European Commission strikes down illegal tax benefits given by Ireland to Apple
Tuesday, 30 August 2016
Unpaid taxes plus interest to be recovered to Ireland without penalty. At a press conference today (30 August), the European Commission announced that it has completed an in-depth investigation of Ireland’s application of state aid rules. The Commission concluded that Ireland has granted undue tax benefits of up to €13 billion to Apple.
This is illegal under EU state aid rules, which have been in force since 1958. It allowed Apple to pay substantially less tax than other businesses, thereby distorting fair competition with other companies that are subject to the same national taxation rules. Ireland must now recover the illegal aid.
Commissioner Margrethe Vestager, in charge of competition policy, said this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 and down to 0.005 per cent in 2014.
In fact Apple has enjoyed a favorable tax regime since 1991 when the Irish tax authorities first decided to approve the set-up of two companies in Ireland, which did not correspond to economic reality, for the sale of Apple products in the entire EU single market.
Under the agreed method, profits from sales in Europe were internally allocated to a “head office” within Apple Sales International in Ireland. This “head office” was not based in any country and did not have any employees or own premises.
In practice, Apple Sales International, which holds the rights to use Apple’s intellectual property, bought its products from their manufacturers. It sold these products throughout Europe, as well as in the Middle East, Africa and India. All sales were then recorded in Ireland.
However, the “head office” was neither subject to tax in Ireland nor anywhere else, according to the Commissioner. This was possible under Irish tax law, which until 2013 allowed for so called “stateless companies”.
Commissioner Vestager illustrated this for one tax year. In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the “head office”, where they remained untaxed.
This means that Apple’s effective tax rate in 2011 was 0.05%. This effective tax rate dropped further to as little as 0.005% in 2014, which means less than 50 euros in tax for every million euro in profit.
“If my tax bill fell from 0.05 to 0.005% I would have felt that I should have a second look at my tax bill,” added the Commissioner. “Tax rulings cannot endorse a method to calculate taxable profits of a business that fails to reflect economic reality.”
The standard corporate tax rate in Ireland is 12.5 %.
The Commission can only recover illegal state aid for a 10-year period preceding its first request for information from Ireland in 2013 after it became aware of the Irish tax decision following a US senate hearing. The unpaid taxes for the period years preceding 2003 will therefore not be recovered.
Apple was expected to be fined by the Commission and obliged to pay a tax penalty. However, as the Commission explained, no penalties or fines are imposed under current EU state aid rules. The Member State concerned is obliged to recover the illegal state aid, be it a grant, a subsidy or a tax benefit, from the recipient.
The Commission’s investigation was limited to Ireland’s application of EU state aid rules and did not include the tax structure set up by Apple in Europe where no taxes were paid on sales in EU member states. Were member states to decide to tax Apple, the recovery by Ireland would be reduced.
Last December, Apple agreed to pay €318 million in unpaid corporate tax to the Italian tax authorities.
The Commission seems to endorse retroactively Apple’s tax planning. The tax amounts to be recovered by Ireland would also be reduced if the US tax authorities would require Apple to pay larger amounts of money to its US parent company.
It’s not clear from the Commission’s decision what Ireland gained in terms of employment from granting Apple such a generous tax treatment which amounted to illegal state aid. Ireland which is obliged to recover the unpaid taxes to its own treasury will apparently appeal against the decision.
According to Apple’s own website, Apple has 22 000 employees in 19 countries in Europe, thereof 5 500 in Ireland. The employees pay income tax on their earnings but the annual tax subsidy per employee in Ireland over the period concerned (2003 – 2014) could be estimated to almost €200 000.
The Commission’s decision was met by negative reactions by Apple and the US and Irish governments. Apple accused the Commission of “rewriting its history in Europe”. A representative of the US treasury called the decision “a transfer of revenue to the EU from the US government and its taxpayers.” The Irish finance minister regarded it as an attack on the “integrity of our tax system”.
However, the only legal way to change the decision would be to launch an appeal against it. The Commission states that if a Member State decides to appeal its decision, it must still recover the illegal state aid but could, for example, place the recovered amount in an escrow account pending the outcome of the EU court procedures.
Other on-going investigations concern tax rulings relating to Amazon and McDonald’s in Luxembourg that may give rise to state aid issues.