Apple to Pay €318 Million for Tax Fraud in Italy

Numerous sources, including The Telegraph, are reporting that Apple’s Italian subsidiary has agreed to pay a €318 million fine for tax fraud.

A spokesman for Italy’s tax office confirmed that the tech company’s Italian subsidiary had agreed to pay the sum to end the investigation, with the amount paid in line with what the agency had asked for.

Citing the Italian newspaper La Repubblica, The Telegraph says:

Apple had been accused of tax evasion over five years, from 2008 to 2013, by booking sales in Italy through its Irish subsidiary.

The Telegraph also reminds readers of Tim Cook’s statement that Apple “every dollar and euro it owes in taxes.”

This is actually a pretty good deal for Apple. This settlement was negotiated based on estimates that Apple owed €880 million in corporation tax. So they still managed to swindle the country for more than half a billion euros.

As Reuters recently pointed out:

“A U.S. Senate investigation in May revealed that Apple structured its operations so that the vast majority of its non-U.S. profits are reported in Ireland, by companies which, through an unusual feature of Irish tax law, are not tax resident in that country.

“ASI [Apple Sales International] contracts with mainly Chinese companies to manufacture iPads and iPhones. ASI then sells these products to another Irish company which resells them to retail subsidiaries in Italy and other European countries.

“The pricing of the inter-company transactions ensures that the lion’s share of the profit ends up with ASI, the Senate report said. Low profits in countries like Italy mean low tax payments there.

“Countries usually consider companies registered on their territory to be tax resident there but Irish law allows ASI to be tax resident nowhere. This means its profits go untaxed.”

As The Guardian says:

This month, the Apple chief executive, Tim Cook, described accusations that the world’s richest company was sidestepping US taxes by stashing cash overseas as “political crap” and insisted: “We pay every tax dollar we owe.”

That may be true for dollars, but apparently it’s not the case for other currencies.

Italy may be the first of many EU companies that claim their due from Apple, who has long siphoned off sales through its Irish subsidiary, which benefits from an extremely beneficial tax regime. That tax deal is under investigation by the European Union.

Apple is, of course, far from being the only company to “avoid” taxes in this manner. Such large tech companies as Google and Facebook, as well as Amazon, use the same techniques. I hope they, too, pay their fair share.

25 thoughts on “Apple to Pay €318 Million for Tax Fraud in Italy

  1. Two of the big problems with corporate tax law are shown in this situation. 1) Much of the tax law in many countries is written for the benefit of the corporations. 2) Every country gives unreasonable legal tax advantages to some group of corporations, and a few countries give advantages that make them international havens for legal advantages that many of us see as outrageous. A third problem is that no one knows what the proper tax payment is for any individual or corporation. Every government tax agency is in court all the time, arguing that they deserve more taxes, while the corporations argue that they should pay less. The governments lose some of the time, and the corporations lose other times. Some of these decisions are reversed on appeal. My point is that no one, not even the courts, can give a definitive answer on what the proper payment is.

    Until the tax codes are clear, and governments stop trying to give unfair treatment to certain companies, or screw other countries out of their taxes, then this situation will continue. Tim Cook could argues that Apple pays all the taxes that it legally owes. In fact, Apple may be paying more taxes that it legally owes. Apple lost this tax battle, but it has won others. On average, are they underpaying or overpaying? No one will ever have a clear answer to that question. It’s one more part of a system that sucks, and Apple is doing what most big companies do, following the convenient laws that corporations helped write.

  2. Kirk, really — “Tax fraud”? You should know that that phrase has a very specific meaning. And it is utterly inapplicable to the reported facts. I’m disappointed that you would stoop to such click-bait crap.

    Between Italian tax law, Irish tax law, US tax law and international tax treaties, there is not just one simple answer as to how much tax to pay. Companies interpret the maze of convoluted (and frequently conflicting) laws, regulations, interpretations, court cases and administrative guidance…and naturally try to find the most favourable result for themselves. Tax authorities seek the opposite. Check the financial statements of ANY multinational corporation and you’ll find that they constantly engaged with the various taxing authorities on a range of issues. THAT’S NOT FRAUD. Responsible individuals would be charged with a criminal offence if any were suspected.

    • Did you read the articles I linked to? They use the term “tax fraud.” And they point out that this settlement does not end the ongoing criminal investigation.

      • You pay taxes according to fixed rules, but philips and apple do not: they negociate. But don’t call it coporatism ;-)

  3. Never understood the inevitable and furious pushback from Apple *users* against this kind of simple factual reporting. Y’know, you can love the products and not be a fan of many aspects of their corporate behavior.

    I know it’s a baffling concept, but users and shareholders are not necessarily the same folks, and don’t necessarily share the same interests.

    • The issue is that these stories are factually wrong. The Italian authorities–or possibly just the press–alleged “fraud” but the settlement has no criminal charges laid. If they actually had evidence of fraud, someone would be facing trial. So it was just hyperbole.

      Regarding Ireland, the Irish government crafted the set of laws that Apple is operating under. The laws were *designed* to attract companies to Ireland. How can Apple–or any other multinational–be “blamed” for taking advantage of an opportunity created by Ireland?

      By the same logic, The Beatles should have been forced to pay UK taxes (approaching 95% of income!!) in the 1960’s. Instead they left the UK and “avoided” paying their rightful share. Were they committing fraud?

      • Yes, there is on ongoing criminal investigation.

        The Beatles (AFAIK) all left the UK, and, as they were not fiscal residents of the UK, only paid taxes in the countries they lived in. Only two countries in the world tax their citizens who don’t like in them: the US and Eritrea.

        As for the comparison between the Beatles and Apple, the Beatles were avoiding taxes, and Apple, in this case, was defrauding Italy by reporting Italian sales to another country. There is a very big difference.

        Don’t defend Apple; this never went to court, and they negotiated a settlement, so they have tacitly admitted that what they did was illegal.

        • Sorry, but this is exactly why Tim Cook called this political bullshit. Sensationalist claims get tossed around the internet and are accepted as truth.

          You cannot buy your way out of criminal tax fraud. Again, if the Italian authorities had actual evidence of fraud, they would be pursuing charges. They would not accept a settlement and certainly not before the criminal investigation was complete.

          Since they apparently have reached a settlement and no charges were announced, there was no fraud.

          Further, Apple has no need to commit fraud when there are several well-known arrangements that facilitate legal tax minimization. It is commonly believed that Apple has employed the “Double Irish” technique:

          https://en.wikipedia.org/wiki/Double_Irish_arrangement

          Why on earth would they pursue a scheme that directly contravenes the law (any law) when there are legal means to achieve the same end?

          • But there is still an ongoing criminal investigation. Then investigation has not been shut down following this payment.

            • It’s a blackmail game. Apple can bring the dollars to the USA (chickens coming home to roost) but at what (tax) price. And government do need more money. Italy (PIGS) is bankrupt. Uk too, but they can print more there own way to war.

    • To give a sense of the complexity, consider research costs. Apple spends _a lot_ of money to investigate possible new products. “A thousand times ‘no’ for every ‘yes’.” Such costs are tax-deductible–but how should they be allocated to Apple’s various taxable entities? Such things are not prescribed by the taxing authority; companies are free to choose a reasonable basis. Should the basis be the past sales volume? Forecasted future volume? (What do you do with wild swings in foreign exchange rates?) On the basis of the potential market size (population) in that jurisdiction? Something completely different?

      Between us, we can come up with *many* reasonable schemes to allocate that cost that may result in very big differences in the amount allocated to any one jurisdiction. The whole pie remains the same–it is just how it is spit up. A jurisdiction, like Italy, may not like the results of the chosen allocation system. I believe *that* is the heart of the reported issue. So the taxpayer and the tax authorities threaten, bluster…and eventually negotiate a revised allocation system and come up with a settlement. You cannot find a multinational corporation that does not have such disputes.

      Now, I’ve only talked about research costs–there are a lot of other costs that need to be allocated. Eg Tim Cook’s renumeration..and the rest of the senior executive team…etc. Oh, and maybe an allocation of the cost of developing and maintaining all of Apple’s operating systems. Welcome to the world of international tax.

      • See GAAP and IFSB. These are international standards (though it seems that the US doesn’t like GAAP) that determine how such charges are allocated. This isn’t rocket science; accountants have been dealing with that sort of thing all the time.

        • I believe you mean IFRS. The first hit for IFSB is the Islamic Financial Services Board! ;)

          You apparently haven’t guessed that I’m a professional accountant. GAAP stands for Generally Accepted Accounting Principles. “Principles”–not detailed rules specifying exactly how to calculate each and every number. We’re accounting professionals because we assess the objectives, facts and constraints* of each individual situation and develop a reasonable solution. Minimizing taxes is a common objective constrained by the facts of the business and the legal and regulatory constraints.

          This sort of cost transfer is part of the broader issue of transfer pricing (see Wikipedia).

          * I can still hear my instructor’s voice ringing in my ears: http://www.rosen-associates.com/about.php

          • Oops, sorry about the acronym! :-)

            But the point is, there are standardized way to allocate these costs, and the issue at hand is one of crediting sales to a company outside the country in which the items were sold.

            • I accept that you know about Bob Dylan. You ought to accept that a professional accountant with multi-national experience knows something about transfer pricing. There is no standardized way to allocate costs. The costs are invoiced from one company to another which is probably where the inaccurate ‘sales outside the county’ nonsense came from.

            • All due respect, but since Apple has made this payment rather than being fine, they are clearly admitting that they did something wrong.

            • Here’s how I would expect it to work, and tell me if I’m wrong.

              Apple is a US company. They have subsidiaries in other countries there they operate. I assume that, if they are only selling items through a retail channel, they don’t need subsidiaries, but they fact that they have a retail presence, selling goods directly, means they do need one.

              Each of those subsidiaries is beholden to the laws of the country where they are located; so the Italian subsidiary is an Italian company, paying taxes in Italy.

              If Apple is selling hardware through that company, yet billing it to ASI, then that sounds pretty illegal to me.

              Again, Apple has admitted wrongdoing by negotiating a settlement. So they were clearly doing something wrong.

            • You are largely correct–except about “wrongdoing”. There are a range of solutions as to how much cost to allocate to each of the subsidiaries rather than one “right” answer. Apple was using one solution; Italy wanted another. Note that Italy initially demanded 800 million Euros and settled for 300. Italy could have dragged this on for years, if they wanted, and continued to plant a few fraud whispers to damage Apple’s reputation. I expect that is Apple’s major motivation for settling. They negotiated a settlement in the middle and want to put it behind them.

              Keep in mind that if the cost allocation to Italy is reduced, it will be increased elsewhere (UK, France, Germany, Ireland, …??). Apple will get some relief on the taxes paid in those places. The amount of relief depends on the effective tax rate in those jurisdictions, so we don’t know the net cost to Apple. And I highly doubt it will make the news when they get a refund!

            • Apparently, the issue was the way they allocated sales, not costs. (Unless by costs you mean the cost of the inventory they sold in Italy.) They seem to have allocated it all to ASI, which is domiciled in Ireland, rather than to their Italian subsidiary.

  4. I’m not sure which report you’re referring to specifically but it is very common for the media to confuse sales revenue and net income, the latter being after all costs are deducted. (Technically, “net income for tax purposes” which is before the deduction of income tax expense and after adjustment for certain costs treated differently for accounting and tax purposes.)

    Apple will have created a situation where as much income as possible is recorded in Ireland to benefit from the very low tax rates there. They can achieve that by transfer pricing their costs through Ireland (low tax) and into jurisdictions like Italy (higher tax). Again, there is no sensible reason to falsify their sales reporting when you have (legal) control over cost allocation.

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