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European Commission: agreements between Apple and Irish tax authorities may have been illegal state aid

Advance pricing arrangements (APAs) agreed between the Irish tax authorities and Apple may have given the company unfair advantages incompatible with EU state aid laws, the European Commission has said.

The Commission will now carry out a detailed investigation of two 'tax rulings' issued by Ireland in favour of Apple in 1991 and 2007. In a letter setting out its preliminary findings (21-page / 105KB PDF), it has requested the full financial accounts of two Apple group companies for the period 2004-13 as well as other information which will help it come to its decision.

In-depth investigations into whether tax arrangements adopted by Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg amounted to "unjustifiable" state aid were announced by the Commission in June. Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that full details of the case against the Netherlands would be published shortly. A letter to Luxembourg has been made available publicly in French.

"These letters should not be understood as the final word, but they do set out the Commission's preliminary findings and will have made extremely uncomfortable reading for all parties involved," she said.

"One area of concern highlighted in the Irish letter is the length of the APAs that were agreed with Apple: its 1991 agreement with Ireland lasted 16 years, compared to arrangements in other European countries that the EU cites as typically lasting for no more than five years. Clearly during that time the company changed significantly: the launch of the iPod in 2001 took it into completely new consumer markets," she said.

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies. If the Commission rules that member states have given unlawful state aid, any company found to have benefited has to pay back any illegal reliefs granted over a period usually covering up to 10 years.

The Commission began investigating tax practices in several member states following media reports alleging that some companies had received "significant tax reductions" in the form of tax rulings issued by national tax authorities. Tax rulings are often used to confirm transfer pricing arrangements, which are the prices charged for commercial transactions between various parts of the same group of companies. Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries.

Setting out its evidence in a letter to Ireland, the Commission said that there were "several inconsistencies" in the way in which transfer pricing rules were applied to Apple that did not "appear to comply with the arm's length principle". It cited tax talks between the state and Apple in 1990 which it said indicated that quoted tax margins had been "reverse engineered" without economic basis and tied to concerns about local jobs. It said that there was "no indication" that the arrangements could be "considered compatible with the internal market"; particularly given the length than the agreement applied without revision.

"Even if the initial agreement was considered to correspond to an arm's length profit allocation, quod non, the open-ended duration of the 1991 ruling's validity calls into question the appropriateness of the method agreed between Irish Revenue and Apple to arrive to that allocation in the latter years of the ruling's application, given the possible changes to the economic environment and required remuneration levels," the letter said.

"[The] Commission is of the opinion that the contested rulings do not comply with the arm's length principle. Accordingly, the Commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple. That advantage is obtained every year and on-going, when the annual tax liability is agreed upon by the tax authorities in view of that ruling. That advantage is also granted in a selective manner," it said.

In a statement, the Irish Department of Finance said that it was "confident" that it had not breached state aid rules and that it had "welcomed [the] opportunity to clarify important issues about the applicable tax law in this case and to explain that the company concerned did not receive selective treatment and was taxed fully in accordance with the law".

"Any company that has struck a favourable tax arrangement with local authorities in the past would be well advised to consider how their own past arrangements would measure up against the views set out in these letters," said tax expert Heather Self of Pinsent Masons. "If the arrangements might be interpreted as usually long-standing, or if they seem to suggest that the rules were being applied more selectively, then that could leave them vulnerable to a state aid investigation."

"It may be better to come forward and seek a compromise than to sit back and wait, given the potential damage that could cause," she said.

"It is clear that the issue of the European Commission investigating potential state aids in national tax treatment is not going away", said EU and competition law expert Guy Lougher of Pinsent Masons. "The issue has been identified as a key priority by European Commission president-elect, Jean-Claude Juncker, and we can expect that to influence the workload and focus of the new Competition Commissioner.”

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