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US Outbound: EC state aid investigation into tax rulings between a US multinational and Ireland

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Sean Foley

Cameron Taheri

The European Commission (EC) announced on August 30 that it had concluded that Ireland granted undue tax benefits of up to €13 billion ($14.5 billion) to a US-based multinational enterprise, Apple Inc., and that this action was "illegal" under EU state aid rules because it allowed the company to pay substantially less tax than other businesses. The EC concluded that Ireland must now recover the illegal aid.

In the accompanying report, following an in-depth state aid investigation that began in June 2014, the EC concluded that two tax rulings issued by Ireland "substantially and artificially" lowered the tax paid by the company in Ireland since 1991. The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the multinational group that "did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a 'head office'." Specifically, the EC found:

  • The "head offices" existed only on paper and could not have generated such profits;

  • These profits allocated to the "head offices" were not subject to tax in any country under specific provisions of the Irish tax law; and

  • Ireland must now recover the unpaid taxes in Ireland from the multinational entity for the years 2003 to 2014 of up to €13 billion, plus interest.

US Treasury reaction

Prior to the release of the EC's decision, the US Treasury Department released a "white paper" outlining its concerns with the approach of the EC and its state aid investigations. A concern expressed by Treasury officials was that the EC's state aid investigations threaten to undermine progress in efforts to curtail corporate tax evasion and could "create an unfortunate international tax policy precedent."

Previously, the Treasury Secretary wrote to the EC, urging it to reconsider these actions while reaffirming the US commitment to continued collaboration through the base erosion and profit shifting (BEPS) Project.

The Treasury has stated that these EC state aid investigations have major implications for the US. In particular, recoveries imposed by the EC "would have an outsized impact on US companies" and "settlement payments ultimately could be determined to give rise to creditable foreign taxes".

Moreover, US taxpayers could eventually be "footing the bill" for these state aid recoveries in the form of foreign tax credits that would offset the US tax bills of these companies. The investigations have global implications as well for the international tax system and the G20's agenda to address BEPS while improving tax certainty to fuel growth and investment.

Next steps

This decision forms part of the standard EC state aid investigation procedure. The non-confidential version of the decision is expected to be published in the next few months. Both Ireland's Finance Minister and the taxpayer have said they will appeal the decision before the General Court (and possibly later the Court of Justice of the European Union). Any appeal would not suspend the recovery payment, however. According to the EC's release, the amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require the taxpayer to pay more taxes on the profits recorded by the two Irish entities for this period.

Sean Foley (sffoley@kpmg.com) and Cameron Taheri (ctaheri@kpmg.com)

KPMG

Tel: +1 202 533 5588

Fax: +1 202 533 3384

Website: www.us.kpmg.com

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