Apple case will stand or fall on backing up claim of no special deal

The European Commission has formally announced its investigation into the tax affairs in Ireland of Apple, but the fuse was first lit in May 2013.

Then, the iPhone maker shocked a US senate committee hearing when it revealed three of its Irish units were “stateless” for tax purposes and that it had previously negotiated a special deal on tax with the Irish authorities.

The shock waves reverberated all the way to Brussels, and the commission immediately began requesting documents about Apple from the Department of Finance as well as from the Revenue Commissioners.

Based upon the documents supplied, the commission developed “concerns” about whether Apple’s tax arrangements here constitute illegal state aid.

These concerns led to the decision to formally put Ireland under the microscope yesterday. Similar investigations were also opened regarding Starbucks and the Netherlands, and Fiat Finance and Trade in Luxembourg.

The department maintains it has nothing to hide and says it is ready to battle the commission all the way to the European Court of Justice if necessary.

It has hired a legal team packed with senior barristers, including a mystery British QC who is an expert in multinationals’ tax affairs, to defend its position.

Legal issue

Apple has never received any special treatment from Irish tax authorities, the department stoutly maintained yesterday. The State’s ability to back up this assertion is where the case against Ireland will stand or fall. So what is the commission’s beef? It is investigating rulings, or “letters of comfort”, given by Revenue to the company when Apple sought opinions as to whether its “stateless” tax practices here were within the rules.

If it finds that Apple got rulings which laid out special rules for calculating the company's tax base, it will deem this to be illegal State aid. Apple Sales International (ASI), which is registered in Ireland with a Cork address, is a lynchpin of the iPhone maker's international tax avoidance strategy.

Once a consumer orders a device, ASI sells the product at a high mark-up to other Apple subsidiaries around Europe and Asia. The effect of this manoeuvre is to make the Irish unit extremely profitable, while depressing the profitability of the various units abroad, where corporate tax rates are often high.

It is classic “transfer pricing”. You would expect ASI to then pay corporate tax at the standard rate of 12.5 per cent, but because it is controlled from abroad, it was always considered by Ireland not to be tax-resident here.

ASI does not fall under the tax net of Apple’s home country of the US either, so the company got an almost free ride on corporate tax. As revealed by this newspaper in February, ASI avoided $850 million of Irish corporate tax between 2004 and 2008, using this method.

Following Apple’s US senate hearing last May, the loophole was closed by the Government, starting from 2015.

Ireland now has 30 days to respond to the commission, although this can be extended by another month. A ruling could take many months, and if Ireland takes it to the European Court of Justice, closure could be five years away.

Legal issue

Ostensibly this is a legal issue, but in reality it is intensely political. Ireland’s corporate tax regime is hated by other member states. They have no right to touch it under EU law, but this investigation is seen by many in Brussels as an opportunity to inflict a high-profile bloody nose.

Feargal O’Rourke, a tax partner in Dublin with PwC, pointed out yesterday that Ireland’s tax system was not under investigation. “There is no case to answer regarding the 12.5 per cent tax rate or our system. That’s the positive angle.”

The department yesterday hinted that the fact that Revenue’s rulings to Apple “were not binding” will form part of its defence.

Will it try to convince the commission that the “rulings” were in fact not proper rulings at all, but merely advice or clarifications?

Since the US senate committee hearing, Apple has said publicly that in fact, it never got a special Irish tax deal after all. If that is the case, you would expect it to seek to correct the record of the US committee meetings.

The publicly listed company has also has yet to inform its shareholders via a stock exchange announcement how the closing of the Irish stateless loophole will affect its future profits.Two issues for the commission to examine further.