Europe Economy

Apple’s Irish tax threat: What you need to know

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Implications of Ireland's tax dealings with Apple
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Apple is in line for a fine of at least a billion euros ($1.1 billion) following a long-awaited ruling later Tuesday from the European Commission over its tax bill in Ireland.

CNBC breaks down what you need to know about this crucial case.

What is Apple supposed to have done?

Following two tax rulings from Irish officials, one in 1991 and one in 2007, Apple, which employs around 5,500 people in Ireland in its European headquarters, gained an extremely low tax rate on its European earnings. The European Commission believes that this so-called "sweetheart" deal gave Apple an unfair advantage compared to other companies, and constitutes a breach of state aid rules.

In recent years, Apple has paid a tax rate of less than 1 percent on some of its European sales, via a complicated tax structure whereby its intellectual property is held in Irish subsidiaries, which are not resident anywhere under the U.S. definition of the term. This compares to the more usual 12.5 percent corporation tax rate in Ireland, or 35 percent in the U.S.

What does the US government think?

A customer uses cash to pay for Apple iPads at the Apple store on 5th Avenue in New York.
Scott Eells | Bloomberg | Getty Images

As one of the world's most recognized companies, and the U.S. company which holds most cash overseas, Apple has become a touchstone for U.S. concerns about this issue. The iPhone maker holds $187 billion outside the U.S., as of its 2015 accounts. That's close to one sixth of the cash all the U.S. global companies have kept offshore as part of a standoff with U.S. tax authorities over what is seen as a punitive 35 percent tax rate. The EU investigation came about following a 2013 U.S. Senate hearing.

"The US is committed to tax fairness and we want to insure that the kinds of agreements you reach with other countries are not manipulated to allow certain companies to shirk their responsibilities," Josh Earnest, the White House press secretary, said Monday night.

Why now?

Ireland's low-tax status has come under the microscope internationally following its 2010 bailout by the European Union, with other European countries like France and Germany concerned that it kept its low corporation tax despite financial aid from the European Union. And the practice of holding profits off-shore by U.S. companies has also come in for criticism.

What next?

Both Apple and the Irish government are expected to appeal the finding in European courts. While the legal battle continues, Apple may have to restate its profits to take the potential fine into account, and could have to pay an estimated sum into an escrow account. And the standoff between the U.S. government and some of its biggest multinationals is likely to continue well into the next term of whoever wins the White House in November.