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E.U. competition chief asks Apple for details on tax arrangements

(Kimihiro Hoshino/Agence France-Presse/GettyImages)

European authorities have asked Apple to share details of its recent tax arrangements as the company faces an order to pay $14.5 billion in back taxes while leaked documents have revealed new details of its alleged tax planning.

“I have been asking for an update on the arrangement made by Apple, the recent way they have been organized, in order to get the feeling whether or not this is in accordance with our European rules but that remains to be seen,” Margrethe Vestager, the European Union's commissioner for competition, said Tuesday at the Web Summit, an international tech conferece in Lisbon.

Just a day earlier, Apple's tax strategies were revealed in reports by the Guardian and the New York Times, including the company's alleged moves to shift key foreign subsidiaries to an island tax haven. The reports relied on leaked material from the so-called Paradise Papers, a cache of 13 million secret corporate records obtained by the German newspaper Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists and dozens of media outlets.

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Vestager said that her request for more information from Apple came before those reports were published and that it is too soon to say whether newly leaked material about corporate tax affairs will prompt investigations. “That remains to be seen if we will open more cases after the Paradise Papers,” she said.

In a statement posted to its newsroom blog Monday, Apple cited what it said were numerous inaccuracies in the news outlets' reporting, including that changes Apple made to its corporate structure were “designed to preserve tax payments to the United States, not to reduce its taxes anywhere else.” Apple also said that no operations or investments were moved from Ireland, where it has overseas operations. In 2016, the E.U. ordered Ireland to collect $14.5 billion in back taxes from the tech giant.

The reports gleaned from the Paradise Papers appear to show how Apple maneuvered to shield billions of dollars in profit from government authorities. The alleged revelations of Apple's tax avoidance measures, which allow the company to maintain an “ultra-low tax rate” come just as President Trump and congressional Republicans move to enact sweeping tax reforms, including a significant reduction in corporate taxation. Apple disputes that characterization and says that it does not have a low tax rate.

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According to the reports, Apple began looking for a new location to base its key foreign subsidiaries in 2014, after the European Union began to scrutinize the company's tax arrangements in Ireland. With the help of Appleby, a Bermuda-based law firm that has partnered with other tech companies to create tax havens, Apple chose Jersey, a small island that sits between England and France. Apple pays taxes at only a fraction of the corporate rate on its overseas profits, the reports said.

Reports of Apple's alleged tax arrangements arrived as Republicans are vying to lower the federal corporate income tax rate from 35 percent to 20 percent. The GOP plan would also cut the tax rate on repatriated foreign earnings from 35 percent to 12 percent, said Scott Kessler, an analyst at investment research firm CFRA. “Assuming that what we have seen essentially becomes the law, I would imagine that most companies with overseas cash are going to repatriate a very large amount of that capital to the U.S.," he said.

The largest overseas stockpiles are all claimed by technology companies, according to data compiled by Bloomberg. Apple tops the charts at $252 billion, followed by Microsoft, Cisco and Google parent company Alphabet. Apple says that almost 70 percent of its total global profits are earned abroad.

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Kessler said Apple would be a major winner if the repatriation rates were to change, not just because of the sheer volume of its foreign stockpile but also because the company has so much of its total cash overseas.

Apple chief executive Tim Cook supports legislation that would shrink the corporate tax rate and lower the rate at which foreign earnings are brought back to the United States. During a recent interview with NBC, Cook said corporate tax reform would lead to more Apple jobs in the United States.

But the proposed tax plan could have adverse consequences for multinational corporations such as Apple, experts said. Under the bill, companies that operate in zero-tax jurisdictions would be subject to a new 10 percent tax on foreign profits, ostensibly eliminating overseas tax havens, said Martin Sullivan, chief economist at Tax Analysts. International companies also would be subject to a new excise tax that would discourage them from using transactions between their American bases and overseas subsidiaries to concoct tax deductions; such royalty payments would be taxed at 20 percent, Sullivan said.

And although the tax plan does remove some of the motivation for companies to stash their foreign earnings overseas, it's unclear whether a lower repatriation rate would lead companies to abandon their elaborate tax planning, Sullivan said.

“They would have to throw out the old playbook that they have been using for years,” he said. “And they would have to figure out methods to get around these new rules, which are tougher.”