In a significant and long-awaited decision, the European Commission has held that Ireland granted tax benefits to Apple in contravention of EU State aid rules. The Commission has estimated the benefits to be worth up to €13 billion which is by far the largest ever State aid recovery order made by the Commission. The previous Commission record for an EU State aid judgment was a €1.3 billion ruling in 2014 involving a German racetrack.
The Commission, which has substantial powers under State aid law stemming from Article 108 of the Treaty on the Functioning of the European Union, and Regulation 2015/1589, first requested information from Ireland in relation to this issue in 2013. An in-depth State aid investigation was subsequently launched in June 2014.
The investigation centred on two tax rulings granted to two Irish subsidiaries of Apple in 1991 and 2007. According to the Commission findings, the rulings substantially and artificially lowered the tax paid by Apple in Ireland since 1991.
The Commission assessment
According to the Commission, the tax rulings endorsed a way to establish the taxable profits for the two Irish entities which did not correspond with economic reality: almost all sales profits recorded by the two companies were internally attributed to a "head office". According to the Commission, this "head office" had no employees, did not own premises, and had no operating capacity to handle and manage substantive business. The Commission noted that these profits allocated to the “head offices” were not subject to tax in any country under specific provisions of Irish tax law, which are no longer in force.
Pursuant to Regulation 2015/1589, the Commission can only order recovery of unlawful State aid for a period of ten years. The Commission has ordered Ireland to recover from Apple the unpaid tax for the ten-year period since 2003, which according to their calculations amounts up to €13 billion, plus interest. The Commission shall fix the interest "at an appropriate rate." Interest is payable from the date on which the unlawful aid was at the disposal of the beneficiary until the date of its recovery.
Interestingly, the Commission states in its press release that the amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by both companies during this period. The assertion creates a certain amount of ambiguity and this issue may be expanded upon in the full publication of the decision.
The Commission noted that the recovery period stops in 2014, as Apple changed its structure in Ireland as of 2015 and the ruling of 2007 no longer applies.
The decision will not spell the end of tax rulings from tax authorities of member states. The Commission pointed out that tax rulings as such are perfectly legal. They give a company clarity on how its corporation tax will be calculated or on the use of special tax provisions.
The Commission also pointed out that the decision does not call into question Ireland’s general tax system or its corporate tax rate.
Companies will have to be aware of the Commission’s finding that profits must be allocated between companies in a corporate group, and between different parts of the same company, in a way that reflects economic reality.
The Commission decision is appealable to the Court of Justice of the European Union. Both the Irish state and Apple have indicated that they intend to appeal the Commission decision. The Commission has noted that pending an appeal, which may take a number of years, Ireland must still recover the illegal State aid, but could, for example, place the recovered amount in an escrow account pending the outcome of the appeals process.