Apple will have to pay up to $14.5 billion plus interest in back taxes to Ireland after the European Union found Tuesday that the U.S. technology giant received illegal tax benefits over 11 years.
The ruling is a dramatic escalation by the EU executive Commission in its battle to have multinationals pay their fair share in the region, where popular outrage over alleged corporate tax dodging is common after years of financial crisis and austerity budgets.
The EU says that many multinationals--including Starbucks, Fiat and Amazon--struck deals with EU countries to pay unusually low tax in exchange for basing their EU operations there.
EU Competition Commissioner Margrethe Vestager said that a three-year investigation found Ireland granted such lavish tax breaks to Apple that the multinational's effective corporate tax rate on its European profits dropped from 1 percent in 2003 to a mere 0.005 percent in 2014.
That last tax rate meant that for each 1 million euros in profits, Apple paid just 50 euros in taxes, Vestager told a news conference.
"Member states cannot give tax benefits to selected companies_this is illegal under EU state aid rules," Vestager said.
"Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to 13 billion euros ($14.5 billion), plus interest," the Commission said in a statement.
For Ireland, a country of barely 4.6 million people, that sum would be a huge windfall--equivalent to over 2,800 euros ($3,150) for every man, woman and child.
And yet the country's government said it would appeal the decision, arguing it had granted no favorable treatment to Apple.
"Ireland's position remains that the full amount of tax was paid in this case and no state aid was provided," the government in Dublin said in a statement. "Ireland does not do deals with taxpayers."
The country has for years offered low corporate tax rates to multinationals to benefit from the jobs they create locally. Apple has 5,500 workers in Ireland, making it one of the biggest private-sector employers.
Apple said in a statement that it had followed the law and paid every cent of the taxes it owed. It said it would challenge the EU action in the European courts, and predicted it would be vindicated.
Apple shares were down 1.1 percent in premarket trading in New York, a modest drop that reflects expectations that Apple can afford the settlement, should it stand. Apple made $10.5 billion in the first three months this year alone.
The EU investigation found that Apple had used two fully owned Irish subsidiaries, Apple Sales International andApple Operations Europe, to record all its sales in Europe in Ireland, rather than in the countries where the transactions actually took place.
That internal company practice, as well as two favorable Irish tax rulings in 1991 and 2007, "enabled Apple to avoid taxation on almost all profits generated by the sale of Apple products in the entire EU single market," which now encompasses 28 nations and more than 500 million consumers, according to the European Commission.
Apple accused the EU executive body of engaging in efforts "to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process."
"The Commission's case is not about how much Apple pays in taxes, it's about which government collects the money," the company said in a statement. "It will have a profound and harmful effect on investment and job creation in Europe. Apple follows the law and pays all of the taxes we owe wherever we operate. We will appeal and we are confident the decision will be overturned."
The EU also risks fueling tensions with the U.S., which argues that the EU is singling out American companies.
Following the bloc's decision on Apple, the U.S. Treasury Department voiced disappointment, saying retroactive tax assessments by the EU Commission "are unfair, contrary to well-established legal principles and call into question the tax rules" of the individual countries in the EU.
What's more, the U.S. government agency warned in a statement, the Apple ruling "could threaten to undermine foreign investment, the business climate in Europe and the important spirit of economic partnership between the U.S. and the EU."
Last week, the U.S. Treasury Department had accused the EU of using a different set of criteria to judge cases involving American companies, terming the development "deeply troubling."
The Irish finance minister, Michael Noonan, said he would seek approval from the Irish Cabinet to legally challenge the EU Commission's ruling.
"It is important that we send a strong message that Ireland remains an attractive and stable location of choice for long-term substantive investment," Noonan said. "Apple has been in Ireland since the 1980s and employs thousands of people in Cork."
Peter Vale, a Dublin-based corporate tax expert for the accounting firm Grant Thornton, calculated that Tuesday's decision, if upheld, could ultimately cost Apple 19 billion euros ($21 billion) because the EU order also includes interest for unpaid taxes going back more than a decade.
The EU decision will require the Irish tax collection agency to issue a demand soon to Apple for payment, Vale said. Any money handed over by the company will be placed in a hands-off escrow account pending what could be years of litigation before the European Court of Justice in Luxembourg, he said.