On 30 August 2016, the European Commission (EC) announced its decision that Ireland had provided illegal state aid to Apple amounting to EUR 13bn, plus interest. This decision is part of a number of EC investigations of certain historic tax rulings made by tax authorities in Member States including Ireland, the Netherlands and Luxembourg.

The EC has, in the case of Ireland and Apple, found that the tax rulings gave Apple an unfair advantage (amounting to illegal state aid) as the rulings approved an artificial allocation of profits within two Irish incorporated Apple subsidiaries. The two Irish companies hold the rights to use the intellectual property of the Apple group to sell and manufacture Apple products outside of the Americas.

Apple’s European sales operations were set up so that all sales (and therefore significant profits) were recorded in Ireland through these two companies. The Irish tax authority rulings agreed   to an internal allocation of these profits so that the majority of the profits were allocation to a “head office” not located in Ireland (or indeed any other jurisdiction) and that had no premises or employees. Only a small proportion of these profits was allocated to the Irish branch of these Irish companies (and therefore subjected to Irish tax). The vast majority of the profits therefore escaped tax and resulted in an effective corporate tax rate of 1%, falling to 0.005% in 2014, on the profits of one of the companies.

The EC, in short, decided that this allocation of profits had no economic justification (as only the Irish branches, and not the “head office” had the capacity to generate the profits). In the EC’s view, this allowed the Apple subsidiaries in Ireland to pay substantially less tax than others, and therefore to benefit from illegal state aid.

Both Apple and the Irish government quickly announced that they intended to appeal the EC’s decision. Apple argues that most of its profits are taxed in the US, where the group’s value is created. The EC’s decision certainly gives rise to an unusual situation whereby a taxpayer has been told to pay historic overdue taxes to a national government that asserts such tax is not  due. There are also suggestions from some in the US that this is part of an anti-American agenda in Brussels and that the US might take action against European companies in response.