Apple (AAPL.O) will launch a legal challenge this week to a record $14 billion EU tax demand, arguing that EU regulators ignored tax experts and corporate law and deliberately picked a method to maximize the penalty, senior executives said.
Apple’s combative stand underlines its anger with the European Commission, which said on Aug. 30 the company’s Irish tax deal was illegal state aid and ordered it to repay up to 13 billion euros ($13.8 billion) to Ireland, where Apple has its European headquarters.
European Competition Commissioner Margrethe Vestager, a former Danish economy minister, said Apple’s Irish tax bill implied a tax rate of 0.005 percent in 2014.
Apple intends to lodge an appeal against the Commission’s ruling at Europe’s second highest court this week, its General Counsel Bruce Sewell and Chief Financial Officer Luca Maestri told Reuters in an interview at the company’s global headquarters in Cupertino.
The iPhone and iPad maker was singled out because of its success, Sewell said.
“Apple is not an outlier in any sense that matters to the law. Apple is a convenient target because it generates lots of headlines. It allows the commissioner to become Dane of the year for 2016,” he said, referring to the title accorded by Danish newspaper Berlingske last month.
Apple will tell judges the Commission was not diligent in its investigation because it disregarded tax experts brought in by Irish authorities.
“Now the Irish have put in an expert opinion from an incredibly well-respected Irish tax lawyer. The Commission not only didn’t attack that – didn’t argue with it, as far as we know – they probably didn’t even read it. Because there is no reference (in the EU decision) whatsoever,” Sewell said.
The European Commission accused Ireland in 2014 of dodging international tax rules by letting Apple shelter profits worth tens of billions of dollars from tax collectors in return for maintaining jobs. Apple and Ireland denied the accusation.
The Commission’s tax demand angered the U.S. government, which accused the EU of grabbing revenue intended for U.S. coffers.
Apple also intends to challenge the EU enforcer’s basis for its case, arguing that the “crazy notion of non-residency” was chosen on purpose to produce a punitive amount.
Other arguments the EU could have used could have been based on transfer pricing – the pricing strategy between a company’s units – or the “arm’s length” principle adopted by companies to sell and buy from affiliates as if they were unrelated firms.
“Both of those other two theories at least could be fleshed out, but they produced much lower numbers,” Sewell said.
He added it was not possible for Apple to comply with the EU decision because it would mean Ireland violating its own past tax laws setting different rules for residents and non-resident companies.
The Irish government is also appealing against the European Commission’s tax demand. It believes it must protect a tax regime that has attracted many multinational employers to the country.
Apple plans to tell the court that the Commission erred when it ruled that the head office of Irish-registered units Apple Sales International (ASI) and Apple Operations Europe existed only on paper, with no justification for the billions of euros it posted in untaxed profits.
Sewell said the fact that an entity was a holding company with no employees on its books did not mean it was inactive and it could be actively managed by employees of its parent company.
“So when Tim Cook, who is the CEO of our company, makes decisions that impact ASI, the Commission says we don’t care because he is not an ASI employee, he is an Apple Inc employee. But to say that somehow Tim Cook can’t make decisions for ASI is a complete mis-statement of corporate law, it’s a misunderstanding of how corporations operate,” he said.
Maestri said the Commission over-estimated the importance of the company’s European headquarters in Cork in the south of Ireland.
“(Vestager) is arguing that the base on which we should pay taxes in Ireland is essentially all the profits we generate outside the United States … in a place that doesn’t do any engineering, doesn’t generate any intellectual property for us,” he said, adding it was an “absurd theory.”
The company hopes U.S. president-elect Donald Trump will enact reforms to tackle tax avoidance which have led to trillions of dollars in profits being held abroad by U.S. companies, Sewell said.
Europeans, he said, were operating under a localized tax system, while the United States had a global deferred system.
“The difference between those two creates exactly the kind of loophole that the Commission has now been able to exploit,” he said.
Trump’s White House victory moves Apple and other big U.S. corporations closer to winning a big tax break on $2.6 trillion in foreign profits, experts say.
Currently, a law lets U.S. companies hold foreign profits overseas without paying U.S. corporate tax on them, unless those profits are brought into the United States.
Corporations have $2.6 trillion stashed abroad under this law. Apple topped the list with $200 billion of profits held overseas, according to March estimates by Citizens for Tax Justice, a corporate income tax watchdog group in Washington.