Apple's EU tax dispute

European Commission investigation of transfer pricing arrangements on corporate taxation of Apple (Ireland)

Wiki: Apple, the European Commission & Ireland

Background

Introduction

On August 30, 2016, after a three-year investigation, the European Commission announced that Apple had received undue tax benefits from Ireland. The Commission ordered Apple Inc. to pay €13 billion, plus accrued interest, in unpaid taxes.[1] This is the biggest tax claim ever.[2] The Irish government has agreed to appeal the ruling, claiming there was no departure from the applicable Irish taxation law and that the Commission's action was an intrusion into Irish sovereignty (since national taxation policy is excluded from Union treaties).[3] Tim Cook, CEO of Apple, has also announced that the company will appeal the Commission's findings.[4]           

History of Apple in Ireland

Apple has had operations in Ireland since 1980 when they opened their production facilities in Holyhill, Cork on December 23 1980.[5] During this period Apple became an important part of the local economy. By 1990, the number of jobs had grown from an initial 700 to 1000 permanent jobs, as well as 500 hired on a sub-contractor basis.[6] Interview excerpts, published by European Commission, found that this information was used in the way of background information by a tax adviser representing Apple during meetings with Apple in 1990.[7] Currently Apple employs 6,000 people in the country.[8]

Apples Corporate Structure

Apple’s structure in Ireland consists of two subsidiaries; Apple Operations Ireland (AOI) and Apple Sales International (ASI). AOI, an Irish-registered holding company, acts as an internal financing company. AOI claimed tax residence in Bermuda and thus, is not an Irish tax resident.[9] The state aid query does not pertain to AOI. ASI on the other hand, is an Irish-registered subsidiary of Apple Operations Europe (AOE).[10] AOI has computer manufacturing operations in Ireland. Both AOE and ASI are parties to an Irish advanced pricing agreement which took place in 1991.[11]

Opening of the Investigation

Apple’s tax practices were initially questioned by a bipartisan investigation by the Senate Permanent Subcommittee on Investigation.[12] The investigation aimed to exam whether Apple used offshore structures, in conjunction with arrangements and transactions, to shift profits from the US to Ireland.[13] Senators Carl Levin and John McCain drew light on what they referred to the special tax arrangement between Apple and Ireland which allowed Apple to pay a corporate tax rate of less than 2%.[14]

Core

The Investigation

The investigation was originally opened by the competition division of the European Commission in June 2014. The Ireland case was opened in conjunction with two other similar cases; involving Starbucks (Netherlands) and Fiat (Luxembourg). The commissioner noted concerns that it believed discretions in transfer pricing rules had been used in the case of Apple to grant a selective advantage to the company. They believed that this violated Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).[15] Article 107(1) states that aid granted by member states cannot threaten to distort competition.[16] In particular they are addressing Irish tax rulings from 1991 and 2007 by the Irish Office of the Revenue Commissioner. Specifically, the Commission refers to taxable profit allocated to the Irish branches of AOE and ASI. The Commission claims the pricing arrangement between Apple and Ireland was not supported by an economic assessment and was in part supported by employment considerations. [17]                   

Investigation Findings

According to the Commission, the tax arrangement between Ireland and Apple qualifies as state aid as it meets the following four criteria:[18]

·       There has been an intervention by the State

·       This intervention gives the benefactor a competitive advantage on a selective basis

·       As a result, competition has been or may be distorted;

·       the intervention is likely to affect trade between Member States.

The Judgement

The stated figure of €13 billion was arrived at by the Commission as this is the amount of state aid, in terms of taxation, which they determined Apple received since 2003. The Commission is permitted to order a recovery for all aid granted within a 10-year period of when they first requested information. In this case they first requested information in 2013.[19]

Commissioner Margaret Vestager also suggested that other member states should claim taxes from Apple. This was possible if other countries believed that Apple’s profits should have been recorded in their jurisdiction. Such claims would reduce Apple’s taxable income in Ireland and thus the amount to be recovered by Ireland from Apple.[20]

The Appeal              

Both Ireland and Apple have said they will appeal the ruling. In a letter to the Apple community in Europe, Tim Cook said the company would appeal the decision.[21]

Even though the €13 billion windfall would benefit Irish finances the government in Dublin announced it would also appeal. In the immediate aftermath of the ruling, Ireland’s finance minister Michael Noonan claimed Ireland would be appealing the decision, subject to cabinet approval.[22] On September 2^nd 2016, the Irish cabinet voted to approve the appeal.[23] This appeal will firstly be heard in the EU’s General Court, with any further appeal being taken to the EU’s highest court; the European Court of Justice.[24]   

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[1] http://europa.eu/rapid/press-release_IP-16-2923_en.htm

[2] http://time.com/4472500/apple-eu-irish-tax-bill/

[3] http://www.reuters.com/article/us-eu-apple-taxavoidance-ireland-idUSKCN1180WR

[4] http://www.apple.com/ie/customer-letter/

[5] http://www.irishcentral.com/opinion/others/when-steve-jobs-and-apple-first-came-to-ireland-137472208-238117741

[6] http://www.businessinsider.com/how-apple-managed-to-get-its-tax-deal-in-ireland-in-1991-2016-8?r=UK&IR=T

[7] https://www.ft.com/content/233744b6-4886-11e4-ad19-00144feab7de?siteedition=uk#axzz3Eo859Rt0

[8] http://www.businessinsider.com/steve-jobs-in-cork-ireland-in-1980-2016-8

[9] https://tax.thomsonreuters.com/blog/checkpoint/Apples-13-billion-Irish-back-tax-bill-reverberates-around-the-world

[10] http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=26016763

[11]Sheppard, Lee A. "Apple's Tax Magic.(Apple Inc.'S Tax Planning)". Tax Notes International Vol.70(10).June 3, 2013 (2013): p.939-943. Print.

[12] https://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-to-examine-offshore-profit-shifting-and-tax-avoidance-by-apple-inc

[13] http://www.forbes.com/sites/timworstall/2013/05/21/apples-profit-shifting-claims-were-in-humpty-dumpty-territory-here/#71b220cc50c2

[14] https://www.rte.ie/news/business/2013/0531/453905-ambassador-us-tax/

[15] http://europa.eu/rapid/press-release_IP-14-663_en.htm

[16] http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT

[17] http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2014.369.01.0022.01.ENG&toc=OJ:C:2014:369:TOC

[18] http://ec.europa.eu/competition/state_aid/overview/index_en.html

[19] http://europa.eu/rapid/press-release_IP-16-2923_en.htm

[20] Hufbauer, G. C., & Lu, Z. (2016). Apple’s Tax Dispute With Europe and the Need for Reform (No. PB16-16).

[21] http://www.apple.com/ie/customer-letter/

[22] http://www.finance.gov.ie/news-centre/press-releases/minister-noonan-disagrees-profoundly-commission-apple

[23] http://www.wsj.com/articles/irish-lawmakers-expected-to-approve-appeal-on-apple-ruling-1473256462

[24] http://fortune.com/2016/09/02/apple-appeal-eu-tax-bill/

[25] https://www.ft.com/content/233744b6-4886-11e4-ad1900144feab7de?siteedition=uk#axzz3Eo859Rt0