While evidence points towards employment being a driving factor in the Apple Ireland case, it is unlikely it had much significance in other tax rulings.
In the public version of the EC’s letter to Ireland, specific reference is made to employment and the role the EC alleges it played in Apple brokering a deal with the Irish government.
“...the reduction of the margin after a certain level above $ [60-70] million would have been motivated by employment considerations, which is not a reasoning based on the arm’s-length principle. In particular, two margins of 20% and 65% are relatively far apart...”
The EC claims that tax margins lacked “economic basis” and were motivated by local job opportunities.
“Apple were certainly a major employer in Ireland and, at the time, Ireland was very focused on building up employment generally,” said Heather Self of Pinsent Masons.
Another aspect which concerns the EC is the length of the advance pricing agreements between Apple and Ireland. The 1991 agreement lasted 16 years while the standard length for arrangements in other European countries rarely exceeds five.
Not a widespread trend
“In relation to other deals, I think most (for example, pharma companies) invested significant resource into Ireland - and indeed, it has become a noted centre of expertise for pharma and IT. I think Apple is relatively unusual in having Irish non-resident companies, with significant profits not taxed anywhere. There may be a small number of other Irish rulings for US MNCs, but I doubt there were many,” said Self.
Although the EC’s claims relating to local employment in the Apple-Ireland deal seem warranted, most tax professionals think this is an isolated occurrence.
“There is no need or possibility of obtaining a ruling or a deal with Irish authorities. Any company doing trade or business in Ireland is subject to the Irish corporate tax and can benefit from the Irish treaty. There is no employment threshold. All intercompany transactions of such an Irish company, including payments made to other jurisdictions, are subject to the regular Irish law and transfer pricing rules based on OECD guidelines. On matters of transfer pricing, it may be possible to obtain an advanced pricing agreement, but these are not all that different than any other jurisdiction,” said one adviser.
Apple’s future
The EC plans to carry out detailed investigations into tax rulings issued by Ireland in 1991 and 2007 in favour of Apple.
“...the Commission’s preliminary view is that the tax ruling of 1990 (effectively agreed in 1991) and of 2007 in favour of the Apple group constitute State aid...The Commission has doubts about the comparability of such State aid with the internal market.”
Two of Apple group’s companies have been asked to provide full financial accounts for 2004 to 2013.
Further reading:
UK Treasury defends Patent Box against EC threat
The potential TP irony of Juncker's EC presidency
EC investigations suggest weakening control of tax authorities
UK and Germany come to agreement over Patent Box signalling European reform of IP regimes
Luxembourg better defines TP rules amid EC investigations
What taxpayers and advisers think about PwC's leaked documents on Luxembourg's tax arrangements
EC investigations could negatively impact legitimate TP arrangements
