The Commission takes on Apple

"La lettre B" l'essentiel de l'actualité économique et financière européenne décryptée

The Commission takes on Apple

In recent years, the issue of multinationals’ tax transparency has been at the forefront of European, and indeed global, politics. Scandals such as Lux Leaks – the revelation of hundreds of Luxembourg’s very favourable tax rulings – have caused public outcry and forced EU leaders to action. However, in spite of efforts to increase fairness, the public appears as yet unconvinced that any concrete action is being taken to reset the balance.

Competition Commissioner Margrethe Vestager, having started her summer break by taking on Google – again – with accusations of abuse of its  dominant position in the market, has now moved on to another of the world’s largest multinationals, Apple.

On 30th August, the European Commission released the conclusions of a two-year in-depth state aid investigation into two tax rulings issued by Ireland. Commissioners have decided that the rulings – which permitted Apple to attribute sales profits from two of its Irish incorporated companies to “head offices” – were nothing more than a front which “substantially and artificially” lowered the tax Apple has paid in Ireland since 1991. The crux of the matter is that the profits of these “head offices”, which the Commission has decided could not possibly have generated such high amounts in any case, were not subject to tax in any country due to now-defunct provisions of Irish tax law.

DG COMP has calculated that as a result of the allocation method approved in the tax rulings, the Cupertino-based firm’s effective corporate tax rate on the profits of Apple Sales International, one of the two Irish incorporated companies concerned, amounted to just 1% in 2003 and declined to an astonishingly low 0.005% in 2014. Moreover, due to the fact that Apple decided to register EU sales in Ireland rather than in the actual country concerned, the Commission has concluded that the arrangement enabled Tim Cook’s company to avoid paying any tax on the near-totality of its profits from the sale of “Igoods” in the EU Single Market. It does of course concede that it was right for any sales in Ireland to have been registered in the country.

Under EU state aid rules, any illegal aid has to be recovered so as to restore equal treatment with other companies. Therefore, as the Commission has decided that Ireland’s selective tax treatment of Apple was incompatible with EU rules, it has now ordered the country to recover an enormous €13 billion, plus interest, in unpaid taxes, covering the period 2003- 2014. Commissioner Vestager is clearly not one to shy away from a fight. As the public figurehead of the Commission’s decision in this case, she has risked raising the hackles of not just Apple, one of the most successful corporations ever,  ut also Ireland. Indeed, while the Commission has been quick to state that the decision “does not call into question Ireland’s general tax system or its corporate tax rate,” it is hard to imagine the country’s leaders gracefully accepting such a significant decision concerning what is generally a national issue.

While Apple will of course hope that Ireland chooses to appeal this recovery decision, it is nevertheless hard to imagine that after a two-year investigation it will be able to provide any evidence that would justify a change in the Commission’s position. Indeed, the Commission has stated quite clearly that it has found no evidence of any employees or premises for the so-called “head offices” and that most of the directors were also employed full time by Apple Inc. It further believes that the only activities capable of generating any profit were the result of decisions taken by these directors, in spite of the fact that this only represents interest on activities such as the distribution of dividends and cash management.

For Ireland to obtain a reversal of the decision, it will need to prove that the tax rulings did not create any unfair advantages for Apple. In light of the Commission’s findings so far, this seems highly unlikely. Nevertheless, we can rest assured that Apple’s lawyers are already working away in the hopes of finding just the right argument to support an overturn, although it seems unlikely that Irish taxpayers would renounce an unexpected budgetary bonus of €13 billion – plus interest – without a fight.

Natasha Slater

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