Apple warns of 'material' financial damage from European tax probe

Apple has warned investors that it could face "material" financial penalties from the European Commission's investigation into its tax deals with Ireland - the first time it has disclosed the potential consequences of the probe.

Under US securities rules, a material event is usually defined as 5 per cent of a company's average pre-tax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5bn.

The warning came in Apple's regular 10-Q filing to the Securities and Exchange Commission on Tuesday, a day after it reported first-quarter revenues of $58bn and net income of $13.6bn.

Brussels has the power to order Dublin to reclaim 10 years of tax advantages granted to Apple if it finds that deals struck in 1991 and 2007 were unlawful.

Both the Irish government and Apple have consistently denied any wrongdoing and declined to comment on the size of any fine. However, some Brussels officials suggest any ruling could set a new record for a state-aid investigation penalty by comfortably topping €1bn.

Apple said in the filing: "If the European Commission were to conclude against Ireland, it could require Ireland to recover from the company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material."

Apple did not have any further comment on its filings, but in an interview last year Apple finance chief Luca Maestri told the FT: "It's very important that people understand that there was no special deal that we cut with Ireland. We simply followed the laws in the country over the 35 years that we have been in Ireland."

Ireland defends its national tax policy and has said that it will appeal immediately to the European Court of Justice if the decision goes against it.

A final decision from Brussels, which is expected before the end of June, represents an important test case for Margrethe Vestager, the new competition commissioner. Her ruling will give an indication of her stance on tax planning by multinationals.

The EU is also investigating tax breaks given to companies including Starbucks, Fiat and Amazon. Apple is also embroiled in its investigation into digital-music licensing.

The commission is investigating whether the Irish government broke European state-aid rules by giving Apple a tax deal that was unfairly beneficial to the iPhone maker, which bases its European headquarters in Cork.

In a highly critical preliminary decision published in September, the commission said the Irish authorities conferred a "selective" advantage on Apple.

While there is no precise definition of what constitutes a material impact on its financial results, the magnitude of Apple's revenues, profits and annual tax payments mean that any penalty could run into billions of dollars.

"We are talking about potentially very significant amounts of money," said Alfonso Lamadrid de Pablo, a senior associate at Brussels law firm Garrigues, "that no one - perhaps including the commission - is able to quantify at this stage."

He added that the nature of the investigation makes it hard to determine how much tax Apple should have paid in Ireland had the rulings applied what are called "arm's length transfer-pricing principles" between its subsidiaries to the commission's satisfaction.

"We know that we didn't do anything that was against the law," Mr Maestri said last year, "and we are very confident that through the investigation it will be shown there was no selective treatment in our favour at any point in time."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation