While Apple aficionados are waiting with bated breath for the iPhone 7 launch on September 7, CEO Tim Cook will be more worried about the European Commission’s (EC) $14.5 billion tax order. Since the order will be contested by Apple, as well as by Ireland which is in the middle of the scrap, it could potentially trigger a tax war between Europe and the US if, as some lawmakers have threatened, the US imposes retaliatory taxes on European firms in the US. The two-year old case centres around EC accusing Ireland of allowing Apple to structure its operations—in return for investing in Ireland and creating jobs there—in such a way as to pay a mere 1% on its profits compared to even Ireland’s low 12.5% headline tax. In essence, EC has held Ireland guilty of giving Apple state aid which is forbidden—if Ireland doesn’t appeal or loses the appeal, it will have to ask Apple to pay back the $14.5 billion EC says the company owes in taxes.
Theoretically, an Irish tax shouldn’t worry the US which is also fighting big corporations like Apple that tend to keep large portions of their profits overseas to escape taxes—an FT report estimates Apple’s $187 billion accounts for a big share of the $1.2 trillion that US MNCs have kept offshore. The reason why the US and Apple are on the same side, however, is that if a deal is struck to bring back MNC profits under a reformed US tax code, the EC tax will eat into it. What complicates matters is that tech firms like Apple argue that were the Irish profits to be brought back to the US, 35% would be taken away by the taxman, leaving that much less for R&D—also, since Apple did not claim tax deductions on the R&D, it is not certain how much the US treasury would have got had the offshore/Irish option not been available. All told, a royal mess that’s headed for European courts and, if it doesn’t get resolved to the US government’s satisfaction, could end up getting messier. For countries like India, which are affected by the Base Erosion and Profit Shifting (BEPS) that MNCs practice and which the G20 and OECD have promised to tackle, Apple is test case of how serious the tax authorities are.