5 takeaways from the EU’s blockbuster ruling against Apple

The European Commission has ordered Apple to pay Ireland 13 billion euros — $14.5 billion — for its tax dealings in a case that is being closely followed in Washington and by the business community. 

The European Union’s executive arm ordered the payout on the grounds that Apple had received unfair state aid from Ireland in the form of tax rulings that allowed the tech giant to pay very little in taxes on its profits from European sales. According to the Commission, such aid was a violation of European Union regulations that prevent member states from granting special tax provisions to companies.

Apple and lawmakers in the U.S. have blasted the decision, which could have broader implications for the future of commerce in the European Union.

Here are five things to know about the ruling. 

The payout is unprecedented

The 13 billion euro fine is the largest ever issued by the European Union over such tax dealings.

Though some experts had predicted the penalty could run in the tens of billions of dollars, many expected a number closer to 100 million euros. 

The tech giant had previously paid a comparatively paltry $350 million in back taxes to Italy in 2015, reports Reuters.

Apple is the most profitable company in the world and the most valuable, in terms of market capitalization.

The case isn’t over yet

Apple and Ireland have said they will appeal the opinion. 

In a letter addressed to the Apple community in Europe, CEO Tim Cook said that the company is “confident that the Commission’s order will be reversed.” 

During a conference call following the decision, representatives from the company mocked the rationale behind the decision, calling it “legal mumbo jumbo” that threatens state sovereignty in Europe and the rule of law.

“The fundamental concern is that the commission has decided to rewrite tax law,” a representative from Apple said. The company is set to release more detailed legal briefs detailing its opposition to the ruling later on Tuesday.

Ireland Finance Minister Michael Noonan said in a statement that an appeal “is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign Member State competence of taxation.”

Ireland is required to recover the taxes from Apple while the appeal is pending, but the money can be held in an escrow until the case is finished, the finance minister’s office said.

Amazon could be next 

The online retail giant has own legal woes with the European Commission. The Commission has two pending investigations into the company, an antitrust probe and a tax case not unlike the situation with Apple.

The tax investigations revolve around Luxembourg allegedly providing state aid to Amazon that the commission says would be in violation of European Union agreements. Preliminary findings in 2015 said that state aid from Luxembourg might have allowed Amazon to underpay taxes.

“Amazon has received no special tax treatment from Luxembourg — we are subject to the same tax laws as other companies operating here,” Amazon said in a 2015 statement.

Amazon declined to comment further.

Though Amazon’s case, like Apple’s, pertains to state aid, there are differences. Amazon generates less profit than Apple and aggressively reinvests what it does make into its operations. If the Commission ruled against the digital retailer, the taxes owed likely would be less significant. 

A decision on the Amazon-Luxembourg case is expected within the next several months.

The decision could heighten US-EU tensions 

The Obama administration and members of Congress have been critical of the EU state aid cases.

Ahead of the Apple ruling, the Treasury Department issued a special report last week listing its objections to the investigations. The Treasury on Tuesday declined to comment specifically on the Apple decision but reiterated that it views the Commission’s retroactive assessments as unfair.

“The Commission’s actions 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,” a Treasury spokesperson said.

Lawmakers also blasted the EU’s ruling, with Speaker Paul Ryan (R-Wis.) calling it “awful.”

Senate Finance Committee Chairman Orrin Hatch (R-Utah) said the commission “has issued an extraordinary decision that targets U.S. business by rewriting already existing tax policies.” 

The top Democrat on the committee, Sen. Ron Wyden (Ore.), warned that the decision could make partnerships between countries to prevent tax evasion more difficult.

“This ruling could set a dangerous precedent that undermines our tax treaties and paints a target on American firms in the eyes of foreign governments,” he said. 

Tax reform is getting a boost

Lawmakers and other stakeholders said that the ruling was a sign that the U.S. international tax system should be overhauled.

The back taxes that U.S. companies have to pay as a result of EU rulings could be foreign taxes that are creditable against the U.S. taxes companies have to pay when they repatriate their income.

“By forcing their member states to retroactively impose taxes on U.S. companies, the EU is unfairly undermining our ability to compete economically in Europe while grabbing tax revenues that should go toward investment here in the United States,” said Sen. Charles Schumer (D-N.Y.). “This is yet another example of why we need to reform the international tax system to ensure these revenues come home.”

Sen. Rob Portman (R-Ohio) similarly said that the Apple ruling signals the importance of international tax reform. “The Commission is blatantly attempting to take advantage of the antiquated U.S. international tax system,” he said.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) called the Commission’s decision an “extreme consequence of our broken tax code,” which he said incentivizes U.S. companies to keep profits overseas. 

Brady was a leader on the House Republicans’ tax reform blueprint. That proposal calls for moving toward a “territorial” system where U.S. corporations are only taxed on the income they earn in the U.S. going forward and for taxing U.S. companies’ earnings currently held offshore at lower rates. Schumer and Portman led a Senate Finance Committee working group on international tax reform last year that made similar recommendations.

But Frank Clemente, executive director of the liberal Americans for Tax Fairness, said that Congress should end companies’ ability to defer U.S. taxes on their foreign earnings and require them to pay U.S. taxes on the income right away.

“While it’s at it, Congress needs to collect the up to $700 billion in back taxes that Apple and other multinational corporations owe on the $2.4 trillion in profits now offshore, most of which are stashed in tax havens,” he said.

Rep. Sandy Levin (Mich.), the top Democrat on the Ways and Means Committee, cautioned that those who are criticizing the EU ruling should “totally avoid legitimizing the practices of multinationals and some nations rigging the tax system so the companies pay little or no taxes for their operations.”

Sen. Bernie Sanders (I-Vt.) tweeted that he applauded the EU’s decision because “huge corporations can’t be allowed to use loopholes and tax havens to boost their obscene profits even higher.”

Tax reform highly unlikely to happen this year because it is an election year, but many lawmakers view 2017 as a window of opportunity to enact tax changes.