Apple and the EU

This morning’s EU action against Apple wasn’t a complete shock — the Financial Times previewed the substance yesterday, though not the amount. Regardless, just as they have in the past claimed expertise of patent law, encryption, automotive manufacturing, or the jewelry market, today everyone who covers tech is suddenly an EU tax expert.

In talking to the reporters who’ve approached me to talk about this today, I’ve tried to avoid diving into that fray. The complexities of the tax arrangements described in the EU press release are dizzying, but represent just a summary of what’s an intricate set of financial arrangements intended to allow Apple to carry out its European tax strategy. None of us not trained in EU tax law should attempt to draw conclusions about the specifics of the accounting structures here. We’re simply not qualified. Apple and the Irish authorities – both of whom obviously have very competent people on staff – have apparently reached different conclusions here from the EU’s staff, and they’re all experts.

But it is possible for non-experts to have an opinion on the reasonableness of the approach the EU is taking here. Apple has acted in good faith throughout, working with the Irish authorities to secure “comfort letters” assuring the company that its behavior was appropriate and conformed to applicable laws regulations in place at the time. The EU now wants to come in after the fact and change the basis on which Apple should be taxed in a key European jurisdiction.

The period in question is 2003 to 2014, meaning that the EU wants to reverse the basis on which Apple paid taxes in Ireland up to thirteen years ago, under agreements that were first made in 1991. If the EU objected to these arrangements then, it should have investigated them then, and not have waited until so long after the fact to look into them. But of course Apple wasn’t nearly as big a target then (or even in 2003) as it is now, and this is where the politics come in.

Apple has, of course, long communicated its approach to this issue. Since its products are conceived and designed in the US, and its software built here, it should pay the bulk of its taxes in the US. It doesn’t consider the current US tax regime favorable, and so has chosen to maintain much of its cash and other liquid assets overseas until such a time as it makes financial sense to repatriate it. But as its investor FAQ on the topic makes clear, it has “previously accrued U.S. taxes related to the income in question.”

This is the key point here — I’ve seen Apple’s European tax strategy described as one for tax avoidance, but this isn’t actually about avoiding paying tax (though it — like all responsible companies — pays the minimum amount possible under applicable laws). It’s about Apple choosing to pay taxes (the full amount due) in the appropriate jurisdiction. Apple will eventually have to pay taxes on the full amount earned in Europe and elsewhere in the world, but it believes that the US is the proper jurisdiction in which to do so. There’s currently a lot of that money overseas on which it hasn’t yet paid taxes, but it won’t escape taxation entirely or indefinitely.

Ultimately, this case — like so many others – comes down to your perspective and preexisting notions. If you’re inclined to believe that big US tech companies don’t pay enough taxes in Europe, this likely confirms that view and makes it official. On the other hand, if you’re more inclined to believe that the EU uses its various investigations as a way to handicap big US tech companies who are more successful than European equivalents, there’s more evidence here for you too. None of this is settled yet, and we’ll have years of court cases before this is decided, but even in the short term I suspect we’ll see lots of non-European companies rethinking their investment strategies for the EU in light of the ruling.