The European Commission has been cracking down on tax loopholes of late, and one that has come in for particular scrutiny is the 1991 deal between Apple Inc. (NASDAQ:AAPL) and Ireland. It is investigating whether the agreement breaks European Union laws which prohibit state aid to companies. Both the Irish government and Apple have stated that they work in accordance with the law.
Fears for Apple’s financial results
Apple released its annual financial report this week, in which it warned investors that “if the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland…the company’s operating results, cash flows and financial condition could be adversely affected.”
The closing of the loophole would lead to a hugely increased tax bill. To date Apple has paid just 2% on profits attributed to its Irish subsidiary. This figure represents a huge discount on the 35% top rate in the U.S., as well as the official Irish rate of 12.5%.
Both European and U.S. lawmakers have complained about the current situation, with Apple CEO Tim Cook even asked to testify on the matter before a Senate committee.
Changing political landscape
In an announcement earlier this month, Ireland said that the loophole would be closed to new companies from 2015, and its use would be completely ended by 2020.
Tax experts have since said that the measure is simply an effort to placate regulators, and that the amount of tax paid by multinationals will not change significantly.
“In many respects, I think this change of law is to improve public relations and inter-government relations with the United States,” said Ryan Dudley, who specializes in international taxes at Friedman LLP in New York.
Dudley says that it is unlikely that the changes will result in higher tax revenues for Ireland or the U.S. because the companies will simply restructure. In fact, Ireland has since said that it is working on a new set of tax breaks, with details still to be released.
Apple continues to say that it does not receive any special treatment in its dealings with Ireland, but refused to comment directly on the latest developments.