The southern portion of the San Francisco Bay Area, better known as Silicon Valley, is home to many of the world’s largest high-tech corporations and thousands of start up businesses. Our tax attorneys in San Jose weren’t surprised at all when our beloved city’s location within the booming computer technology industry earned San Jose the nickname “Capital of Silicon Valley”.
The Apple Inc. headquarters is also located just west of San Jose in the Santa Clara Valley. Despite its position as the largest tech company in the world and the 8th largest overall, Apple has recently come under scrutiny for tax penalties that they were ordered to pay by the European Union.
The Task Force on Tax Planning Practices is a team of investigators out of the European Union led by German attorney Max Lienemeyer. Lienemeyer and his colleagues pursued a three-year inquiry of Apple that highlighted new changes in the EU’s attitude towards the tax activities of multinationals.
In 1980, Apple, Inc. created several Irish affiliates that were each tasked with a different function. The Task Force asserts that over time these stateless entities enabled Apple to control how much or how little tax it paid.
Lienemeyer’s team says the iPhone maker channeled earnings from several countries through two Ireland-based units. These profits were then split, and the majority was allocated to a “head office” with no employees or specific home base, which made it not liable to taxation on any profits from sales outside Ireland. Meanwhile, since the units were incorporated in Ireland, the U.S. didn’t tax them either.
For example, in 2011 an entity titled Apple Sales International recorded profits of about 16 billion euros from sales outside the U.S. However, only 50 million euros were considered taxable in Ireland, leaving the remainder of the profits untaxed.
The EU determined in August 2016 that Ireland had broken European law by allowing Apple to conduct business in this manner, and ordered the country to bill the tech giant 13 billion euros ($13.9 billion) in back taxes and interest.
Ireland appealed the ruling at the EU General Court, arguing it hasn’t given Apple any special treatment and they have no right to tax non-resident companies for profits that come from outside the country. Irish Finance Minister Michael Noonan said that Ireland strictly adheres to tax regulations and Apple should not be subject to any tax penalties.
Further, Apple maintains that they were selectively targeted, despite the EU saying its goal is “to ensure equal treatment of companies” across Europe. Apple released a statement in December stating the EU is “choosing to disregard decades of Irish law,” and its investigators didn’t understand the differences between European and U.S. tax systems.
In the coming weeks, the EU is expected to publish details of the investigation, and Apple will likely file an appeal of its own. Although Apple will have to pay the back taxes within weeks, the money will be held in escrow. As tax attorneys in San Jose, we predict that the issue will likely take years to be fully resolved.
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