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30 August 2016
EU Direct Tax Newsalert
European Commission finds that Ireland
has granted unlawful State aid to Apple
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In its press release issued on 30 August 2016,
the European Commission (EC) announced the
adoption of its final decision in the formal State
aid investigation into the profit attribution
arrangements and corporate taxation of Apple
in Ireland. It has concluded that, in its opinion,
Apple benefitted from unlawful State aid
granted by Ireland, and it orders full recovery of
the aid in an amount of up to €13 billion plus
compound interest.
On this basis, the EC concluded that, in its view,
the tax rulings issued by Ireland endorsed an
artificial allocation of Apple’s sales profits to
their “head offices” enabling Apple to pay
substantially less tax than other companies
which is unlawful under EU State aid rules. The
full reasoning of the EC will only be apparent
when the detailed non-confidential decision is
published. This is likely to take several months.
Next steps
However, the EC has clearly stated that the
decision does not call into account Ireland’s
general tax system or its corporate tax rate and
notes also that no other companies in Ireland
are subject to this decision.
The EC has ordered Ireland to recover the
unlawful aid from Apple as outlined above.
However, the EC has also stated that the amount
of unpaid taxes to be recovered by Ireland could
be reduced if other countries were to require
Apple to pay more taxes on the profits recorded
Background
by each entity. The recovery order is subject to a
The EC’s investigation related to two rulings on limitation period of ten years.
the attribution of profits to the Irish branches of
two Irish incorporated, non-resident companies The Irish Government has stated publically that
ultimately owned by Apple Inc. These rulings it will contest the negative decision. Under EU
State aid law, both Apple and the Irish
were granted in 1991 and 2007.
Government can challenge the validity of the
The EC’s position is that the agreements made decision and ask for its annulment before the
between the taxpayer and Ireland do not reflect EU’s General Court. The judgment of the
economic reality as regards the profit General Court can in turn be appealed before the
attribution. The EC concluded the rulings EU’s Court of Justice which will ultimately have
deviated from the arm’s length principle in a the final say on the merits of the EC’s decision
manner which was selective and thus which could take several years. It should be
noted however that an appeal does not suspend
constituted unlawful State aid.
recovery procedures and Commissioner
Vestager indicated that the amount of the aid
Key aspects
could be paid into an escrow account pending
The EC has focused on a number of aspects of the outcome of any appeal.
the rulings on Apple Operations Europe (AOE)
and Apple Sales International (ASI) which it PwC Takeaway
considered to be of key relevance for further
analysis and in its final decision, it notes that, in The EC is clearly focused on the fact that a large
its view:
proportion of the profits generated from sales
across the EU were not subject to tax anywhere.
i) the tax rulings issued by Ireland endorsed On this basis, coupled with the limited activity at
an artificial internal allocation of profits the head office, the EC appear to be saying that
within ASI and AOE which has no factual or residual profit should be taxed in Ireland rather
economic justification;
than allocated to the head office.
ii) most sales profits of ASI were allocated to its
“head office” when this “head office” had no It is not clear to what extent this is consistent
operating capacity to handle and manage with, for example, the OECD guidelines on
the distribution business;
branch profit attribution and how that interacts
iii) the sales profits of ASI and AOE should have with the State aid analysis. We will need to wait
been recorded with the Irish branches of ASI for the detailed decision to answer this
and AOE and taxed there;
important question.
iv) the only activities that associated with the
“head offices” were decisions taken by its
directors on the distribution of dividends,
administrative arrangements and cash
management.
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