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The Inside Story of Apple's $14 Billion Tax Bill

The iPhone came out in 2007. So why was Apple still paying taxes like it was 1990?

by

Gaspard Sebag, Dara Doyle and Alex Webb

16 December 2016, 06:01 CET

The Maxforce is the European Union team that ordered Ireland to collect billions of euros in back
taxes from Apple Inc., rattled the Irish government, and spurred changes to international tax law.
Youd think it might have earned the name by applying maximum force while investigating alleged
financial shenanigans. It didnt. Its just led by a guy named Max.

A European Commission official gave the nickname to the Task Force on Tax Planning Practices in
honor of its chief, Max Lienemeyer, a lanky, laid-back German attorney who rose to prominence
vetting plans to shore up struggling banks during Europes debt crisis. Since its launch in 2013, the
Maxforce has looked at the tax status of hundreds of companies across Europe, including a deal
Starbucks Corp. had in the Netherlands, Fiat Chrysler Automobiles NV's agreement with Luxembourg,
and -- its largest case -- Apple in Ireland.

Lienemeyers team of 15 international civil servants pursued a three-year investigation stretching from
the corridors of the European Commission, the EUs executive arm, to Ireland's Finance Ministry and
on to Apple's leafy headquarters in Cupertino, California. Much of it outlined for the first time here,
this story chronicles a growing clash between Europe and the U.S. and a shift in the EUs approach to
the tax affairs of multinationals.

The Maxforce concluded that Ireland allowed Apple to create stateless entities that effectively let it
decide how much -- or how little -- tax it pays. The investigators say the company channeled profits
from dozens of countries through two Ireland-based units. In a system at least tacitly endorsed by Irish
authorities, earnings were split, with the vast majority attributed to a head office with no employees
and no specific home base -- and therefore liable to no tax on any profits from sales outside Ireland.
The U.S., meanwhile, didn't tax the units because theyre incorporated in Ireland.

I cant see why the tax liability is in Ireland. Irish Finance Minister, Michael Noonan

In August the EU said Ireland had broken European law by giving Apple a sweetheart deal. It ordered
the country to bill the iPhone maker a record 13 billion euros ($13.9 billion) in back taxes, plus
interest, from 2003 to 2014. One example the Commission cites: In 2011, a unit called Apple Sales
International recorded profits of about 16 billion euros from sales across Europe. But only 50 million
euros were considered taxable in Ireland, leaving 15.95 billion euros of profit untaxed, the
Commission says.

Though the EU says its goal is to ensure equal treatment of companies across Europe, Apple
maintains that the Commission selectively targeted the company. With the ruling, the EU is
retroactively changing the rules and choosing to disregard decades of Irish law, and its investigators
dont understand the differences between European and U.S. tax systems, Apple said in a Dec. 8
statement.

Apple, which has some 6,000 workers in Ireland, says its Irish units paid the parent company a
licensing fee to use the intellectual property in its products. The Irish companies didn't own the IP, so
they dont owe tax on it in Ireland, Apple says, but the units will face a U.S. tax bill when they
repatriate the profits. This case has never been about how much tax Apple pays, its about where our
tax is paid, the company said. We pay tax on everything we earn.

Ireland on Nov. 9 appealed the Commissions ruling at the EU General Court in Luxembourg, arguing
it has given Apple no special treatment. Irish Finance Minister Michael Noonan has said he
profoundly disagrees with the ruling and that Ireland strictly adheres to tax regulations. The
government says Ireland has no right to tax non-resident companies for profits that come from
activities outside the country.

Look at the small print on an iPhone, Noonan said after the EU released its ruling in August. It says
designed in California, manufactured in China. That means any profits that accrued didnt accrue in
Ireland, so I cant see why the tax liability is in Ireland.

In the coming weeks, the EU is expected to publish details of the Maxforce investigation. At about the
same time, Apple will likely lodge its own appeal in the EU court. Though Apple will have to pay its
tax bill within weeks, the money will be held in escrow, and the issue will probably take years to be
resolved.

This story is based on interviews with dozens of officials from the EU, Ireland, and Apple, though
most didn't want to speak on the record discussing sensitive tax matters. A Maxforce representative
declined to make Lienemeyer available for an interview. Ireland's Office of Revenue Commissioners
(the equivalent of the American Internal Revenue Service) says it cant comment on specific
companies.

Inconsistency and ambiguity Tim Cook on the EU investigation

Lienemeyer began assembling the Maxforce in late spring of 2013 with a mandate of scrutinizing tax
policies across Europe in search of any favoritism. Direct subsidies or tax breaks to court a specific
company are illegal in the EU to prevent governments aiding national champions. His first hire -- the
person who would oversee the Apple probe -- was Helena Malikova, a Slovak who had worked at
Credit Suisse Group AG in Zurich. He quickly added Kamila Kaukiel, a Polish financial analyst who
had been at KPMG, and Saskia Hendriks, a former tax policy adviser to the Dutch government.

As the four initial members began their investigations, they got a head start from a U.S. Senate probe
of the tax strategies of American multinationals. The Senates Permanent Subcommittee on
Investigations said Apple shifted tens of billions of dollars in profit into stateless affiliates based in
Ireland, where it secured a tax rate of less than 2 percent.

At 9:30 a.m. on May 21, 2013, senators gathered in Room 106 of the Dirksen Office Building.
Included in the evidence presented that day was a 2004 letter from Tom Connor, an official at Irelands
tax authority, to Ernst & Young, Apples tax adviser. Connors question: A unit of the tech company
hadnt filed a tax return; Was it still in business? E&Y responded two days later that the division was a
non-resident holding company with no real sales. There is nothing to return from the corporation tax
standpoint, E&Y wrote. The Senate exhibits didnt include Connors response if there ever was one.
At the hearing, Arizona Republican John McCain castigated Apple as one of the biggest tax avoiders
in America. Democrat Carl Levin of Michigan peered over the glasses perched on the tip of his nose
and said Apple uses offshore tax strategies whose purpose is tax avoidance, pure and simple.
Crucially, though, Levin told the crowded room that under U.S. law, there was little the panel could do
to force Apple to pay more tax. Apple Chief Executive Officer Tim Cook passionately defended the
companys actions, telling the senators We dont depend on tax gimmicks.

The Senate revelations raised eyebrows at the Maxforces office in Madou Tower, a 1960s high-rise in
the rundown Saint-Josse neighborhood of Brussels. Three weeks after the Senate hearing,
Lienemeyer's team asked Ireland for details of Apple's tax situation. The Irish tax authorities soon
dispatched a representative carrying a briefcase filled with a bundle of bound pages. The Irish could
have simply sent the material via e-mail, but they were cautious about sharing taxpayers information
with the EU and have a ground rule to avoid leaks: never send such documents electronically.

While the Irish government remained bullish in its public statements, saying Apple hadnt received
any favors, behind the scenes tensions were rising. Through the summer of 2013, the Finance Ministry
assured government ministers that the EU investigation would amount to nothing, according to people
familiar with the discussions. But those assertions seemed less confident than earlier communications.
There was a sense that Apple had worked out its Irish tax position in a vastly different era, and no one
remembered many details of the negotiations decades earlier.

In 1980, the four-year-old company -- the Apple III desktop had just been released -- created several
Irish affiliates, each with a different function such as manufacturing or sales, according to the Senate
report. Under Irish laws dating to the 1950s designed to shore up the moribund post-war economy, as a
so-called export company Apple paid no taxes on overseas sales of products made in Ireland.

To comply with European rules, Ireland finally ended its zero-tax policy in 1990. After that, Apple and
Ireland agreed that the profit attributed to a key Ireland-based unit, the division discussed in Tom
Connors letter, be capped using a complex formula that in 1990 would have resulted in a taxable
profit of $30 million to $40 million.

An Apple tax adviser confessed there was no scientific basis for those figures, but that the amounts
would be of such magnitude that he hoped it would be seen as a bona-fide proposal, according to
notes from a 1990 meeting with the Irish tax authority cited by the EU. The equation didnt change
even as Apple began assembling the bulk of its products in Asia.

Ireland and Apple started to make changes a few months after the Maxforce began looking into their
tax relationship. In October 2013, Finance Minister Noonan announced he would close the loophole
that let stateless holding companies operate out of Ireland. And the EU says Apple changed the
structure of its Irish units in 2015.

As the Maxforce stepped up its probe in June 2014, Irish Prime Minister Enda Kenny was wooing
potential investors in California. At a San Francisco event to promote Irish entrepreneurs, Governor
Jerry Brown quipped that he had thought Apple was a California company, but according to tax
returns, theyre really an Irish company. News clips show Irish officials looking on stony-faced as
the governor makes his jest.

Enforcement of EU rules on taxation is a matter of fairness EU competition chief, Margrethe

Vestager
With Lienemeyers team digging further into the issue, Apples concern deepened. In January 2016,
CEO Cook met with Margrethe Vestager, the EU competition chief -- and Lienemeyer's ultimate boss
-- on the 10th-floor of the Berlaymont building, the institutional headquarters of the European
Commission in Brussels.

Vestager, a daughter of two Lutheran pastors, has a reputation for being even-handed but tough,
cutting unemployment benefits while advocating strict new rules for banks when she served as
Denmark's finance minister. While she has acknowledged that her team had little experience with tax
rulings -- in a November interview with France's Society magazine, she said, We learned on the job
-- Vestager says enforcement of EU rules on taxation is a matter of fairness.

In the meeting with Cook she quizzed him on the tax Apple paid in various jurisdictions worldwide.
She told the Apple executives that someone has to tax you, according to a person present at the
meeting. In a Jan. 25 follow-up letter obtained by Bloomberg, Cook thanked Vestager for a candid
and constructive exchange of views, and reasserted that Apples earnings are subject to deferred
taxation in the U.S. until those profits are repatriated.

Subsequent correspondence became more heated. On March 14, Cook wrote to Vestager that he had
concerns about the fairness of these proceedings. The Commission had failed to explain fully the
basis on which Apple was being investigated, and the body's approach was characterized by
inconsistency and ambiguity, Cook said.

Apple contended that the EU had backtracked on a 2014 decision recognizing that its two Irish
subsidiaries were not technically resident in Ireland, and therefore only liable for taxes on profits
derived from Irish sources. Now, Cook said, it seemed the Commission was intent on imposing a
massive, retroactive tax on Apple by attributing to the Irish branches all of Apples global profits
outside the Americas.

"There is no inconsistency," an EU spokesman said in a Dec. 15 statement. Only a fraction of the

profits of the subsidiaries were taxed in Ireland, the statement said. "As a result, the tax rulings
enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid
rules."

Cook's entreaties did little to sway Vestager, and in August she phoned Noonan to tell him the results
of the Maxforce investigation: The Commission was going to rule against Ireland. Late in the
afternoon of Aug. 29, Irish officials began hinting to reporters that Apples tax bill amounted to
billions and could be anything. At noon the following day, Vestager told a packed press conference
in Brussels that the Commission had decided Apple owed Ireland 13 billion euros.

Though that would be equivalent to 26 percent of the 2015 national budget, Ireland didn't want the
windfall, saying the ruling was flawed because the country hadnt given Apple any special treatment.
The decision sparked a political crisis as left-leaning members of Enda Kennys fragile minority
administration saw a potential bonanza for taxpayers that the worlds richest company could well
afford. Even as Noonan toured television studios vowing to appeal the decision, independent
lawmakers demanded that Ireland take the money.

Facing a potential revolt that could bring down the government, Kenny and Noonan eventually bowed
to demands for a review of the countrys corporate tax system. But they said they would fight the case,
and on Sept. 7, Irish lawmakers overwhelmingly backed the motion for an appeal.

Bottom of Form
Officials from Lienemeyers team and other EU offices say they have gathered tax information on
about 300 companies, looking for what they deem to be favorable treatment by governments across
Europe. While they don't expect all of those to yield payoffs as hefty as that from their investigation of
Ireland and Apple, they say a worrying number require the kind of maximum force that the Maxforce
can apply.

"We focus on outliers where you're looking at something that is off the radar screen," Lienemeyer's
boss, 50-year-old Dutchman Gert-Jan Koopman, who is in charge of state-aid enforcement at the EU,
said at a Brussels conference in November. "If you're paying a fair amount of tax then there is
absolutely nothing to worry about.