UK and International Tax news

EC Concludes On Legality Of Tax Benefits Given By Ireland To Apple

Wednesday 31st August 2016

Following the opening in June 2014 of the in-depth investigation by the European Commission to examine whether EU state aid rules had been broken by tax authorities in Ireland, the EC has now concluded that Ireland gave illegal tax benefits to Apple worth up to €13bn.

The EC had been investigating under EU state aid rules certain tax practices in several member states following media reports alleging that some companies have received significant tax reductions by way of tax rulings issued by national tax authorities.

The EC did not call into question the general tax regimes of the member states concerned but has looked more closely at certain tax rulings [advance pricing agreements] which were used to confirm transfer pricing arrangements between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group.

The EC examined rulings issued by the Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe and in its letter to the Minister for Foreign Affairs in Dublin confirmed its preliminary view that tax rulings in 1990 and 2007 in favour of the Apple group constitute state aid according to Article 107(1) TFEU and has doubts about the compatibility of such aid with the internal market.

It requested Ireland to submit its comments and provide further information in order to assess the aid given.  It has also reconfirmed that any unlawful aid may be recovered from the recipient under Article 14 of Council Regulation EC No 659/1999.

In a press release issued yesterday, the EC has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991. The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (ASI and AOE), which did not correspond to economic reality. Almost all sales profits recorded by the two companies were internally attributed to a “head office”. The EC’s assessment showed that these “head offices” existed only on paper and could not have generated such profits. These profits allocated to the “head offices” were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of ASI.

The EC has held that the selective tax treatment of Apple in Ireland is illegal under EU state aid rules because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.

The EC can order recovery of illegal state aid for a ten-year period preceding its first request for information in 2013. Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 billion, plus interest.

The EC added that the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This was due to Apple’s decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.

In a press release issued by the Irish Government, Finance Minister Noonan has disagreed profoundly with the EC’s decision on Apple and confirmed that “Ireland’s position remained that the full amount of tax was paid in this case and no state aid was provided, Ireland did not give favourable tax treatment to Apple and does not do deals with taxpayers”.

Following discussion with the Taoiseach, the Minister for Finance will now seek Cabinet approval to appeal the EC decision to the European Courts.  Ireland has a period of two months and 10 days to bring an appeal.  The Government will now study the decision of the European Commission in consultation with its legal advisors to prepare the grounds for an appeal.

It is expected that both Ireland and Apple will appeal against the EC decision.

If you would like further details on this case, please contact Keith Rushen on 0207 486 2378.

 

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