No one seriously expected Apple to lie down and hand over €13bn (U.S.$1.05bn) in unpaid taxes without a fight. Nor did anyone think that Ireland would take the cash when greater sums are at stake for a country that prides itself on being pro-business.
On 19 December, just as the European Commission disclosed new details from its 130-page decision from August that ordered Ireland to recoup the allegedly unpaid taxes, Apple launched its own appeal against the Commission’s decision.
Not to be outdone, that same day the Irish Department of Finance released a statement outlining the legal arguments for the application it lodged on 9 November with the General Court of the European Union—the court that hears actions taken against EU institutions—to annul the Commission’s decision.
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In a short statement, the Irish Department of Finance said that “Ireland does not do deals with taxpayers,” that it “does not accept the Commission’s analysis,” and that “Ireland did not give favourable tax treatment to Apple—the full amount of tax was paid in this case and no state aid was provided.”
“On balance, it seems likely that the complexity of Apple’s legal structure, which overlays its global business activities and decision making, may make it almost an impossible task to actually decipher where (geographically) profits are being made and how chains of activities and decisions taken across the globe contribute to the profits made on transactions happening in specific locations.”
Louise Gracia, Tax Profesor, U.K. Warwick Business School
Ireland says that the Commission has “misunderstood the relevant facts and Irish law” in eight areas. It says that the Commission has misapplied State Aid law, and has wrongly applied the “arm’s-length principle,” a standard for setting commercial conditions between units of the same company as if they were independent.
The Department of Finance also says that the Commission exceeded its powers, interfered with national tax sovereignty, failed to follow required procedures during its investigation, wrongly invoked “novel legal rules” of EU law that had never been previously identified, and failed to provide proper reasons for its decision. It contends that its tax rulings “did not depart from ‘normal’ taxation” because it followed a portion of Irish tax code that says non-resident companies shouldn’t pay income tax on profit that isn’t generated in Ireland.
These developments suggest that all three parties are in for a lengthy legal battle—probably several years—and there is more than just €13bn (U.S.$1.05bn) at stake.
The Commission is battling to retain its credibility as an executive body and as a powerful regulator, but its reputation is wobbly following Brexit and the rise of populist anti-EU parties springing up all over Europe. Ireland’s attractiveness as a low-tax base is also under the spotlight. And Apple has a lot riding on the decision, as any climb-down by the Commission may result only in a “pyrrhic victory” for the technology company, which is likely to suffer a public relations backlash over its tax arrangements even if it wins in court.
EUROPEAN COMMISSION ASSESSMENT
Below is an excerpt from the European Commission’s assessment of the Apple case.
Tax rulings as such are perfectly legal. They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions.
The role of EU state aid control is to ensure Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise. More specifically, profits must be allocated between companies in a corporate group, and between different parts of the same company, in a way that reflects economic reality. This means that the allocation should be in line with arrangements that take place under commercial conditions between independent businesses (so-called “arm’s-length principle”).
In particular, the Commission’s state aid investigation concerned two consecutive tax rulings issued by Ireland, which endorsed a method to internally allocate profits within Apple Sales International and Apple Operations Europe, two Irish incorporated companies. It assessed whether this endorsed method to calculate the taxable profits of each company in Ireland gave Apple an undue advantage that is illegal under EU state aid rules.
The Commission’s investigation has shown that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which has no factual or economic justification. As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its “head office” when this “head office” had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.
The “head office” did not have any employees or own premises. The only activities that can be associated with the “head offices” are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission’s assessment, are the only profits which can be attributed to the “head offices.”
Similarly, only the Irish branch of Apple Operations Europe had the capacity to generate any income from trading, i.e. from the production of certain lines of computers for the Apple group. Therefore, sales profits of Apple Operation Europe should have been recorded with the Irish branch and taxed there.
On this basis, the Commission concluded that the tax rulings issued by Ireland endorsed an artificial allocation of Apple Sales International and Apple Operations Europe’s sales profits to their “head offices,” where they were not taxed. As a result, the tax rulings enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules.
This decision does not call into question Ireland’s general tax system or its corporate tax rate.
Furthermore, Apple’s tax structure in Europe as such, and whether profits could have been recorded in the countries where the sales effectively took place, are not issues covered by EU state aid rules. If profits were recorded in other countries this could, however, affect the amount of recovery by Ireland.
Source: European Commission
“There is a lot at stake here, and hence Ireland and Apple have much to fight for,” says Louise Gracia, a tax professor at Warwick Business School in the United Kingdom. “On balance, it seems likely that the complexity of Apple’s legal structure, which overlays its global business activities and decision making, may make it almost an impossible task to actually decipher where (geographically) profits are being made and how chains of activities and decisions taken across the globe contribute to the profits made on transactions happening in specific locations,” she says.
There is no suggestion that Apple has done anything illegal. At issue is whether two Irish tax rulings granted to Apple in 1991 and 2007 gave a form of special treatment to the company, or whether they just reiterated an interpretation of Irish tax law as it was applied more generally. Either way, the tax treatment that Apple received in Ireland enabled the technology company to avoid taxation on almost all profits generated by sales of its products throughout the entire European Union.
The two rulings allowed two Irish-registered Apple units to attribute only a small part of their U.S.$130bn profits to Ireland, based on what Ireland and Apple say is a “reasonable” split, given that almost all of Apple’s intellectual property is developed in the United States, while the Irish operations mostly handle logistics and distribution. This is at the crux of Apple’s appeal. The Commission, on the other hand, believes that no other company has been subject to such favourable tax rulings in Ireland, and thus constitutes state aid. It believes that all of the profit from the two units should be allocated to Ireland, because Apple’s unit there paid cost-sharing fees to Apple in the United States in return for the right to use the company’s intellectual property.
According to the Commission’s figures, Apple paid an effective corporate tax rate of 1 percent on its European profits in 2003—down to a ridiculously low 0.005 percent in 2014. The usual corporate tax rate for every other company in Ireland is 12.5 percent—some 2,500 times more. Apple has said that such numbers are “extremely misleading and deceptive.” The company’s CEO Tim Cook has gone so far as to say that the Commission’s decision is “political crap.”
Across the Atlantic, Cook is not the only one who thinks that the Commission is over-reaching itself. In a statement also released on 19 December, the U.S. Department of the Treasury said that while it agrees that tax avoidance is a “serious problem,” it continues to believe? “the Commission is retroactively applying a sweeping new state aid theory that is contrary to well-established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe?. Moreover, it threatens to erode America’s corporate tax base.”
The impact of any change in the Commission’s original decision could have serious ramifications for any company operating within the European Union, as a number of member states are already being investigated or have had their knuckles rapped for their tax treatment of certain companies. Businesses and compliance officers may need to reconsider whether the tax rulings that they have been given—which may allow them to pay next to nothing to the European Union in taxes, despite generating huge revenues in the Single Market—are worth the paper they are written on.