Apple and EU Clash in Public Ahead of Court Fight Over Tax Bill

(Bloomberg) -- Apple Inc. and European Union competition watchdogs clashed on a public stage for the first time since regulators ordered Ireland to claw back a record-breaking 13 billion euros ($13.9 billion) in back taxes from the iPhone maker.

The EU’s August decision is “seriously flawed” and implies Apple products such as its best-selling smartphones are designed in the Irish city of Cork, rather than the U.S., a lawyer for the California-based tech giant argued during a state-aid conference in Copenhagen Friday. An EU official hit back, saying the company was creating a “very nice tax story.”

“There are great products in Ireland, but it’s not the iPhone,” said Andreas von Bonin, an attorney for Apple at Freshfields Bruckhaus Deringer. “The iPhone is a U.S. product and not an Irish product.” The EU’s conclusion is not in line with “reality.”

In an order that reverberated across the Atlantic, the EU slapped Apple with the multi-billion euro bill, saying Ireland granted unfair deals that reduced the company’s effective corporate tax rate to as little as 0.005 percent in 2014. The U.S. Treasury said the EU was making itself a "supra-national tax authority" that could threaten global tax reform efforts.

The EU decision focused on how Apple allocated almost all its European sales profits to what the regulator said was a head office not subject to tax.

U.S. ‘Value Creation’

“The value creation happens in the U.S., the distribution logistics happen in Ireland,” said von Bonin. “Therefore, under the international tax rules, the profit should be attributed to the U.S. and the profit should be attributed to the U.S. parts of” the Irish units.

Apple is “creating a very nice tax story,” said Karl Soukup, a director in the European Commission’s competition arm. “It’s about fog and creating perceptions” but what Apple is doing is “mixing up Apple Inc. and the head office” of the Irish units as if they were one.

“There’s one story but I think it doesn’t really hold,” said Soukup, adding that this is made clear in the commission’s written decision. For the commission, Apple Inc. “is one thing” and the Irish units and their head office are another.

“When we started to look into this head office, what we found is that this head office in fact does not exist. There is no address, there are no employees, there are no premises, there are in fact no real activities,” said Soukup. “The only thing which exists are the minutes of the board meetings.”

‘Head Office’

The commission has looked in detail at these minutes and concluded that board members were granting “proxies to lawyers, to confirm the annual accounts, to fix the yearly dividends and to give the cash management to an external company,” but “nothing in these minutes suggests that this head office would have discussed anything which would have really to do with managing the operations of Apple in Europe,” said Soukup.

Ireland last month filed its appeal against the EU decision after Finance Minister Michael Noonan repeatedly said that the country “fundamentally disagrees” with the commission’s analysis and was left with no choice than to go to court.

The EU General Court in Luxembourg isn’t likely to come to very quick decisions, Marc van der Woude, one of the court’s judges, said last month.

“It’s a serious flaw” in the commission’s case to focus so much on the board minutes, “which are not very telling,” said von Bonin. The commission “has chosen to disregard what we presented as explanation and evidence about how this company functions, where the value is created.”

“This is the position that we will have to battle about in the court: If you ask where the profits from the intellectual property have to be allocated,” in Apple’s view this happens where the “strategic decisions over this IP are taken, where the IP is developed and where the decisions are taken.”

Apple’s stance mirrors that of the Irish government. “Look at the small print" on an iPhone, Noonan said after the EU released its ruling in August. "It says designed in California, manufactured in China. That means any profits that accrued didn’t accrue in Ireland, so I can’t see why the tax liability is in Ireland.”

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net. To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Peter Chapman, Giles Turner