Apple's EU tax dispute

Margrethe Vestager European Commissioner for Competition

Apple Inc

On August 29, 2016, after a three-year investigation, Margrethe Vestager of the European Commission announced that Apple Inc. had received undue tax benefits from Ireland. The Commission ordered Apple to pay €13 billion, plus interest, in unpaid Irish taxes. This is the biggest tax fine in history. The Irish government is appealing 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). Tim Cook, CEO of Apple, has also announced that the company will appeal the Commission's findings.

The issue is Apple's unique variation of the double Irish tax system which, up to end 2014, it used to shield circa €100bn of non-US profits from tax. Apple did not use the standard two Irish companies (as Google and other Irish based US multi-nationals employ) but received rulings from the Irish Revenue that it could use one Irish company, split into two branches. This was not a ruling given to other Irish based US multinationals and is therefore charged as being illegal Irish State Aid.

It was also shown in 2018 that Apple's subsequent re-structuring of its Irish subsidiaries was the driver of the 2015 Irish leprechaun economics GDP growth. It additionally highlighted that Apple is now using the new Irish capital allowances for intangible assets arrangement to avoid taxes on non-US profits. The manner in which Apple executed this new scheme could be subject to further EU challenge and fines of a similar magnitude (see further potential Apple litigation).

Background

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. 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. 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. Currently Apple employs 6,000 people in the country.

Apple's corporate structure

The corporate 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. The state aid query does not pertain to AOI. ASI on the other hand, is an Irish-registered subsidiary of Apple Operations Europe (AOE). AOI has computer manufacturing operations in Ireland. Both AOE and ASI are parties to an Irish advanced pricing agreement which took place in 1991. This agreement was updated in 2007.

Apple's structure in Ireland is an adaptation of what is known as the Double Irish Arrangement, a tax avoidance strategy used by multiple multinationals. Apple's structure does not use the traditional double Irish structure using two companies (one in Ireland and another in a tax haven); instead, Apple conducts the key transactions within one company which is internally split into two "branches". It is this "branch structure" the EU Commission allege is illegal State aid, from Irish Revenue, as it was not available to other companies operating in Ireland (i.e. they all used a two company double Irish arrangement).

Calculation of the €13bn fine

The simplified logic of the EU Commission fine is that this structure should be voided, and Apple's companies regarded as normal Irish companies (the €13bn fine reconciles with the estimate of their total profits to end 2014, at a 12.5% Irish corporate tax rate). Note that Irish economic expert, Seamus Coffey, estimates the additional interest fines could be circa €6bn (at 8% p.a. Irish Revenue rate).

A fallback position of the EU Commission is that if these are not Irish companies, then they were "stateless", and Apple has been illegally remitting royalty payments from EU countries to entities outside the EU with no EU tax treaty. Apple would, therefore, owe back-taxes to the EU counties from which the royalties were paid. Given that most EU countries have corporation tax rates in excess of the Irish 12.5% rate, the total fine would be materially in excess of the €13bn figure. Margrethe Vestager appealed to EU taxing authorities to assess this aspect individually when she announced the fine.

Investigation and findings

Opening of the investigation

Apple’s tax practices were initially questioned by a bipartisan investigation by the Senate Permanent Subcommittee on Investigation in May 2013. The investigation aimed to examine whether Apple used offshore structures, in conjunction with arrangements and transactions, to shift profits from the US to Ireland. Senators Carl Levin and John McCain drew light on what they referred to as a special tax arrangement between Apple and Ireland which allowed Apple to pay a corporate tax rate of less than 2%.

The investigation was originally opened by the European Commissioner for Competition on behalf 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 discretion 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). Article 107(1) states that aid granted by member states cannot threaten to distort competition. In particular, they are addressing the 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.

Investigation findings

No formal decision has yet been released as it is currently being scrubbed for confidential information by the Commission. However, in August 2016 the Commission released a four-page press release describing their decision and rationale. The Commission identified deemed head office expenses that lowered the Irish taxable income of those Irish affiliates and specified that they considered this as selective government aid.

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

Michael Noonan (Ireland's Minister for Finance) speaking after an Informal Meeting of Ministers for Economic and Financial Affairs (Informal ECOFIN) (September 2016)

• 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 the Member States

Ruling

The stated figure of €13 billion was arrived at by the Commission as this is the amount of state aid 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. 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 (but would materially increase Apple's overall fine as Irish tax rates are the lowest in EU).

Appeal process

In a letter to the Apple community in Europe, Tim Cook said the company would appeal the decision. The Irish government also announced it would appeal, despite the fact that the €13 billion windfall would benefit Irish finances. In the immediate aftermath of the ruling, Ireland’s finance minister Michael Noonan claimed Ireland would be appealing the decision, subject to cabinet approval. On September 2, 2016, the Irish cabinet voted to approve the appeal. 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.

Subsequent issues

The EU Commission's findings cover the period to end 2014, and their report notes that Apple had re-structured its Irish operations in January 2015. Analysis by [[

University College Cork economist Seamus Coffey (Chairman of the State's Irish Fiscal Advisory Council and consultant to the Irish Government on the Irish National Accounts and Irish Corporate Taxation) published a long analysis on his own economics blog on the 24th January 2018 confirming Apple was the source of "Leprechaun Economics" (quoting from his article) :

Timeline

• 1980 - Apple establishes production facilities in Ireland
• 1991 - Irish government agrees first tax deal with Apple Inc.
• 2007 - Original 1991 tax agreement is re-negotiated
• 2013 - Senate subcommittee examines offshore profit shifting and tax avoidance by Apple Inc.
• 2014 - European Commission opens case against Apple Inc.
• 2015 - Apple re-structures its Irish subsidiaries (leprechaun economics moment)
• 2016 - European Commission release findings announcing Apple has undue tax benefits owed to Ireland (up to end 2014)
• 2016 - Both Apple Inc. and Ireland announce a decision to appeal the ruling
• 2018 - Apple pays the €13bn fine (no interest under after appear) to Ireland (subject to appeal)
• 2018 - European Commission ask for details of Apple's 2015 re-structuring in Ireland

See also

• Criticism of Apple Inc.
• Double Irish arrangement
• Leprechaun economics
• Tax competition