All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Apple state aid decision: What is the precedent, if any?

john-gulliver thumb

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.

Introduction

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.

Background

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.

Taxing rights

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 100

John Gulliver, head of tax.
T: +353 1 614 5007
E: jgulliver@mhc.ie

more across site & bottom lb ros

More from across our site

Several tax chiefs shared their administrations’ latest digital identity tracking systems and other tax technologies at the OECD’s annual meeting of authorities.
Businesses welcome the UK’s decision to scrap the IR35 reforms but are not happy about the time and money they have wasted to date.
Energy ministers agreed on regulations including a windfall tax on fossil fuel companies to address high gas prices at an extraordinary Council meeting on September 30.
The European Parliament raises concerns over unanimity in voting on pillar two, while protests break out over tax reform in Colombia.
Ramesh Khaitan speaks to reporter Siqalane Taho about tax morality, transfer pricing regulations, Indian tax developments, and the OECD’s two-pillar solution.
Join ITR and KPMG China at 10am BST on October 19 as they discuss the personal, employment, and corporate tax-related implications of employees working from overseas.
Tricentis and Boehringer Ingelheim, along with a European Commission TP specialist, criticised the complexity of pillar one rules and their scope at an ITR event.
Speakers at ITR’s Managing Tax Disputes Summit said taxpayers can still face lengthy TP audits, despite strong documentation preparation
Gig economy companies in New Zealand will need to fully account and become liable for the goods and services tax of underlying suppliers on their platforms, under new proposals.
Join ITR and Thomson Reuters at 2pm (UAE) / 11am (UK) on October 13 as they discuss how businesses can prepare for Tax Administration 3.0 and future-proof against changes such as e-invoicing and increasing digitisation.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree