WASHINGTON — Tensions between the U.S. and Europe ratcheted up on Wednesday after the European Commission ordered Apple Inc. to pay $14.5 billion in back taxes, a move that put U.S. multinational companies on high alert.
Treasury Secretary Jacob Lew weighed in on the action on Wednesday, saying the EC’s ruling undermines business confidence in Europe and indicates a “pattern” of probes that appear to be “aimed squarely at the U.S. tax base.”
The unexpected move by the EC, which is going after a major U.S. technology firm over taxes, has sparked a firestorm on Capitol Hill.
“As the head of the U.S. tax agency, I have been concerned that it reflects an attempt to reach into the U.S. tax base to tax income that ought to be taxed in the United States,” Lew said after a speech at the Brookings Institution here on the upcoming G-20 Leaders Summit in China. “What I don’t think is right is for these issues to be addressed in ways that undermine the spirit of economic cooperation and is inconsistent with well-established principles of tax law.”
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The EC, which is the executive body of the European Union, issued a ruling Tuesday stating that Ireland provided illegal tax incentives to Apple over several years and must now recoup as much as 13 billion euros, or $14.5 billion, from the company.
The EC ruled that Apple, which runs its European operations out of Ireland, received illegal and unfair “state aid” from Ireland through tax breaks that allowed the company to significantly reduce the amount of taxes it paid on profits from European sales.
Margrethe Vestager, the European Commissioner for competition, said Tuesday that two tax rulings granted by Ireland “artificially reduced Apple’s tax burden for over two decades, in breach of EU state aid rules” that have been in place since 1958.
She said the rules are designed to “ensure that companies can compete on equal terms” regarding taxation in each of the EU’s 28 member states in order to protect European taxpayers. Both Apple and Ireland said they plan to appeal the EC’s ruling.
The ruling has broad implications for multinational firms doing business in Europe.
The EC has been ramping up pressure on U.S. firms to repay taxes it claims they have avoided in countries including Luxembourg, the Netherlands and Ireland. Starbucks and Fiat’s tax payments have been found unlawful already, while McDonald’s and Amazon remain under investigation. Microsoft, Google and Facebook all have used the same tax practices in Ireland that the EC has ruled are illegal in the case of Apple.
Asked whether he believes the EC is targeting U.S. companies, Lew said: “I have raised the issue that the pattern of the actions certainly appears to be highly focused on U.S. firms.”
“[European officials] point to some smaller action against non-U.S. firms, but the largest actions do appear to be aimed squarely at our tax base,” Lew said.
“Our concern with the European Commission’s action is that it is using a state aid theory to make tax law,” Lew said. “It is doing it in a way that is retroactive and that overrides national tax authority in our view. And we think that it undermines the environment in Europe for international business because it creates an uncertainty that ultimately will not be good for the European economy.”
Lew said the U.S. has been working hard to find a bipartisan compromise in Congress that would allow the U.S. to tax a company’s profits overseas. The strategy has been labeled as “corporate inversion” whereby U.S. companies keep their profits overseas to reduce the tax burden on income.
Lawmakers have been calling for reform of the U.S. international tax system for the past few years and many expressed outrage that the EC is trying to obtain taxes that they argue are duly owed to the U.S. government.