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Richard Padley
Richard Padley

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An Apple a day keeps the tax man away?

As Apple unveils their new iPhone 7, they continue to be in the press due to their tax affairs. The European Commission recently directed that Apple owes the Irish Republic €13bn in back taxes, plus interest accruing on the amount. The €13bn penalty is the largest ever levied by the commission. The judgement handed down by Margrethe Vestager, EU competition commissioner, has continued to deepen tensions between the US and EU authorities over the crackdown on corporation tax.

Apple’s business in Ireland received a deal enabling it to benefit from favourable tax arrangements in respect of profits made in Europe and global markets. The arrangements date back to a 1991 tax ruling, subsequently replaced by another in 2007. These rulings were in effect ‘letters of comfort’ to provide clarity on tax questions to a business. Apple’s letters came to light after EU officials scrutinised the work of a US senate subcommittee. The EU inquiry considered whether the favourable tax treatment received by two Apple subsidiaries was available to any other business.

The subsidiaries under consideration were:

Apple Sales International, a company structured in a manner that allowed profits on the sale of Apple products in Europe, the Middle East, Africa and India to be recorded in Ireland, and

Apple Operations Europe which manufactured certain computer lines.

The 1991 and 2007 rulings meant profits were allocated to a ‘head office’ in Dublin. According to the EU Commission this head office had no employees or premises, and simply existed on paper.

Upon scrutiny Apple Sales International recorded €16bn profit in 2011 alone. €50m of that profit was allocated to the head office, and Apple paid €10m tax in Dublin on that. The effective tax rate paid by Apple in Ireland on €16bn profit was 0.05%. The view of Ms Vestager was that the arrangement allowed an artificial allocation of profit to enable Apple to pay substantially less tax than other companies.

The implications of the decision may well allow tax officials across Europe to consider how Apple’s business activities are treated and see whether Apple was right to record most of its non-US sales profits in Ireland, rather than the country in which the sales were booked. If they consider that the sales should have recorded in the country in which the sale is booked, rather than Ireland, they could require Apple to pay more local tax. This would reduce the amount to be paid to Ireland. However this may well increase Apple’s overall tax bill as other countries have higher rates of corporation tax. These include France (approximately 33%) and Germany (about 30%), both of whom are higher than Ireland’s 12.5%.

The EU decision sets EU law even while the appeal is pending. In establishes that tax rulings allocating profits to a non-existent entity is a form of illegal state aid. It is unknown how many tax rulings Ireland has issued, but those that have received these comfort letters on profit allocation may well see themselves targeted in light of this ruling.

The decision brings together complex areas of European competition and tax law. It appears that the commission has taken the approach of encroaching on a member state’s tax matters which are generally the ambit of the member state alone. The decision poses a further question – if the Irish government assisted Apple to breach tax and competition rules should they benefit from the €13bn tax bill when matters are put right? An alternative would be for the US to recover the tax as that is where Apple’s main business, Apple Inc., is based. However this would be a misstatement of US law as for nearly 100 years the nation has followed the principle that the jurisdiction in which income arises has priority in taxing cross-border income. To prevent double taxation a US Company will claim credit against its US tax bill for taxes paid to source countries.

Such is the concern over the ruling that the Irish parliament was recalled early following the decision to debate the ruling. Mr Kenny, the prime minister, said that the ruling was wrong, damaging to Ireland and could not be allowed to stand. He explained that while Revenue Commissioners would take steps to collect the sums involved as required, it would be held in an escrow account pending the final outcome of the legal proceedings. It is anticipated that the Irish government will appeal the ruling arguing that it did nothing wrong and did not collude with Apple in a secret sweetheart deal to assist avoid paying taxes in other countries.

It is further expected that Apple too will appeal the ruling, and have drafted in the law firm Freshfields to consider the merits of such. What appears clear is that given the significance of this decision it is unlikely to be the end of this matter. And Freshfields, this Counsel is free.

Posted by Richard Padley on 08 September 2016 at 11:46