The European Commission on August 30 announced it has concluded that Ireland granted Apple about €13 billion (USD 14.5 billion) in illegal state aid by issuing tax rulings to the company that inappropriately lowered its tax liability in 2003–2014. To restore fair competition, Apple must repay the aid to plus interest, the Commission said.
The determination comes after a two year investigation into Apple’s tax arrangements with Ireland and confirms the Commission’s preliminary conclusions on the matter.
“This decision sends a clear message: member states cannot give unfair tax benefits only to selected companies, no matter if they are European or foreign, large or small, part of a group or not,” said Commissioner Margrethe Vestager, who leads EU competition policy.
The decision involves Apple Sales International (ASI), an Irish-incorporated nonresident company that operated through a branch in Ireland. ASI was responsible for buying Apple products from equipment manufacturers around the world and for selling Apple products throughout Europe, the Middle East, Africa, and India.
Apple arranged its affairs so that all profits from product sales in Europe, the Middle East, Africa, and India were booked by ASI.
Though ASI was incorporated in Ireland, it was managed and controlled in the US. As a result of this set up and because of mismatches in US and Irish tax law, ASI claimed that, while its Irish branch was subject to tax in Ireland, the company’s head office had no tax residence anywhere and was thus not required to pay tax to any government.
The Irish tax authority, in 1991 and 2007, issued tax rulings to Apple sanctioning the allocation of the bulk of ASI’s profit to its head office, instead of its branch, which resulted in ASI’s profits being taxed at extremely low rates. For example, in 2013, profits from ASI sales were taxed at a 1% rate. In 2014, the tax rate was 0.005%, Commission said.
The same two tax rulings allowed most profits of another subsidiary, Apple Operations Europe (AOE), responsible for manufacturing Apple computers, to be allocated to its “head office,” as opposed to its branch, with the result being that most profits were also not taxed by any government during the same period, the Commission said.
The Commission concluded that Apple’s method of internally allocating profits had no factual or economic justification. The head offices were paper companies, not based in any country, with no employees, and having no function other than holding occasional board meetings, the Commission said.
Profits should have been recorded with the Irish branches of ASI and AOE since only those units had the capacity to generate any income from trading, the Commission said.
The Commission concluded that Ireland’s tax rulings enabled Apple to pay substantially less tax than other companies, contrary to EU state aid rules. The Commission thus ordered Ireland to collect the additional tax that would have been due, plus interest, had Apple correctly allocated profits to each branch.
While the Commission estimated the Irish back taxes would amount to up to €13 billion (USD 14.5 billion), surprisingly, the Commission suggested that not all of the tax recovery may belong to Ireland.
The Commission said that Apple’s structure, which allowed it to avoid tax on almost all profits from sales of Apple products in the EU, could not be addressed through EU state aid law, but it may be attacked by other countries. If that happened, the state aid recovery by Ireland would be reduced by amounts recovered in other jurisdictions, the Commission said.
Similarly, the Commission said Ireland’s recovery would be reduced if US tax authorities conclude that Apple’s Irish operations should pay larger amounts to their US parent company for the period at issue under an existing cost sharing agreement.
Ireland’s Minister for Finance, Michael Noonan, said he “disagrees profoundly” with the Commission decision.
“The decision leaves me with no choice but to seek Cabinet approval to appeal the decision before the European Courts. This 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,” Noonan said.
Ireland’s Department of Finance, in a statement, added that the Commission decision is contradictory as it requires Ireland to recover the tax but also acknowledges that the sums may in fact be taxable in other jurisdictions.
The government also said the mismatch between different countries’ tax rules which Apple took advantage of is not the responsibility of Ireland alone.
Apple CEO Tim Cook called the Commission’s decision “unprecedented” and denied that his company asked for or received any special tax deals from Ireland.
“We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid,” Cook said.
Cook said that Apple plans to appeal, and said he was confident the Commission’s order will be reversed.
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