Today, the European Union handed Apple a €13 billion tax bill (roughly about $14.5 billion). The European Commission’s (the executive branch of the EU) anti-trust investigation alleges that for over a decade Apple was able to avoid taxes on profits made in Europe, and to pay substantially less than other companies when Ireland granted Apple "illegal tax benefits." While Ireland is a member of the EU, it also has some of the lowest corporate tax rates in not just Europe, but the world.
What does this mean for Microsoft?
So how does this affect Microsoft or many other multinational corporations for that matter?
Microsoft, like virtually every multinational corporation, keeps as much of its profits as possible in countries with low tax rates. Some decry this as exploiting loopholes, others say companies are just playing by the rules governments themselves created.
Either way, corporations have a fiduciary responsibility to their shareholders to maximize the company’s value. This directly translates into minimizing how much money goes out the door to the taxman instead of business operations.
And when the corporate tax rate in the United States is 35%, and some EU countries with rates of 20%, 25%, 29% or 33.99%, corporations are going to shop around for the best deal. And as we reported earlier this year, a report by Moody’s estimates together that Microsoft, Apple, Alphabet, Cisco, and Oracle hold a total of $500 billion in cash offshore.
Ireland has a corporate tax rate of just 12.5%. So a great deal of companies’ offshore cash is held in Ireland. In fact, the south side of Dublin has earned the nickname “Silicon Docks” because of all of the tech company headquarters popping up there over the past few decades. And as we reported earlier this summer, Microsoft has avoided £100 million in taxes in the UK through an arrangement with the UK tax authority that lets them report earnings in Ireland.
Microsoft's offshore holdings
In total, Microsoft has over $100 billion sitting offshore in what's essentially cash, like short-term investments. It isn’t clear how much of this is actually in Ireland because the company moves money around through multiple tax structures.
But now that the EC has ruled Apple as non-compliant with EU taxes because of their treatment by Ireland, a question begins to form for Microsoft and many many other corporations. What kind of precedent does this set for any company doing business in Europe? Could Microsoft be getting a knock on the door at their Dublin office from the EC’s anti-trust unit?
The case against Apple cites that they paid an effective tax rate of .005% in Ireland due to a special arrangement with the Irish government. It is unclear if this special arrangement is extended to other multinationals or only Apple is paying a tax rate well below Ireland's stated 12.5% corporate tax rate. So it is too early to tell if Apple's case is an anomaly or the norm.
It also isn’t clear what the fallout will be because many sides are already disputing the ruling. The Wall Street Journal reports that Apple is planning to appeal. So too is the Irish government, which is in a strange position of being against the European Commission's attempts to provide them a big tax payoff.
The U.S. Treasury Department also made a statement “arguing that the bloc unfairly targets American companies and acts inconsistently with international tax norms.” It may be years before we know the final verdict on this case and any legal precedent is set. But with offshore profits and tax loopholes becoming such a significant issue, both on this side of the Atlantic and in Europe, it’s always possible too that some political reform of the tax code could be on the horizon.