On August 30 2016, the European Commission announced that
Ireland had granted illegal state aid to two companies in the
Apple group involved in the manufacture of personal computers
and sale of Apple products, including iPhones.
The Commission held that tax rulings granted by the Irish
Revenue to ascertain the profits attributable to the Irish
branches of two Irish incorporated – but non
tax-resident companies – did not correspond to the
economic reality. Apple had enjoyed an unfair advantage over
other businesses and was therefore in receipt of state aid.
The Commission's decision will be appealed but irrespective
of the outcome of any appeal, the international tax community
and businesses face a period of uncertainty. Exactly how much
uncertainty will depend on the extent of the precedent that the
Apple ruling creates.
The Apple decision will not have universal application,
however. Irish tax law, transfer pricing analysis and indeed
the nature of tax rulings has changed since the Apple rulings
with Ireland, but nonetheless these are part of a worrying
trend of state aid cases, including Starbucks, Fiat and Amazon.
We await publication of the detailed Commission decision which
businesses require urgently.
The Commission's reasoning raises some alarming concerns
that require further explanation. Fundamentally, the Commission
appears to have ignored the legal documentation entered into by
the non-resident company and imposed a state aid penalty by
reference to deeming effectively a tax charge on income from
the intellectual property not related to the Irish trade as if
it were trading income. It has not sought to apply the Irish
legislative tax code to the underlying facts, but sought to
charge income from intellectual property as if it were trading
profits of a branch.
The Apple case involves two separate tax rulings agreed
between the company and Irish tax authorities, in 1991 and
2007, concerning two 'stateless’ Apple companies
that conducted trading activities from Irish branches.
The major target of the tax rulings appears to be a company
conducting sale and procurement operations for Apple's non-US
Rulings from Irish Revenue were necessary in order for Apple
to obtain certainty in determining the profit attributable to
the Irish trade carried on from the branches.
While the decision itself will not be published for some
time, the Commission’s press release and its
preliminary assessment published in 2014 provide useful insight
into the case.
Irish tax law and the facts
Under former Irish tax law, it was possible to have an Irish
incorporated, but non Irish tax resident, company that was
stateless for tax purposes (i.e. not liable to tax anywhere by
reason of its tax residence). In such circumstances, the charge
to Irish tax was limited to the measure of Irish trading
profits from a branch in Ireland.
Irish statute provides that "the chargeable profits
of a company not resident in the State but carrying on a trade
in the State through a branch or agency, shall be
a) any trading income arising
directly or indirectly through or from the branch or agency,
and any income from property or rights
used by, or held by or for, the branch or agency
Under Irish tax law, any other income from property or
rights not used or held by, or for, the branch is, and indeed
was, outside the scope of Irish tax regime (i.e. income from
intellectual property not related to the branch activities is
not liable to tax under Irish statute). In 1991, the UK had
similar tax laws.
In its preliminary assessment, the Commission found the 1991
ruling provided for profits to be attributed by reference to a
variant of the cost plus model. The profit margins varied from
10% to 65% of the costs attributable to the relevant Irish
branch before capital allowances. There was no evidence of any
supporting transfer pricing report. The Commission was also
concerned that the rulings were issued for an indefinite
duration unlike other EU member states' advance pricing
agreements. The contents of the ruling requests, transfer
pricing mechanism, notes of meetings and any other
correspondence appeared to be key factors in the Commission
making its finding of state aid.
The Commission has invited both the US Internal Revenue
Service and indeed other countries to consider taxing the
Apple's historic profits.
This is a clear challenge to the respected OECD
international framework of taxation.
The Commission’s invitation on taxing rights
can be viewed as its way towards introducing a form of the EU
common consolidated tax base where each member state can claim
taxing rights linked to sales and other activity in that state.
Under EU law, the introduction of any such regime requires the
consent of all member states.
This article was prepared by Mason Hayes & Curran,
International Tax Review’s correspondents in
Ireland. For further information, please contact John
||John Gulliver, head of
T: +353 1 614 5007