EC says Apple’s Irish tax deal is illegal state aid

The European Commission has said it believes the Irish authorities conferred a tax advantage to Apple, according to its preliminary findings into the Irish Government's tax arrangement with the US multinational.

In the letter setting out the terms of the investigation published this morning, the European Commission says that its preliminary views is that two tax agreements reached by the Irish authorities in 1991 and 2007 “constitute State aid.”

The 21-page letter is a copy of the letter sent to the Government in June indicating that it was commencing a formal investigation following a preliminary enquiry. While a final decision is likely to be years away, it provides details of why the Commission decided to proceed with the investigation, having opened an informal request of information in October 2013.

Among the detail included in the letter is an account of the minutes of a meeting between a tax advisor representing Apple and an official from the Irish Revenue in 1991.

The letter focuses on two ‘tax rulings’ or agreements negotiated by the Irish authorities and Apple in 1991 and 2007. Much of the letter focuses on the principle of ‘transfer pricing’ , a structure which allows companies to allocate profits and taxes across different parts of a company.

While transfer pricing is legal, the Commission questions whether the Irish authorities adhered to the ‘arms length’ principle, a guiding principle of transfer pricing arrangements set out by the OECD. If found that the two tax rulings offered by the Governmnet to Apple in 1991 and 2007 “do not comply with the arm’s length principle.”

“Accordingly, the Commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple.”

It substantiates its preliminary finding on a number of grounds.

It points out that a mark-up of 65 per cent of the costs attributable to one of the Apple subsidiaries, AOE, appeared to have been “reverse engineered” so as to arrive at a taxable income of around $28-38 million.

It notes that the 1991 ruling was negotiated by the Irish authorities rather than substantiated by reference to comparable transactions. It also found “several inconsistencies” in the application of the transfer pricing method chosen by the Irish authorities when determining profit.

It also notes that the ruling was applied by Apple for fifteen years without revision. “Even if the initial agreement was considered to correspond to an arm’s length profit allocation, quod non, the open-ended duration of the 1991 ruling’s validity calls into question the appropriateness of the method agreed between [the two Apple subsidiaries].”

While countries are permitted to offer companies a myriad of tax breaks and specific tax arrangements to encourage economic activity, the European Commission is arguing that the specific tax ruling offered by the Government to Apple was in breach of state aid by giving an unfair advantage to Apple.

In its preliminary findings, the Commission states that the aid given by the Government to Apple “cannot be considered compatible with the internal market in that it does not facilitate the development of certain activities or of certain economic areas, nor are the incentives in question limited in time, digressive or proportionate to what is necessary to remedy to a specific economic handicap of the areas concerned.”

It notes that specific tax rulings “should not have the effect of granting the undertakings concerned lower taxation than other undertakings in a similar legal and factual situation.”

It also confirms that the government would be able to recoup the tax revenue that was received by the beneficiary, should the Commission win its state aid case.