The European Commission has ruled that Ireland should recover up to thirteen billion Euro (plus interest) from Apple in retroactive taxes. This amount is calculated over a ten-year period preceding the Commission’s first request for information in 2013 which eventually led to the Commission’s present conclusion that Apple’s Irish tax benefits are illegal, breaching EU state aid rules.

The Commission held that Ireland enabled the company to pay substantially less than other businesses. Whereas the standard rate of Irish corporate tax is 12.5%, Apple paid a corporate tax rate of no more than 1% from 2003, being as low as 0.005% in 2014; which is equal to fifty Euro tax for every million Euro made in profits.

These benefits were accrued following two tax rulings issued by Ireland to Apple concerning the internal allocation of profits, endorsing a way to establish a split of taxable profits for two Irish incorporated companies of the Apple group; Apple Sales International and Apple Operations Europe, both ultimately controlled by the US parent, Apple Inc.

Both Irish incorporated companies hold the rights to use Apple’s intellectual property to sell and manufacture Apple products outside North and South America in virtue of a ‘cost-sharing agreement’ which allows the Irish companies to make payments to Apple in the United States to fund research and development efforts conducted in the United States on behalf of the Irish companies. These payments contributed to fund more than half of all research efforts by the Apple group to develop its intellectual property; with such expenses being deducted from the profits recorded by the Irish companies each year, in line with the tax ruling granted by Ireland in 1991, which was replaced by a similar tax ruling in 2007.

In virtue of the agreement, the majority of the profits recorded by the two companies were internally attributed to a ‘head office’, which according to the Commission’s assessment, only existed on paper, having no premises or employees, leading to the conclusion that such head offices could not have generated the allocated profits. Moreover, the head offices in question were not subject to tax in any country under specific provisions of Irish tax law, which are no longer in force.

Commissioner Margrethe Vestager held that the tax agreement reached between Ireland and Apple meant that the company’s taxable profits ‘did not correspond to economic reality’, and gave Apple a significant advantage over other businesses, in violation of EU state aid rules.

Reacting to the Commission’s decision, Apple disagreed with the penalty, stating that the company will be appealing against it. The company held that such a decision would be harmful for jobs, stating also that ‘The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process’. Apple further insisted that the company follows the law and pays all taxes owed wherever they operate, and is for this reason confident that the decision will be overturned on appeal.

The Irish government held a similar view, expressing profound disagreement with the Commission. Finance minister Michael Noonan held in a statement that the decision leaves him no choice but to seek approval from the cabinet to appeal, as such appeal is necessary to defend the integrity of Ireland’s tax system, provide certainty to businesses, and challenge encroachment of EU state aid rules into the sovereign Member State competence of taxation.

Further disagreement was expressed from the US treasury, which held that the decision could ‘undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU’. It further illustrated its concerns that the European Commission was in danger of becoming a ‘supranational tax authority’.

Apple, is, however, not the only company that has been targeted for securing beneficial tax treatment in the European Union, as last year witnessed the Commission ordering the Netherlands and Luxembourg to recover as much as thirty million Euro from Starbucks and Fiat respectively. Furthermore, the Commission has two ongoing in-depth investigations into tax rulings which may give rise to state aid issues in Luxembourg regarding Amazon and McDonald’s.