Brussels, 30 August 2016
The European Commission has
concluded that Ireland granted undue tax benefits of up to €13 billion to Apple.
This is illegal under EU state aid rules, because it allowed Apple to pay
substantially less tax than other businesses. Ireland must now recover the
illegal aid.
Commissioner Margrethe
Vestager, in charge of competition policy, said: "Member States cannot
give tax benefits to selected companies – this is illegal under EU state aid
rules. The Commission's investigation concluded that Ireland granted illegal
tax benefits to Apple, which enabled it to pay substantially less tax than
other businesses over many years. In fact, this selective treatment allowed
Apple to pay an effective corporate tax rate of 1 per cent on its European
profits in 2003 down to 0.005 per cent in 2014."
Following an in-depth state
aid investigation launched
in June 2014, the European Commission has concluded that two tax
rulings issued by Ireland to Apple have substantially and artificially lowered
the tax paid by Apple in Ireland since 1991. The rulings endorsed a way to
establish the taxable profits for two Irish incorporated companies of the Apple
group (Apple Sales International and Apple Operations Europe), which did not
correspond to economic reality: almost all sales profits recorded by the two
companies were internally attributed to a "head office".
The
Commission's assessment showed that these "head offices" existed only
on paper and could not have generated such profits. These profits allocated to
the "head offices" were not subject to tax in any country under
specific provisions of the Irish tax law, which are no longer in force. As a
result of the allocation method endorsed in the tax rulings, Apple only paid an
effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on
the profits of Apple Sales International.
This selective tax treatment
of Apple in Ireland is illegal under EU state aid rules, because it gives Apple
a significant advantage over other businesses that are subject to the same
national taxation rules. The Commission can order recovery of illegal state aid
for a ten-year period preceding the Commission's first request for information
in 2013. Ireland must now recover the unpaid taxes in Ireland from Apple for
the years 2003 to 2014 of up to €13 billion, plus interest.
In fact, the tax treatment in
Ireland enabled Apple to avoid taxation on almost all profits generated by
sales of Apple products in the entire EU Single Market. This is due to Apple's
decision to record all sales in Ireland rather than in the countries where the
products were sold. This structure is however outside the remit of EU state aid
control. If other countries were to require Apple to pay more tax on profits of
the two companies over the same period under their national taxation rules,
this would reduce the amount to be recovered by Ireland.
Apple's tax structure in
Europe
Apple Sales International and Apple Operations Europe are two Irish incorporated
companies that are fully-owned by the Apple group, ultimately controlled by the
US parent, Apple Inc. They hold the rights to use Apple's intellectual property
to sell and manufacture Apple products outside North and South America under a
so-called 'cost-sharing agreement' with Apple Inc.
Under this agreement, Apple
Sales International and Apple Operations Europe make yearly payments to Apple
in the US to fund research and development efforts conducted on behalf of the
Irish companies in the US. These payments amounted to about US$ 2 billion in
2011 and significantly increased in 2014. These expenses, mainly borne by Apple
Sales International, contributed to fund more than half of all research efforts
by the Apple group in the US to develop its intellectual property worldwide.
These expenses are deducted from the profits recorded by Apple Sales
International and Apple Operations Europe in Ireland each year, in line with
applicable rules.
The taxable profits of Apple
Sales International and Apple Operations Europe in Ireland are determined by a tax ruling granted by Ireland in 1991, which in 2007 was replaced by a similar second tax ruling.
This tax ruling was terminated when Apple Sales International and Apple
Operations Europe changed their structures in 2015.
Apple Sales International
Apple Sales International is
responsible for buying Apple products from equipment manufacturers around the
world and selling these products in Europe (as well as in the Middle East,
Africa and India). Apple set up their sales operations in Europe in such a way
that customers were contractually buying products from Apple Sales International in Ireland rather than
from the shops that physically sold the products to customers. In this way
Apple recorded all sales, and the profits stemming from these sales, directly
in Ireland.
The two tax rulings issued by
Ireland concerned the internal allocation of these profits within Apple Sales
International (rather than the wider set-up of Apple's sales operations in
Europe). Specifically, they endorsed a split of the profits for tax purposes in
Ireland: Under the agreed method, most profits were internally allocated away
from Ireland to a "head office"
within Apple Sales International. This "head office" was not
based in any country and did not have any employees or own premises. Its
activities consisted solely of occasional board meetings. Only a fraction of
the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The
remaining vast majority of profits were allocated to the "head
office", where they remained untaxed.
Therefore, only a small
percentage of Apple Sales International's profits were taxed in Ireland, and
the rest was taxed nowhere. In 2011, for example (according to figures released
at US Senate public hearings), Apple Sales International recorded profits of
US$ 22 billion (c.a. €16 billion[1]) but under the terms of the
tax ruling only around €50 million were considered taxable in Ireland, leaving
€15.95 billion of profits untaxed. As a result, Apple Sales International paid
less than €10 million of corporate tax in Ireland in 2011 – an effective tax
rate of about 0.05% on its overall annual profits. In subsequent years, Apple
Sales International's recorded profits continued to increase but the profits
considered taxable in Ireland under the terms of the tax ruling did not. Thus
this effective tax rate decreased further to only 0.005% in 2014.
Apple Operations Europe
On the basis of the same two
tax rulings from 1991 and 2007, Apple Operations Europe benefitted
from a similar tax arrangement over the same period of time. The company was
responsible for manufacturing certain lines of computers for the Apple group.
The majority of the profits of this company were also allocated internally to
its "head office" and not taxed anywhere.
Commission assessment
Tax rulings as such are
perfectly legal. They are comfort letters issued by tax authorities to give a
company clarity on how its corporate tax will be calculated or on the use of
special tax provisions.
The role of EU state aid
control is to ensure Member States do not give selected companies a better tax
treatment than others, via tax rulings or otherwise. More specifically, 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. This means
that the allocation should be in line with arrangements that take place under
commercial conditions between independent businesses (so-called "arm's length principle").
In particular, the
Commission's state aid investigation concerned two consecutive tax rulings
issued by Ireland, which endorsed a method to internally allocate profits within Apple Sales
International and Apple Operations Europe,two Irish incorporated companies. It
assessed whether this endorsed method to calculate the taxable profits of each
company in Ireland gave Apple an undue advantage that is illegal under EU state
aid rules.
The Commission's investigation
has shown that the tax rulings issued by Ireland endorsed an artificial
internal allocation of profits within Apple Sales International and Apple
Operations Europe,which has no factual or economic justification.
As a result of the tax rulings, most sales profits of Apple Sales International
were allocated to its "head office" when this "head office"
had no operating capacity to handle and manage the distribution business, or
any other substantive business for that matter. Only the Irish branch of Apple Sales International had the
capacity to generate any income from trading, i.e. from the distribution of
Apple products. Therefore, the sales profits of Apple Sales International
should have been recorded with the Irish branch and taxed there.
The "head office"
did not have any employees or own premises. The only activities that can be
associated with the "head offices" are limited decisions taken by its
directors (many of which were at the same time working full-time as executives
for Apple Inc.) on the distribution of dividends, administrative arrangements
and cash management. These activities generated profits in terms of interest
that, based on the Commission's assessment, are the only profits which can be
attributed to the "head offices".
Similarly, only the Irish branch of Apple Operations Europe had the
capacity to generate any income from trading, i.e. from the production of
certain lines of computers for the Apple group. Therefore, sales profits of
Apple Operation Europe should have been recorded with the Irish branch and
taxed there.
On this basis, the Commission
concluded that the tax rulings issued by Ireland endorsed an artificial
allocation of Apple Sales International and Apple Operations Europe's sales
profits to their "head offices", where they were not taxed. As a
result, the tax rulings enabled Apple to pay substantially less tax than other
companies, which is illegal under EU state aid rules.
This decision does not call
into question Ireland's general tax system or its corporate tax rate.
Furthermore, Apple's tax
structure in Europe as such, and whether profits could have been recorded in
the countries where the sales effectively took place, are not issues covered by
EU state aid rules. If profits were recorded in other countries this could,
however, affect the amount of recovery by Ireland (see more details below).
Recovery
As a matter of principle, EU
state aid rules require that incompatible state aid is recovered in order to
remove the distortion of competition created by the aid. There are no fines
under EU State aid rules and recovery does not penalise the company in
question. It simply restores equal treatment with other companies.
The Commission has set out in
its decision the methodology to calculate the value of the undue competitive
advantage enjoyed by Apple. In particular, Ireland must allocate to each branch
all profits from sales previously indirectly allocated to the "head
office" of Apple Sales International and Apple Operations Europe, respectively,
and apply the normal corporation tax in Ireland on these re-allocated profits.
The decision does not ask for the reallocation of any interest income of the
two companies that can be associated with the activities of the "head
office".
The Commission can only order
recovery of illegal state aid for a ten-year period preceding the Commission's
first request for information in this matter, which dates back to 2013. Ireland
must therefore recover from Apple the unpaid tax for the period since 2003,
which amounts to up to €13 billion, plus interest. Around €50 million in unpaid
taxes relate to the undue allocation of profits to the "head office"
of Apple Operations Europe. The remainder results from the undue allocation of
profits to the "head office" of Apple Sales International. 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 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 Apple Sales
International and Apple Operations Europe for this period. This could be the
case if they consider, in view of the information revealed through the
Commission’s investigation, that Apple's commercial risks, sales and other
activities should have been recorded in their jurisdictions. This is because
the taxable profits of Apple Sales International in Ireland would be reduced if
profits were recorded and taxed in other countries instead of being recorded in
Ireland.
The amount of unpaid taxes to
be recovered by the Irish authorities would also be reduced if the US
authorities were to require Apple to pay larger amounts of money to their US
parent company for this period to finance research and development efforts. These
are conducted by Apple in the US on behalf of Apple Sales International and
Apple Operations Europe, for which the two companies already make annual
payments.
Finally, all Commission
decisions are subject to scrutiny by EU courts. If a Member State decides to
appeal a Commission decision, it must still recover the illegal state aid but
could, for example, place the recovered amount in an escrow account pending the
outcome of the EU court procedures.
Background
Since June 2013, the
Commission has been investigating the tax ruling practices of Member States. It
extended this information inquiry to all Member States in December 2014. In October
2015, the Commission concluded that Luxembourg and the Netherlands had granted
selective tax advantages to Fiat and Starbucks, respectively. In January
2016, the Commission concluded that selective tax advantages granted by Belgium
to least 35 multinationals, mainly from the EU, under its "excess
profit" tax scheme are illegal under EU state aid rules. The Commission
also has two ongoing in-depth investigations into concerns that tax rulings may
give rise to state aid issues in Luxembourg, as regards Amazon and McDonald's.
This Commission has pursued a
far-reaching strategy towards fair taxation and greater transparency and we
have recently seen major progress. Following our proposals on tax transparency
of March 2015, Member States reached
a political agreementalready in October 2015 on automatic exchange of
information on tax rulings. This legislation will help to bring about a much
greater degree of transparency and deter from using tax rulings as an
instrument for tax abuse.
In June 2015, we unveiled our Action
Plan for fair and effective taxation: a series of initiatives
which aims to make the corporate tax environment in the EU fairer and more
efficient. Key actions included a framework to ensure effective taxation where
profits are generated and a strategy to re-launch the Common Consolidated
Corporate Tax Base for which a fresh proposal is expected later this year.
The
Commission launched a further package
of initiatives to combat corporate tax avoidance within the EU and
throughout the world on 27 January of this year. As a direct result, Member
States have already agreed to tackle the most prevalent loopholes in national
laws that allow tax avoidance to take place and to extend their automatic exchange of
information to country-by-country reporting of tax-related financial
information of multinationals. A proposal is also on the table to make some of
this information public. All of our work rests on the simple principle that all
companies, big and small, must pay tax where they make their profits.
The non-confidential version
of the decisions will be made available under the case number SA.38373in the State aid register on
the DG
Competition website once any confidentiality issues have been
resolved. The State
Aid Weekly e-News lists new publications of State aid decisions on
the internet and in the EU Official Journal.
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