of Ireland, where Apple has run its European operations.

Perhaps even more surprising is that Ireland doesn’t want the money. The country’s finance minister released a statement saying he “disagrees profoundly” with the ruling and is seeking permission to launch an appeal.

Apple also challenged the European Commission – or EC, the European Union’s executive body, which announced today’s ruling – saying that it was attempting to “rewrite Apple’s history in Europe” and “ignore Ireland’s tax laws and upend the international tax system in the process.” The company said it will appeal.

Here’s a breakdown of what happened:

Apple’s operations in Europe

Apple, according to the commission, conducted its business in Europe through two fully owned companies that were incorporated in Ireland: Apple Sales International and Apple Operations Europe.

Outside North and South America, those two companies hold the rights to Apple’s intellectual property, allowing them to manufacture and sell the company’s products around the world, according to the EC.

Apple Sales International, according to the EC, is responsible for buying products from equipment manufacturers (the factories that build them) and then selling them in Europe, the Middle East, Africa and India.

Apple Operations Europe, the EC said, “was responsible for manufacturing certain lines of computers for the Apple group.”

The deal between Ireland and Apple

The EC said that Ireland gave Apple unfair tax advantages, allowing it to pay rates as low as 0.005 percent at times.

By comparison, Ireland typically taxes corporations at about 12.5 percent, according to the BBC.

According to the commission, Apple was channeling its profits in Europe through companies it incorporated in Ireland. Two Irish tax rulings – one in 1991 and one in 2007 – then “endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group ... which did not correspond to economic reality.”

“Apple set up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland rather than from the shops that physically sold the products to customers,” the commission said. “In this way Apple recorded all sales, and the profits stemming from these sales, directly in Ireland.”

From there, the commission said, only part of Apple’s sales in Europe were taxed in Ireland.

The Irish laws “endorsed a split of the profits for tax purposes in Ireland,” the commission said. “Under the agreed method, most profits were internally allocated away from Ireland to a ‘head office’ within Apple Sales International.”

“Almost all sales profits recorded by the two companies were internally attributed to a ‘head office,’” the EC said, which “existed only on paper.”

The commission said, “As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1 percent in 2003 to 0.005 percent in 2014 on the profits of Apple Sales International.”

About the head office

While the offices of tech firms are often busy complexes with hundreds of employees and luxurious open floor plans, the EC said Apple’s head office in Europe had no physical location or employees.

“This ‘head office’ was not based in any country and did not have any employees or own premises,” the commission said. “Its activities consisted solely of occasional board meetings.”

“This ‘head office’ had no operating capacity to handle and manage the distribution business or any other substantive business, for that matter,” it added. “The only activities that can be associated with the ‘head offices’ are limited decisions taken by its directors (many of which were at the same time working full time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management.”

Why Ireland doesn’t want the money

Perhaps this is a bit of a head scratcher for some: Ireland doesn’t want back taxes from Apple.

When the ruling was announced, Irish Finance Minister Michael Noonan immediately released a statement. “I disagree profoundly with the commission’s decision,” he said, adding that Ireland’s “tax system is founded on the strict application of the law.”

This ruling puts Ireland in a difficult position because it wants to continue its relationship with Apple and other foreign businesses.

The BBC reported that “governments such as Ireland, Luxembourg and the Netherlands, which face losing the advantages that attract foreign investment ... resent what they see as interference in their right to set their own taxes.”

Similarly, another BBC report read, “Countries can scarcely afford not to cooperate when Apple comes calling; it has a stock market value of $600 billion, and the attraction of the jobs it can create and the extra inward investment its favors can bring are too much for most politicians to resist.”

Noonan said that he was left “with no choice but to seek Cabinet approval to appeal the decision before the European Courts. This is necessary to defend the integrity of our tax system, to provide tax certainty to business and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation.”

The US reaction to the EU tax bill for Apple

The U.S. Treasury was quick to condemn this kind of ruling when the news broke this morning.

A Treasury representative refused to comment on the Apple case specifically but said that the Treasury was disappointed that the commission was “acting unilaterally and departing from the important progress the U.S., the EU and the rest of the international community have made together to combat tax avoidance.”

The spokesperson added, “We believe that retroactive tax assessments by the commission are unfair, [are] contrary to well-established legal principles and call into question the tax rules of individual member states.”

Finally, the representative warned that the commission’s actions “threaten to undermine foreign investment, the business climate in Europe and the important spirit of economic partnership between the U.S. and the EU.”

The response follows a white paper and summarizing blog post from the U.S. Treasury last week that sharply criticized the European Commission and rulings of this nature.

“We emphasize that the commission should not seek to impose recoveries under this new approach in a retroactive manner because it sets a bad precedent for tax policymakers around the world,” the blog post read. “The commission’s approach undermines U.S. tax treaties and international transfer pricing guidelines already accepted broadly in the global tax community.”