Last week, the Irish Cabinet agreed to appeal the European Commission Decision that Ireland had granted undue tax benefits of up to €13 billion to Apple. So, what’s all this really about?
EU state aid rules prohibit any Member State from giving companies aid that distorts competition between Member States. The intent is simple, to maintain a ‘level playing field’ for all companies active in the EU regardless of the Member State in which the companies are located.
In order for aid to constitute ‘state aid’ four tests must be met: (1) there has to be some intervention by the State (in this case Ireland); (2) as a result of the intervention, competition has been distorted; (3) the intervention gives the recipient (in this case Apple) an advantage on a selective basis (i.e. a benefit that was not available to other companies); and (4) the intervention is likely to affect trade between Member States. While these tests appear straight forward on the face of it, in practice assessing their application to specific circumstances can be both complex and difficult.
It is now well established that tax treatment can, in certain circumstances, constitute state aid. However, that’s not what is at issue here. What’s at issue is the very sensitive subject of Ireland’s right to regulate its own taxation policies, the European Commission’s use of EU state aid rules to potentially circumvent that right and slap bang in the middle of it all are the tax structures used by certain multinationals to reduce their tax bills and how multinationals allocate profits internally within those structures.
In reaching its decision, the European Commission called into question two Tax Rulings issued by the Irish Revenue Commissioners to Apple. Tax Rulings are letters of comfort issued by a Tax Authority designed to give a company clarity on how it will be taxed in its jurisdiction. They aren’t unusual. In this case, the Irish Revenue Commissioners considered Apple’s Irish corporate and tax structures in both 1991 and 2007 and, based on applicable tax rules at the time, came to the view that while some of Apple’s profits were taxable in Ireland, the bulk of them were not subject to tax in Ireland. The Revenue Commissioners didn’t express a view on where those other profits were to be taxed, that wasn’t within its remit, only that they were not subject to tax in Ireland. This was because Apple had put a structure in place that meant the Head Offices of the Irish companies could not be said to be located in Ireland, or indeed in any particular country, for tax purposes. And, Apple allocated the bulk of its profits to these Head Offices, where they effectively sat in ‘tax limbo land’.
The Commission has now determined that Apple’s allocation of the bulk of its profits to these Head Offices, thereby avoiding tax on them, was artificial and didn’t reflect economic reality. And, in a somewhat pointed message stated that the two Tax Rulings issued by the Irish Revenue Commissioners ‘endorsed’ this artificial allocation of profits, and therefore constituted state aid.
The question of allocation of profits aside, and leaving aside also the legal status of Tax Rulings within the context of state aid rules, these types of tax structures (rightly or wrongly) are relatively widely used. Given that one of the tests that must be met for state aid is that the intervention must give the recipient an advantage that’s not available to other companies, one would assume that if any other company set up a structure similar to the structure used by Apple, then the Revenue Commissioners would have adopted a consistent approach. Meaning, the approach taken by the Revenue Commissioners could not be said to have been specific to Apple (and only available to Apple), but rather would apply to, and would have been available to, any company that adopted that type of tax structure. This ‘selective basis’ point, is likely to be the critical point in determining the outcome of the appeal, and how far the Commission will be allowed stretch the state aid rules. For those who want a sneak preview, keep a watchful eye on the Santander case (C-20/15P and C-21/15P) currently before the European Court of Justice!