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Dec. 20, 2016, 2:20 a.m. EST

Apple hits back at EU's tax order

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By Sam Schechner

Apple Inc. on Monday fought back against the European Union's decision that EUR13 billion ($13.6 billion) in tax breaks the company received from Ireland were illegal, as the feuding sides dug in for a protracted legal battle.

The iPhone maker filed its appeal on the day the European Commission disclosed new details of the 130-page decision from August, which ordered Ireland to recoup the allegedly unpaid taxes from Apple.

The filings highlight sharp disagreements between the commission on one side and Ireland and Apple on the other, presaging a yearslong battle in the EU's top courts that will determine the extent of the bloc's powers to rein in alleged tax avoidance by multinational companies doing business in Europe.

The EU contends that Irish tax authorities have been "inconsistent" and "not systematic" in their treatment of global companies such as Apple.

The commission, the EU's executive arm, asserted that two Apple units registered in Ireland brought in $130 billion in profit over an 11-year period that should have been taxed at Ireland's 12.5% corporate tax rate, but instead remained largely untaxed anywhere.

Ireland, which filed its own appeal last month, on Monday said the EU overstepped its powers by trying to rewrite Irish tax law.

Apple complained about the fairness of the proceedings, which began in 2014. Apple didn't make its appeal public.

"It's been clear since the start of this case that there was a predetermined outcome," an Apple spokeswoman said, arguing that the EU "took unilateral action and retroactively changed the rules" to selectively target the California firm.

If Ireland and Apple successfully make their case, the EU could see the curtailment of a powerful tool aimed at limiting the help governments can give to individual companies. If the EU prevails, it could call into question tax arrangements by a swath of companies that have relied on tax rulings from authorities in Ireland, Luxembourg and other countries.

"It sets a very worrying precedent," said Julia Macrae, Apple's tax director for Europe, Middle East, India and Africa.

The tax bill on Apple is by far the highest that Brussels has so far levied in a series of cases against corporate tax deals, some targeting American firms including McDonald's Corp. and Amazon.com Inc. The commission argues the deals constitute illegal "state aid" under EU law because they give specific firms advantages over rivals in the form of lower tax bills.

The U.S. Treasury Department on Monday said that the EU's decision is "retroactively applying a sweeping new State aid theory that is contrary to well-established legal principles" and "threatens to undermine the overall business climate in Europe."

At issue in the Apple case is whether two Irish tax rulings granted to Apple in 1991 and 2007 gave a form of special treatment to the company, or whether they just reiterated an interpretation of Irish tax law as it was applied more generally.

Those rulings allowed two Irish-registered Apple units to attribute only a sliver of their $130 billion in profit to Ireland, based on what Ireland and Apple say is a reasonable split, given that almost all of Apple's intellectual property is developed in the U.S., not Ireland. Over the 11-year period between 2003 and 2014, the units paid a total of about $90 million in taxes, almost all to Ireland, the EU decision says.

The EU decision, which was published weeks after it was rendered to give Apple time to edit out sensitive information about its business, argues that the rulings gave Apple a selective advantage because Apple and Ireland offered no specific evidence to justify how the profit was allocated. The EU also argued the rulings deviated from the "arm's-length principle," a standard for setting commercial conditions between units of the same company as if they were independent.

The EU goes on to say all of the profit from the two units should be allocated to Ireland, because Apple's unit there paid cost-sharing fees to Apple in the U.S. in return for the right to use the company's intellectual property. But the EU adds that the amount could be reduced if Apple paid more to share costs with the U.S. or if Apple paid more tax on that profit to other countries, such as Italy.

Apple said that its appeal disputes the allocation of nearly all of its overseas profit to Ireland because Apple doesn't manage or create most of its intellectual property in Ireland, but rather handles mostly logistics and distribution.

"They don't dispute that we should be taxed based on the activities that are being performed in Ireland," Apple's Ms. Macrae said. "But the way they calculate that gives clearly a bizarre outcome."

Ireland said Monday that the EU overstepped its authority and misinterpreted Irish law with the decision by asserting a novel interpretation of international tax law. It contends that its tax rulings "did not depart from 'normal' taxation" because it followed a portion of Irish tax code that says nonresident companies shouldn't pay income tax on profit that isn't generated in Ireland.

But in Monday's document the EU shot back that its examination of other tax rulings based on that law "demonstrates no consistent criteria are applied to determine the allocation of profits to Irish branches" and that, in the absence of objective criteria, "those rulings should be considered to confer a selective advantage" on Apple.

Write to Sam Schechner at sam.schechner@wsj.com

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