Out-Law News | 30 Aug 2016 | 12:44 pm | 3 min. read
In what is the largest proposed recovery order seen in the EU, the Commission said it has concluded that Ireland granted undue tax benefits to Apple between 2003 and 2014.
"This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid," the Commission said.
Commissioner Margrethe Vestager, who is in charge of competition policy, said: "Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003 down to 0.005% in 2014."
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said: "This is a bigger number than many were expecting. The Commission is focusing on profits allocated to the 'head office' of Apple Sales International, which appear to have escaped tax altogether."
The decision follows a three year investigation into two rulings given by Ireland in favour of Apple concerning the profits to be taxed in Ireland.
The European Commission does not have direct authority over national direct tax systems. However, under EU rules it is unlawful for any EU country to give financial help to selected companies in a way which would distort fair competition. If a ruling contravenes market principles so as to confer a selective advantage, it could be considered to be state aid.
In today's announcement the Commission said that the rulings allowed Apple to establish the taxable profits for two Irish incorporated companies of the Apple group, Apple Sales International and Apple Operations Europe in a way "that did not correspond to economic reality".
Almost all of the sales profits recorded by the two companies were internally attributed to a head office that the Commission said "existed only on paper and could not have generated such profits". The 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to the head offices were not subject to tax in any country "under specific provisions of the Irish tax law, which are no longer in force", it said.
As a result, Apple only paid an effective tax rate of between 0.005% and 1%, it said.
State aid expert Caroline Ramsay, also of Pinsent Masons said: "Given the information contained in the Commission's opening decision, which provided an insight into how Apple's tax in Ireland was to be calculated, this decision comes as no surprise. It confirms the Commission's view that tax rulings by member states can provide a selective advantage to multinational companies, an advantage that is not available to all companies subject to the general rules of corporate taxation in that member state. It remains to be seen whether the Commission's interpretation of what constitutes a selective advantage is upheld by the EU's General Court, and both Apple and the Irish government have indicated an intention to appeal this decision. Given the position adopted in the paper released by the US Department of Justice last week, we wait to see what comes of this decision."
The US warned the EU last week that it risks damaging international agreements on tax reform if it continues to act as a "supra-national tax authority".
Self said: "The Commission has tendered an olive branch to the US, by suggesting that the US could require Apple to pay larger sums for financing US research and development. Effectively, this may give a face-saving route to a solution for both sides, with more tax being paid in the US rather than Ireland."
However, Self said she shares the more general US concern that the EU is encroaching on national sovereignty.
"There is a risk that the EU competition authorities may end up creating outcomes that are at odds with the current OECD initiative that looks at transfer pricing: the Base Erosion and Profit Shifting (BEPS) project," Self said.
In June 2014 the European Commission announced in-depth investigations into whether tax rulings issued to Apple by Ireland, Starbucks by the Netherlands and Fiat Finance and Trade by Luxembourg amounted to "unjustifiable" state aid. In October 2014 a similar investigation was announced into Amazon in Luxembourg.
In October 2015 it decided that the rulings provided to Fiat and Starbucks constituted unlawful state aid and that the countries would have to recover €20 to €30 million from each company to claw back the benefits of the state aid received. The Amazon investigation is continuing.
Editor's note 21.12.2016: This story previously referred to 'advanced pricing arrangements' (APAs) between Ireland and Apple. The investigation was into rulings, not APAs. We apologise for the error.