Printable versionSend by emailPDF version
September 14, 2016

2016-Issue 30 – On August 30, 2016, the European Commission announced a final decision on one of its key state aid investigations — Apple’s potentially favorable treatment by Ireland. The European Commission issued only a four-page summary for immediate public digestion, with the full ruling to be released at some future time after working through confidentiality requirements with both the company and the Irish government. After considering transfer pricing rulings between Ireland and Apple, Inc., the European Commission ordered the Irish government to recover a record €13 billion ($14.5 billion) plus interest from the company, the largest tax bill ever levied by the European Commission. The decision covers the taxes for years 2003-2014. Both the Irish government and Apple confirmed they would appeal the decision before the General Court, and possibly the Court of Justice of the European Union thereafter.

However, Apple is not the only corporation being targeted. The European Commission has already ordered the Netherlands and Luxembourg to recover as much as €30 million ($33.3 million) from Starbucks and Fiat Chrysler. Furthermore, Google, Amazon, Facebook and McDonald’s are all similarly under investigation on state aid grounds. This edition of Tax Advisor Weekly outlines the background of the Apple case, the potential impact of this case on multinationals, and considerations that in-house tax teams should take into account.


Apple Sales International and Apple Operations Europe are two Irish incorporated companies that are ultimately controlled by the U.S. parent, Apple, Inc. While both entities are Irish incorporated, the operations were split between a “head office” that was tax resident outside of Ireland, and Irish branch operations that were resident in Ireland. Apple Operations Europe is engaged in the manufacturing of a specialized line of personal computers, while Apple Sales International purchases Apple’s finished goods from worldwide third-party manufacturers and resells them to Apple-affiliated distribution companies and other customers.

Ireland granted a ruling to Apple in 1991 addressing the profit allocation between the Irish “branch” operations and the “head office.” The ruling was subsequently updated through second ruling in 2007. In the 2007 tax ruling, the Irish tax authority agreed the manufacturing entity should earn a profit margin between 10 percent and 20 percent of its operating costs and a return of 1 percent to 9 percent on manufacturing process technology. For the sales entity, a profit margin of 8 percent to 18 percent of the operating costs was agreed upon.

The European Commission indicated that the profit markup that Ireland accepted was arbitrary and had no factual or economic justification. Further, the taxable profits were deemed to be low compared to other counterparts in the computer industry. As a result of the tax rulings, most of the profits of Apple Sales International were allocated to its “head office,” which was not subject to taxation in Ireland or elsewhere. While the “head office” did not have any employees, its functions were managed and controlled through Board of Director meetings. In this context, the European Commission concluded that the tax rulings issued by Ireland endorsed an artificial allocation of internal profits and enabled Apple to pay substantially less in tax than equivalent companies also taxed locally. This was determined to be illegal under EU state aid rules.

The Various Reactions to the Apple Case

Both Apple and Ireland vowed to fight the decision in the EU court immediately after the decision was made. Apple claimed that it did not receive selective tax treatment from Ireland and stated that the European Commission ignored Ireland’s tax laws and the international taxation system. The Irish finance minister was adamant that it did not treat Apple differently from other similarly situated companies and that it would fight for its reputation as a stable choice of substantive investment, crucial to its continued economic success.

The U.S. Treasury Department, which has aggressively pushed against EU state aid probes, commented that the retroactive tax assessment by the European Commission was unfair and contrary to well-established legal principles. It “could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU.” (BNA Bloomberg: “Appeal of Pricing Agreements Fades After EU State Aid Rulings,” August 30, 2016.) Earlier in an August 24 white paper (“The European Commission’s Recent State Aid Investigations of Transfer Pricing Rules”), the U.S. Treasury accused the European Commission of taking on the role of a “supra-national tax authority” that has the scope to threaten global tax overhaul deals. In addition, the U.S. Treasury was also concerned that other tax authorities, particularly those in developing countries, will follow the EU’s lead and seek large and punitive retroactive recoveries from both U.S. and EU companies.

Further, the seemingly new interpretation of the arm’s-length principle of the European Commission, not fully shared in the case summary, may not be in line with the prevailing principle set out by the Organisation for Economic Co-operation and Development (OECD), undermining the OECD’s project to combat tax base erosion and profit shifting (BEPS). Furthermore, the Apple case decision determined that the company's tax rulings with Ireland, applying domestic Irish tax laws in place at the time, violated EU rules, a decision that seems to call into question the viability of all tax rulings administered under local laws, at least in the EU.

Controversial Issues Related to the Apple Case

Why is Apple targeted? As the world’s richest company and the third largest American company by revenue, the tech giant arguably presented an easy target. The company generated more than $230 billion in revenue and more than $53 billion in net income in 2015. The company also owns enormous stockpiles of cash and other assets, valued at more than $232 billion, of which $214 billion has been kept in Ireland and other countries overseas. Besides Apple, technology groups such as Google, Amazon and Facebook are also under investigation. The reasons as to why the European Commission may be picking on these technology groups likely include their strong profitability and deliberate tax planning.

Is the decision fair? The European Committee is charged with ensuring that EU Member States comply with the EU rules. At issue in the Apple case (and other cases under investigation by the European Commission) is whether the rulings granted provide a selective advantage. How the criterion of "selectivity" should be applied to the tax ruling cases is unclear. The European Committee did not disclose in the four-page press release whether Ireland’s government treated Apple differently from other comparable companies in the same fact pattern. Further, the European Committee rejected the internal allocation between the Irish subsidiaries and the head office. It remains unclear to what extent the European Committee’s ruling is consistent with the OECD guidelines on branch profit attribution and how that interacts with the state aid analysis.

Did tax the Irish ruling protect or hurt Apple? Another issue raised from the Apple case is whether multinationals remain encouraged to obtain tax rulings with European countries. If Apple had not filed the tax ruling and had instead relied on ordinary tax audit processes in working with the Irish government, would it be completely free from the challenge of state aid? The European Commission’s decision implies the answer is “yes.” The decision focuses on the fact that Apple obtained a ruling that in its view provided an unfair advantage to Apple. So, by default that would mean Apple would not have had an advantage over other companies if it had no ruling and instead, for example, relied on an opinion from advisors as to the correct interpretation of Irish law.

What does the future hold? For Apple, the future will likely involve years of ongoing appeals processes with the EU court. For others, is it time to pack up and move out of any rulings based European country? Not necessarily. For those that are heavily invested in countries such as Luxembourg and the Netherlands, it may be worth reviewing any rulings on hand in light of the European Commission’s state aid challenges. Does the ruling confer a benefit that would not be available to other similarly situated companies? Many tax ruling processes (including IRS rulings) provide taxpayers with valuable guidance as to how to interpret tax laws, with no sweetheart deal attached. In fact, in response to the Apple case, some European countries, such as the Netherlands, stated that there is no intention to reduce or eliminate their rulings processes. Further, for countries such as Ireland that are not primarily rulings based, multinationals should not be apprehensive about maintaining or setting up new structures in-country. The Irish trading company tax rate of 12.5 percent remains very attractive, and with others such as the U.K. considering lowering corporate tax rates to 15 percent, Europe remains open for business.

Alvarez & Marsal Taxand Says:

The Apple case brought considerable attention to the investigations by the European Commission into state aid and the fight against potentially harmful tax competition. Though the targets under investigations are large multinationals, small and medium-sized companies should continue to consider European Union developments in assessing existing and future operating and tax planning strategies. 

Written by Marc Alms

Related Issues

A Tale of Two Continents: It was the BEPS of times...

Back in March, Robert Stack, the U.S. Department of the Treasury’s deputy assistant secretary for international tax affairs, shocked the transfer pricing community by stating that U.S. country-by-country (CbC) reporting regulations (at that time in draft) were expected to be finalized by June 30, 2016. The Treasury has exceeded this aggressive deadline, and on June 29 (24 hours early!) final regulations were released.

OECD Releases Guidance on Implementation of Country-by-Country Reporting

On 29 June 2016, the Organisation for Economic Co-operation and Development announced additional guidance on the practical implementation of its Country-by-Country (CbC) Reporting program, published in final form on 5 October 2015 as Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative. The larger BEPS program contains 15 intertwined initiatives that generally seek to limit base erosion and profit shifting by promoting transparency, coherence and substance in tax filings. CbC Reporting is a transparency initiative which recommends taxing authorities require taxpayers to provide aggregate annual business and financial information in each jurisdiction where they do business.

Brexit - The Tax Implications

The referendum in the United Kingdom on whether to leave the European Union has produced a clear, if close, result in favor of leaving. In this edition of Tax Advisor Weekly, we consider the immediate impact of the result, the potential impact on the tax system in the United Kingdom and internationally, and the likely response from business.