AAPL Apple Inc

By Natalia Drozdiak 

BRUSSELS -- When the European Union's antitrust chief Margrethe Vestager ruled this week that Apple Inc. owed billions of euros in alleged unpaid taxes, the decision created a financial and public relations problem for the technology giant. It also opened up a Pandora's box of legal questions for Apple and other multinationals operating in Europe.

Apple has said it would appeal the decision -- as has Ireland, which the European Commission accused of forging a sweetheart tax deal with the iPhone maker, in violation of the bloc's prohibition against "state aid" for selective companies. Both of those legal challenges could take years.

The decision also opens the door to further scrutiny of Apple finances, legal structure and tax payments by national governments across the continent. Ms. Vestager specifically invited them to do so, saying governments in Europe, as well as the U.S., could claim a piece of the roughly EUR13 billion, or about $14.5 billion, in taxes that the commission has estimated Apple avoided paying in Europe and has ordered Dublin to recoup.

Ms. Vestager's move to inspire other European governments to undertake their own audits into how Apple paid taxes across Europe plays into the commission's wider strategy of aiming to close down tax havens and loopholes in the bloc. The job of actually identifying any back taxes owed and getting it back into national coffers would be up to the respective national authorities, Ms. Vestager said.

A number of individual countries are already investigating whether rival multinationals paid enough tax. In one of the highest profile cases, France has been investigating whether Google parent Alphabet Inc. owes back taxes. Alphabet has said it paid its fair share.

Apple hasn't been targeted by any country in the EU in tax-related investigations.

The European Commission invited folk "to come forward and try to claim a piece of this settlement...so we anticipate that that may happen and a feeding frenzy may occur," said Jennifer McCloskey, director of government affairs at ITI, a U.S.-based technology industry trade group, which represents Apple and other tech companies.

Apple comment wasn't immediately available.

So far, no other government has said publicly they are considering the option.

One factor that may limit any claim from elsewhere in Europe: Most tax authorities in European countries, as well as in the U.S., can only seek to claw back taxes for about three or four years back. The commission's ruling, on the other hand, covers 10 years under the bloc's state-aid rules.

Some lawyers say if other capitals pursue their own back-tax claim, they would face big hurdles. The commission has focused its ruling on what it alleges was Apple's profit shifting from a taxpaying affiliate in Ireland to its nontaxable, nonresident Irish affiliate. In its ruling, the commission didn't focus on whether Apple paid sufficient taxes for its affiliates in other EU countries, said Howard Liebman, a Brussels-based tax partner at Jones Day.

"To my mind, that doesn't really give an open invitation to other EU countries," Mr. Liebman said.

U.S. officials roundly condemned Ms. Vestager's actions, making it unlikely they would agree to try to benefit from the ruling. U.S. Treasury Secretary Jack Lew on Wednesday said the EU's decision "reflects an attempt to reach into the U.S. tax base to tax income that ought to be taxed in the United States."

Apple or Ireland, however, could upend the commission's decision altogether if either wins their appeals in court. Barring an outright decision to overrule the commission's decision, Apple could win court backing for a smaller claw back.

The commission's stance on how to calculate tax owed by Apple is stricter than guidelines by the Organization for Economic Cooperation and Development, lawyers say, making it potentially vulnerable in court.

Challenging the commission's methodology on calculating the claw back size will likely be "a very important part" of appeals by Apple and Ireland, said Jonas Koponen, global head of the antitrust practice at law firm Linklaters. "The legality would hinge on that."

Until those questions are resolved in court, the commission's move could spawn widespread ambiguity for all sorts of multinational companies operating in Europe, and relying on tax arrangements similar to the one between Apple and Ireland. So-called "comfort letters" are common, giving companies clarity on how a country's specific tax laws will be applied.

"For many companies it creates uncertainty [around]... the validity of tax rulings they have received in the past -- what should they do?" Mr. Koponen said.

--Richard Rubin in Washington contributed to this article.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com

(END) Dow Jones Newswires

August 31, 2016 17:07 ET (21:07 GMT)

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