The European Commission pulled no punches on Tuesday 30 August, when it ordered Ireland to recover some €10 billion in undue tax breaks enjoyed by the American giant Apple since 1991.
This decision, which argues that through an Irish tax ruling, Apple received illegal state aid, follows on from its previous conclusions on Starbucks and Fiat. The message sent out to the member states today is that a ruling does not validate any allocation of a company's profits that does not reflect the economic reality.
This, however, the Commission argues, is exactly what the Irish tax authorities did when they granted two rulings to Apple in 1991 and 2007. Two Irish subsidiaries of the American giant, Apple Sales International and Apple Operations Europe, saw virtually all of their sales profits allocated internally to head offices that existed only on paper. "We were unable to find an address" or anything to prove the presence of these head offices anywhere, a European source explained.
The headquarters of Apple Sales International employed no staff and had no premises. Its activities were limited to meetings of its board of directors.
Consequently, the profits of both companies were taxed nowhere, which for instance allowed Apple Sales International to reduce its effective taxation rate to 1% in 2003 and 0.005% in 2014. The Commission has therefore ordered Ireland to recover the tax due on its territory between 2003 and 2014, an estimated €13 billion, plus interest.
Ireland and Apple have already announced that they will appeal against the Commission's decision, but the country must still start to calculate the exact amount of the company's tax adjustment.
"If a member state decides to appeal against a decision of the Commission, it still has to recover illegal state aid, but it can, for instance, place the amount recovered into a blocked account pending the outcome of the proceedings before the Court of Justice", the Commissioner with responsibility for the dossier, Margrethe Vestager, explained.
Other countries may also require Apple to pay more tax on the profits of the two companies over the same period under their own national tax rules. This, therefore, would reduce the amount Ireland has to recover. Indeed, Apple organised its sales activities in Europe in such a way that its clients contractually purchased products from Apple Sales International rather than the shops that physically sold them the products. This meant that Apple registered all sales, and the ensuing profits, directly in Ireland. In light of the information revealed by the Commission's investigation, other countries could consider that the commercial risks, sales and other activities of Apple should have been registered on their territory.
However, that is not all. The amount that Ireland will have to recover may also be reduced if the United States also claimed their slice of the cake, according to the Commission. Last week, the American Treasury stated that the recovery of aid by member state from American businesses could result in a "transfer of tax revenue from the American government and its taxpayers to the EU, as such foreign taxes would be imposed on income that should not have been allocated to the member state in question".
In the case of Apple, Apple Sales International and Apple Operations Europe make annual payments to Apple to finance the research and development activities carried out on behalf of the Irish companies in the United States. These payments stood at around $2 billion in 2011 and increased considerably in 2014.
On Tuesday, the Commission gave a clear indication that the amount to be recovered by Ireland could be reduced if the American authorities required Apple to pay a higher amount to its American parent company over this period to finance the research and development activities. Higher payments to the parent company would therefore be taxable in the United States, the same Europe source explained.
Ireland expresses concern at the precedent this decision sets
Ireland is challenging the Commission's reasoning and pointing out inconsistencies within it. "While requiring Ireland to recover the tax sums, the Commission is also acknowledging that the sums may in fact be taxable in other jurisdictions", the Irish Ministry of Finance states in a press release. The Commission is also incorrect to state that "profits allocated to the Apple companies' head offices were not subject to tax in any country under a specific provision of the Irish tax law. This refers to a mismatch between different countries' tax rules, which by definition cannot be the responsibility of Ireland alone", the ministry goes on to explain. According to the finance minister, Michael Noonan, the decision to appeal the Commission's decision is necessary to "defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation".
Incidentally, the concept of 'tax certainty' will be one of the discussion points of the G20 in China this weekend, and then of the informal meeting of the finance ministers, to be held in Bratislava next week.
Much of civil society has welcomed the Commission's decision, as have several political groups of the European Parliament. EUROPE will return to this matter. (Original version in French by Elodie Lamer)