European Commission rules against Apple on state aid grounds

By Nikolaos Theodorakis

On a decision issued in the end of August, the European Commission concluded that Ireland granted undue tax benefits to Apple. These benefits are estimated to be up to €13 billion, which the commission has now ordered Apple to pay back. Apple and Ireland object to the decision and will likely appeal. The final developments in the case may determine the tax treatment that companies can expect to have in the European Union from now on.

It is important to note that the Commission has been actively investigating the tax ruling practices of Member States since 2013. In 2015, it concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. In the beginning of 2016, it concluded that Belgium granted selective tax advantages to more than 35 multinationals under its excess profit tax scheme, which violated EU state aid rules. Ongoing investigations include Amazon and McDonald’s.


Commission’s assessment

The Commission launched an investigation in June 2014 on the assumption that Ireland has substantially lowered the tax that Apple had to pay in the country since 1991. Irish court rulings allowed Apple to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple operations Europe). The reportings from these companies did not, in fact, correspond to economic reality, and almost all profits were internally attributed to a head office, the Commission claimed. The head office was not subject to any country and as such, was not bound by any tax obligations. As a result, Apple paid a corporate tax rate of 0.005% in 2014 on the profits of Apple Sales International. In comparison, the usual tax rate for corporations in Ireland is 12.5%.

The Commission supported that such a selective tax treatment violates EU state aid rules since it gives Apple a significant advantage over corporations that follow national taxation rules. Recovery extends for up to ten years preceding Commission’s initial request, i.e. 2003. This amount totals €13 billion, plus interest.

The Commission did not attack the tax rulings per se, which it found to be “comfort letters” used to facilitate the company to calculate its tax due or the use of special tax provisions. In finding the appropriate legal ground, it chose the EU state aid provisions that ensure Member States do not grant some companies a better tax treatment than others via any means, including tax rulings. State aid rules provide that profits must be allocated between companies in a corporate group in a way that reflects economic reality.

The Commission claims that these rulings endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which had no factual justification. Instead of the profits being recorded and taxed with Apple’s Irish branch, they were attributed to the head office, which had practically no operating capacity, no employees, and no office space. The only decisions taken, and which the Commission recognizes as profits of the head office, were administrative arrangements and distribution of dividends.

As a result of the above analysis, Apple was allowed to pay substantially less tax than other companies, which is illegal under EU state aid rules. The decision does not question Ireland’s general tax system or corporate rate, on which Ireland has exclusive competence. Rather, it highlights the inconsistency that allowed undue preferential treatment.


Reactions from Apple and Ireland

Apple has warned that future investment by multinationals in Europe could be negatively affected by this record-breaking decision. In a letter to customers, Apple’s chief executive claimed that the ruling could severely impact companies that might consider further investing in the EU. The U.S. Treasury also said that this ruling threatens to harm “the important spirit of economic partnership between the U.S. and the EU.”

Apple claims that the Commission has targeted the company, jeopardizing investment and job creating in Europe. This ruling opens the Pandora’s box for companies in Europe, which are suddenly subjected to the threat that they will be forced to pay retroactively taxes under laws that never existed. The Commission’s decision overrides Irish law and disrupts the international tax system. Apple never asked for special treatment and, thus, it suggests that “[w]e 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.”

The Irish government wants to reverse the ruling since it wishes to preserve its status as a low-tax base for overseas companies. The finance minister, Michael Noonan, said that he will seek cabinet approval to appeal the decision. The reasoning behind the appeal is to defend the integrity of Ireland’s tax system, provide tax certainty to businesses and challenge the intrusion of EU state aid rules in taxation, which is governed by member states exclusive competence.

Apple and Ireland are, hence, working together to appeal against the ruling.


Further steps

In principle, EU state aid rules require that incompatible state aid is recovered in order to remove distortion of competition created by such aid. Such rules do not provide for fines nor sanctions, but rather a restoration of equal treatment. Ireland is charged with recovering unpaid taxes from Apple for the period of 2003 to 2014. Apple changed its corporate structure in Ireland in 2015 and the 2007 rulings, that allowed this preferential treatment, no longer apply.

The Commission clarified that the amount due (€13 billion plus interest) to Ireland would be reduced if: (a) other countries requested that part of Apple’s profits should have been recorded and taxed in their jurisdiction, based on the Commission’s findings or (b) if the U.S. requires Apple to pay larger amount of money to their U.S. parent company for the period in question, to finance research and development efforts.

Since all Commission decisions are subject to EU courts scrutiny, a Member State may wish to appeal this decision. It is likely that Ireland will appeal the decision and the EU courts will have to decide on the legitimacy of this alleged preferential treatment. Even so, the Commission would ask that the illegal state aid is recovered and placed in an escrow account, pending the court ruling.