Apple Tax Defense Rests on Legal and Emotional Pillars

by

Apple Inc. has a ferocious and vigorous defender-in-chief in Timothy Cook, who also doubles as the company’s chief executive officer. This year, Cook has written at least two “open” letters to Apple stakeholders on challenges facing the company, the last being on a $14.5 billion fine from the European Commission. Earlier this year, Cook in another letter, challenged the U.S. government’s request for access to the company’s technology and made a passionate case for encrypting consumers’ information in Apple’s iPhone.

Cook’s encryption defense resonated with most of Apple’s customers because it outlined why they should be wary of governmental intrusion in their private lives while presenting the company as a vigorous defender of people’s privacy.

“For many years, we have used encryption to protect our customers’ personal data because we believe it’s the only way to keep their information safe,” Cook said. “We have even put that data out of our own reach, because we believe the contents of your iPhone are none of our business.”

Arguably, Apple won that battle, as the U.S. government found another way to open the device in dispute. It looks like the latest conflict between Apple and another regional government may go all the way before an appeal court, however. Cook, and many external observers, believe the company will get the judgment reversed but the case may drag on for years and snag Apple in an embarrassing public dispute with Europe’s regional authority. It may also give the company a black eye with some European customers who think Apple has found and exploited loopholes in tax regulations.

As in the privacy case, Cook has taken Apple’s case directly to consumers. Drawing from the company’s history and tugging at the heartstrings of people who still revere co-founder Steve Jobs and the Irish folks who can recall Ireland’s desperate economic situation in the 1980s, Cook presented Apple as a selfless enterprise that contributed to the revival of a struggling nation. The company, he said, led other high-tech enterprises in creating an Irish economy that today is “stronger than ever.”

Cook is setting the stage for what is bound to be an epic fight, however. The real case for curbing the EC’s money grab for Ireland is quite simple; Apple played by the rule in existence and has not done anything wrong. It cannot therefore be punished for complying with regulations created by responsible tax authorities from which it sought and received appropriate guidance, much like any other company could if needed.

The EC, Cook insists, is trying to punish Apple with a legal opinion or an imaginary law that wasn’t in place when the company first established operations in Ireland. Apple, he said, complied fully with the law and remains the continent’s biggest corporate tax payer. Invariably, the EC’s decision will have implications for other companies in Ireland, according to Cook.

Tim Cook, CEO, Apple Inc.

“Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe,” he said in the statement. “Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.”

Here are the core pillars of Apple’s defense:

1. Apple didn’t Move to Ireland for the Tax Benefits: Cook went down the history lane by noting that Jobs first established a presence for Apple in Ireland 36 years ago. The company has stayed in Cork since then, growing with the community and being a part of its transformation. The decision to move to Ireland had nothing to do with tax shelters, he said.
2. Ireland did not Give Apple any Major Tax Breaks: One party to this dispute isn’t being fully open about what happened between Ireland and Apple. While the EC claims Ireland repeatedly offered Apple incentives that helped reduce its tax obligations, Cook insists this “has no basis in fact or law.” Perhaps the confusion lies in what the two parties might understand individually as “a special deal” on taxes. Apple’s position is that the company “never asked for, nor did we receive, any special deals.” What the company received from Irish tax authorities was guidance “on how to comply correctly with Irish law.”
3. The EC’s Action Aims to Rewrite Irish Tax Law: With the claim that Apple benefitted from a deal approved by Irish authorities that supposedly benefitted the company at the expense of other European nations, the EC would be imposing its own view of how tax laws should be, rather than how it is stated in Irish business law, claims Cook. Furthermore, Ireland has now been put in the difficult position of being awarded money it doesn’t believe Apple owes the country, Cook said.
4. Apple Created Value Mainly in the U.S. and it should Pay the Majority of its Tax there: Apple’s R&D efforts are central to the company’s value-creation said Cook. They represent the bulk of the company’s value and therefore should be taxed in the United States. This, he said, is why Apple pays the “vast majority of our profits” in the U.S. The EC’s ruling will retroactively change this longstanding international tax understanding, according to Cook.
5. Any Changes to the Law should be Applied to Future Earnings and not be made Retroactive: This may be Apple’s strongest legal argument. Indications are that the EC did not find Apple criminally liable. Instead, it was found to have benefitted from a system created by a member of the European Union. In other words, the entity that should be on trial here for creating the loophole Apple used should be Ireland and not the companies that benefitted from this opportunity.

The statement from Cook follows:

August 30, 2016 A Message to the Apple Community in Europe

Thirty-six years ago, long before introducing iPhone, iPod or even the Mac, Steve Jobs established Apple’s first operations in Europe. At the time, the company knew that in order to serve customers in Europe, it would need a base there. So, in October 1980, Apple opened a factory in Cork, Ireland with 60 employees.

At the time, Cork was suffering from high unemployment and extremely low economic investment. But Apple’s leaders saw a community rich with talent, and one they believed could accommodate growth if the company was fortunate enough to succeed.

We have operated continuously in Cork ever since, even through periods of uncertainty about our own business, and today we employ nearly 6,000 people across Ireland. The vast majority are still in Cork — including some of the very first employees — now performing a wide variety of functions as part of Apple’s global footprint. Countless multinational companies followed Apple by investing in Cork, and today the local economy is stronger than ever.

Steve Jobs visits Apple’s new facility in Cork, October 1980.

The success which has propelled Apple’s growth in Cork comes from innovative products that delight our customers. It has helped create and sustain more than 1.5 million jobs across Europe — jobs at Apple, jobs for hundreds of thousands of creative app developers who thrive on the App Store, and jobs with manufacturers and other suppliers. Countless small and medium-size companies depend on Apple, and we are proud to support them.

As responsible corporate citizens, we are also proud of our contributions to local economies across Europe, and to communities everywhere. As our business has grown over the years, we have become the largest taxpayer in Ireland, the largest taxpayer in the United States, and the largest taxpayer in the world.

Over the years, we received guidance from Irish tax authorities on how to comply correctly with Irish tax law — the same kind of guidance available to any company doing business there. In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.

The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process. The opinion issued on August 30th alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid.

The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed.

At its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money.

Taxes for multinational companies are complex, yet a fundamental principle is recognized around the world: A company’s profits should be taxed in the country where the value is created. Apple, Ireland and the United States all agree on this principle.

In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States. European companies doing business in the U.S. are taxed according to the same principle. But the Commission is now calling to retroactively change those rules.

Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.

Apple has long supported international tax reform with the objectives of simplicity and clarity. We believe these changes should come about through the proper legislative process, in which proposals are discussed among the leaders and citizens of the affected countries. And as with any new laws, they should be applied going forward — not retroactively.

We are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment. We firmly believe that the facts and the established legal principles upon which the EU was founded will ultimately prevail.

Tim Cook