A pedestrian stands across the street from the new Apple Inc. flagship store at Union Square during the grand opening in San Francisco, California, U.S., on Saturday, May 21, 2016. The flagship location boasts 40-foot-tall doors opening onto the square and comprises five departments, or what Apple prefers to call "features." Photographer: David Paul Morris/Bloomberg
By the time Apple took off it was a 30-year-old company © Bloomberg

The US has launched a stinging attack on the European Commission in a last-ditch bid to dissuade Brussels from hitting Apple with a demand for billions of euros in underpaid taxes.

In a sharp escalation of the transatlantic feud, the US Treasury department issued a rare warning on Wednesday that Brussels was becoming a “supranational tax authority” that threatened international agreements on tax reform.

The criticism comes as the European Commission is finalising a probe into an alleged sweetheart tax deal that Ireland granted to Apple, the biggest single case in a crackdown on corporate tax avoidance across the EU. After prolonged delays, a definitive ruling is expected next month. 

The Obama administration is stepping up its assault on the probe having failed to deter Brussels earlier this year by arguing publicly that it was setting unfair and “disturbing” precedents and singling out US companies. 

The Apple probe, which began in mid-2013, centres on “transfer pricing”, a practice by which companies move profits to low-tax jurisdictions through internal transactions. The commission has accused the Irish authorities of “reverse engineering” tax opinions to help Apple minimise its tax bill. The company has faced criticism in the US Senate for paying a 2 per cent corporate tax rate in Ireland, far lower than the headline 12.5 per cent rate.

In a white paper commissioned by Treasury secretary Jack Lew, the US touched on sensitivities over Brussels’ accountability by suggesting that the novel legal approach of the directorate leading the probe amounted to a power grab. 

“This shift in approach appears to expand the role of the [competition directorate] beyond enforcement of competition and state aid law . . . into that of a supranational tax authority that reviews member state” decisions on corporate tax, it said. 

The Obama administration has said little about potential retaliation, but the white paper said “the US Treasury department continues to consider potential responses should the commission continue its present course”.

A commission spokeswoman said there was no bias against US groups in the tax clampdown and added that EU law applied indiscriminately to all companies operating in Europe. “The commission has been in contact with US authorities on this matter on several occasions already and remains available to offer all necessary further clarifications,” she said.

Earlier this year the Senate finance committee urged Mr Lew to consider imposing a double tax rate on European companies if the commission directed Apple to pay back-taxes in Ireland. 

Margrethe Vestager, EU competition commissioner, has already directed the Netherlands to recover €20m to €30m in back taxes from Starbucks. Luxembourg must recover a similar amount from Fiat Chrysler Automobiles and investigations continue into the retailer Amazon

But the Apple case is much larger, as the underpaid tax could run to billions of euros if the commission rules against Ireland. JPMorgan, investment banker to Apple, has said the company could be on the hook for $19bn in a worst-case scenario. 

The Treasury department said the “commission’s pursuit of retroactive recoveries is not only in tension with the G20’s efforts to emphasise tax certainty, but also sets an undesirable precedent that could lead to other tax authorities . . . [seeking] large and punitive retroactive recoveries from both US and EU companies”.

The Irish authorities and Apple are bracing for an adverse ruling, which they would challenge in the European courts. Each has denied that tax rulings issued by Dublin conferred a selective advantage to Apple.

Tim Cook, Apple’s chief executive, has insisted that the company complied fully with tax law and did not do anything wrong. This month he told the Washington Post that if Apple did not get a “fair hearing” in Brussels “then we would obviously appeal it”.

The OECD club of rich countries has developed its own guidelines on aggressive transfer-pricing arrangements. The Treasury said the commission’s approach conflicts with these.

“In contrast to the OECD [guidelines], no country will have played a role in developing the commission’s guidance, which also would not be incorporated into bilateral tax treaties between the United States and [EU] member states,” the Treasury paper said. 

It notes that the tax authorities in the US and EU member states have “entire departments whose sole responsibility is to examine transfer pricing issues”, while pointedly referring to the commission as a “non-tax agency”. 

By taking the side of US companies on the issue, Mr Lew has drawn criticism from anti-avoidance campaigners who say he should be standing up to businesses trying to escape US taxes. Treasury says it is doing a lot of other work to crack down on avoidance.

The US’s earlier lobbying efforts included trips to Brussels by Robert Stack, the Treasury official in charge of international tax policy, and a public letter in February from Mr Lew to Jean-Claude Juncker, the commission president.

Additional reporting by Tim Bradshaw in San Francisco

Letters in response to this article:

US is levying a new global tax—and it is huge / From Keith Craig

Joined-up thinking urged / From Geoff Key

Show some respect — and reciprocal commitment / From James Anderson

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