Apple tax

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Negative decision for Apple and for Ireland to be appealed

According to the European Commission (“EC”), Apple has to pay Ireland back up to €13 billion in ‘State Aid’ that it (allegedly) received over the past decade. This decision is likely to be the subject of a lengthy appeals process in the courts. The EC’s view is that the advance transfer pricing arrangements provided by the Irish Revenue Commissioners to Apple regarding the allocation of profits to Irish branches of companies that were not managed and controlled in Ireland (i.e. non-Irish tax resident) constitute State Aid, which is incompatible with the EU treaty.

The U.S. gave its opinion of the issues raised in this case in no uncertain terms in a white paper issued last week, in which it fundamentally disagreed with the EC, noting that the state aid decisions by the EC “undermine” legal certainty and indeed the multilateral progress made towards reducing tax avoidance. The U.S. white paper outlines four concerns regarding the EC’s interpretations of State Aid, as follows:

  1. The EC has “sought to impose penalties retroactively based on a new and expansive interpretation of state aid rule”
  2. The investigators have thus far mainly targeted U.S. companies.
  3. The new enforcement theory “appears to target, in at least several of its investigations, income that Member States have no right to tax under well-established international tax standards” and
  4. The EC’s investigations “could undermine U.S. tax treaties with EU Member States”.

The white paper notes that there is the possibility that any repayments ordered by the EC will be considered foreign income taxes and creditable against U.S. taxes, thereby reducing the U.S. tax liability “dollar for dollar” by these recoveries when offshore earnings are repatriated or treated as repatriated as part of any possible U.S. tax reform. The paper refers to this as “deeply troubling, as it would effectively constitute a transfer of revenue to the EU from the U.S. government and its taxpayers”.

Minister Noonan (Ireland’s Finance Minister) made it clear that Ireland will be appealing the decision (subject to cabinet approval) and it will be the opinion of the European Courts that will matter, something we may not hear for a number of years. That said, he is of the view that Our tax system is founded on the strict application of the law, as enacted by the Oireachtas, without exception” and that Ireland “does not do deals with taxpayers”.  

Further, the EC notes in its press release that the amount of unpaid taxes to be recovered by Irish Revenue authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by its entities for this period. That could be the case if they consider that Apple's commercial risks, sales and other activities should have been recorded in their jurisdictions. The amount to be recovered by Irish Revenue authorities would also be reduced if the U.S. authorities were to require Apple to pay larger amounts of money to their U.S. parent company for this period to finance research and development efforts. The Department of Finance highlights in its press release that this demonstrates an inherent flaw in the Commission’s decision in that while requiring Ireland to recover tax, the EC simultaneously accepts that the respective amounts may in fact be taxable in other jurisdictions.

The Department of Finance’s press release notes that Ireland is not alone in its view and referred to the view of the U.S. white paper which noted that the U.S. Treasury has stated that: “The Commission’s new approach is inconsistent with international norms and undermines the International tax system”. Critically, the Chairman of the Irish Revenue Commissioners has noted without otherwise commenting “…on the specific facts of this case, I can confirm that there was no departure from the applicable Irish tax law by Revenue; there was no preference shown in applying that law; and the full tax due was paid in accordance with the law”.

As noted already, Minister Noonan has indicated his intention to appeal the opinion of the EC…why? Companies have been receiving such transfer pricing rulings for many years from EU countries with no reason to doubt their applicability, let alone their legality. Therefore, the EC’s decision goes to the core of Ireland’s published international tax strategy which focuses on the importance of Ireland’s tax rate, reputation and regime. From an Ireland Inc. perspective, the following points must be borne in mind as can be seen from the Department of Finance’s press release: “The Government disagrees profoundly with the Commission’s analysis in that Ireland did not give favourable tax treatment to Apple” and the EC has explicitly stated that, “this decision does not call into question Ireland's general tax system or its corporate tax rate”. Further, no other companies are subject to this decision by the EC.

State Aid is prohibited if it constitutes, “…any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods”. In summary, fair competition is required, but if State Aid is to be found to be incompatible with the EU treaty then there must be an advantage and it must be a selective one benefitting one or some companies over others.

Irish Revenue are clear in defending its position that it applied its taxing rights in an Apple context no differently than it applied them to other taxpayers with branch operations in Ireland. Both the Government and Irish Revenue have come out strongly in defending the position that the correct amount of Irish tax due has been paid by Apple on the profits within the scope of Irish tax;. Further, Ireland has already taken action in previous years changing its tax residence rules, to address international tax concerns around how the profits of multinationals are taxed, given the mismatch between the U.S. tax regime and other countries (like Ireland).

The European Commission’s decision will certainly escalate tensions between the EU and the U.S., adding further fuel to U.S. Treasury concerns outlined earlier. It will cause all EU Member States to take notice, and perhaps reflect on whether the EC approach is appropriate or whether it is encroaching into the domestic tax regimes of EU Member States, over which they retain sovereignty.

Finally, it is worth noting that there is a G20 summit in Hangzhou, China on 4-5 September 2016. Although not mentioned in the joint letter to Heads of State and Government of the European Union by the EC President Jean-Claude Juncker and European Council President Donald Tusk highlighting key issues to be discussed at the G20 summit, the EC’s decision is something that is sure to be discussed there.

If you would like to discuss any of the above then please call your usual Deloitte contact.  

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