Apple state aid decision: What is the precedent, if any?
The head of tax at Mason Hayes Curran, John Gulliver, considers the key factors tax directors need to consider following the European Commission’s state aid decision against Apple and Ireland.
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 operations.
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 Gulliver:
John Gulliver, head of tax.