The Commission concluded that Ireland granted Apple undue tax benefits of up to €13bn

One of the current European Commission’s overarching strategies is fair taxation and greater transparency. In order to achieve this, the Commission has been investigating tax ruling practices of all Member States since December 2014.  These investigations have led to rulings that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively.  Two further investigations into tax rulings by Luxembourg for Amazon and McDonald’s are ongoing.  Previous publications of the Brussels Agenda have outlined the main principles and questions to be considered in such cases. This article focuses on the specific circumstances of the Apple case.

The recently published Ireland and Apple case decision has received much media attention. The Commission concluded that Ireland granted Apple undue tax benefits of up to €13bn, which is illegal under EU state aid rules, and so have ordered Ireland to recoup the illegal aid plus interest.  Both Apple and the Irish government are exerting their right to appeal the decision but, in the meantime, the sum demanded is to be placed in an escrow account pending the outcome of the appeal.

The Commission concluded that two tax rulings by Ireland to Apple substantially and artificially lowered the tax paid by Apple in Ireland since 1991. The rulings enabled Apple to establish taxable profits for two Irish incorporated companies of the Apple group which did not correspond with the economic reality. This was because the majority of sales profits were attributed to a “head office”, which in fact only existed on paper, and were not subject to tax. This led to the very low levels of effective tax being paid by Apple; according to the Commission the real tax rates were 1% in 2003 and 0.005% in 2014.

The Commission concluded that the way Ireland treated Apple constitutes selective treatment. This is because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules and this is illegal under EU state aid rules.  The Commission can only order the recovery of the illegal state aid for a period of 10 years preceding the first request for information in 2013. As Apple changed its tax structure in 2014, the recovery period is from 2003 to 2014, meaning up to €13bn plus interest is recoverable.

Ireland and Apple are both challenging the Commission’s ruling on the basis that Ireland’s treatment of Apple was not selective, all parties adhered to the laws in force and the way Apple structured its companies could have been done in the same way by other businesses too.

Ireland has low business tax legislation in place to encourage foreign direct investment and to enhance the economy’s growth but, according to some sources in the media, the Commission’s ruling is undermining  Ireland’s sovereignty over its fiscal policies.  This targeted media coverage has led to a perception by businesses that Ireland’s low tax system is not legally certain or trustworthy, discouraging investment. In fact, however, the decision was about discrimination, and the Commission was not taking a position on the Irish tax rates. Therefore, according to Vestager, businesses could end up in a better situation as no specific companies can be selectively advantaged over others; they are on an equal footing.  However, a particular aspect of the decision businesses take issue with is that tax can be recouped retrospectively which, as shown in this case, could be extremely large sums. 

The Irish government therefore had little option but to appeal the Commission’s decision to show its support for foreign companies investing in Ireland. The strength of this decision as a deterrent for companies to be based in Ireland is demonstrated by a recent letter from 185 CEO’s to the leaders of EU countries. The leader warned that the decision would undermine the legal certainty needed to attract  investment. We must now wait to see how the appeals progress and whether they are successful.

Update on other state aid cases

A similar state aid case that involved a tax scheme exempting the excess profits of a number of MNCs  is Belgium v Commission (T-131/15).  Following the ruling that the scheme did constitute state aid and therefore ordered the taxes to be recouped, Belgium made an interim application for the suspension of the operation of the measures.  This application was dismissed on 19 July 2016 by the President of the General Court.

The Commission has also initiated a new set of proceedings against Luxembourg and its tax treatment of Engie.