Apple’s New Tax Bill

Apple Company Tax Bill

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The European Commission has recently ordered multinational tech giant Apple, Inc. to pay €13 billion to Ireland to settle back tax debt. The EC concluded that the deal made between Apple and Ireland was illegal and aided Apple in avoiding its proper tax liability. Though it is not the largest corporate back tax bill by a long shot, this tax bill will certainly spell substantial changes in the way Apple conducts its tax affairs.

Commissioner Margrethe Vestager determined that the Irish deal enabled Apple to pay an effective tax rate of just 1 percent on its European profits in 2003, and that this sunk to just 0.005 percent in 2014. The European authorities have put Ireland in charge of recovering the €13 billion (approximately $14.6 billion) from Apple.

This new tax bill can accurately be perceived as an inevitable consequence of Apple’s practice of using creative accounting strategies to avoid tax obligations.

Context

Apple has used three primary methods to minimize its tax burden: deferral, transfer pricing and check-the-box. Deferral simply allows U.S. firms to avoid paying U.S. tax on income earned abroad until it is physically returned to the states. In reality, companies often keep international earnings offshore indefinitely and thus avoid paying tax altogether. Transfer pricing is a bookkeeping method used by companies to distribute expenses among their affiliates. Apple is able to utilize transfer pricing to its benefit by charging small fees to foreign subsidiaries for use of its intellectual property; in this way, Apple maximizes the profits of its affiliates and minimizes its intellectual property income in the U.S. Check-the-box allows firms to classify their affiliates as “disregarded entities” which are not subject to U.S. income tax.

The deal struck with Ireland further enhanced the effectiveness of these strategies. Apple set up two entities in Ireland through which it was able to channel two-thirds of its pre-tax global income. The income which passed through these Irish entities did not return back to Apple but was instead routed to the U.S.-based bank accounts of these entities. This allowed the income to avoid U.S. tax.

Final Thoughts

The European Union is trying diligently to crack down on faulty agreements between multinational firms and EU member states. European authorities have already ordered the Dutch government to recover €30 million from Starbucks and demanded that Luxembourg recover roughly the same amount from Fiat Chrysler. Both Amazon and McDonald’s are also likely to face similar treatment in the near future as a result of their dealings with Luxembourg. Though creative accounting will almost certainly continue well into the future, it appears that European authorities will take an increasingly aggressive approach to enforcing EU tax laws.

Apple certainly has the cash to settle its tax bill. And its relationship with Ireland is likely to suffer little as Ireland still has a relatively low corporate tax rate of 12.5 percent. However, it seems clear that Apple will have to employ cleverer strategies in the future in order to dodge the European taxman.

Image credit: Dr-Leech

Tax issues in the corporate world are plentiful. If you’re a current or future business owner interested in learning about how entity selection can help your tax liability you should view this presentation by our principal John Huddleston

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johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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