Explainer: Apple’s €13bn tax appeal has huge implications

Case is of massive significance for Ireland and for the policing of state aid by the European Commission

There wasn't even a brass plate in Dublin to identify Apple Sales International. Or at least the court papers do not record it. The "head office" of one of the largest and most profitable companies incorporated in Ireland effectively had no physical presence in Ireland.

It held the rights to use Apple's intellectual property to sell and manufacture Apple products outside the Americas. But it had no premises, no staff, and its board met only occasionally to discuss the distribution of dividends, administrative arrangements and cash management. The directors were full-time executives of other Apple entities.

Crucially, it had no tax residency in Ireland.

It was a happy arrangement for Apple, duly approved by the Irish government. It ensured that the digital giant’s tax liability for sales of its products across Europe in the decade between 2003 and 2014 dropped from 1 per cent of profits to 0.005 per cent.


Or so the European Commission calculates. Apple demurs.

In 2013, the Commission's competition directorate decided to investigate the arrangement and, in June 2016, Commissioner Margrethe Vestager announced what amounted to the largest corporate tax fine in history.

Investment managers would oversee the disputed cash in the escrow account making low-risk investment decisions. The Irish taxpayer would be protected from any losse

Technically speaking, however, it was not a fine: instead, a most reluctant Irish Government was ordered to recover some €13 billion in taxes allegedly underpaid by Apple, regarded by the Commission as improper state aid.

“Member states cannot give tax benefits to selected companies. This is illegal under EU state aid rules,” Vestager said at the time. “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.”

Apple has always insisted that it is absolutely not true that it did not pay all the taxes due. Apple says it is committed to respecting all tax laws as they stand, and that it pays huge amounts of tax on its profits – some $37 billion to the US treasury alone in respect of its international operations..

It is now, the company boasts, the world’s and Ireland’s largest taxpayer. And the 6,000 workers it employs in Ireland pay a huge part of the State’s income tax, it notes.


An oral hearing in the appeal against the commission ruling by both Ireland and Apple – whose €14.3 billion (including interest) is now resting safely in an escrow account held in Dublin pending the court's ruling – opens in the General Court of the European Union in Luxembourg on Tuesday.

The proceedings, mainly written pleadings, are expected to last for months after which an appeal to the senior Court of Justice of the European Union (ECJ) is likely.

Ireland’s case will be articulated by former attorney general Paul Gallagher SC.

Related proceedings against Ireland taken by the Commission, over the delay in collecting the back taxes following the ruling, were dropped earlier this year when Minister for Finance Pascal Donohoe announced he had received from Apple €13.1 billion in back taxes plus €1.2 billion interest.

Investment managers would oversee the disputed cash in the escrow account, he said, making low-risk investment decisions. The Irish taxpayer would be protected from any losses, he promised.

Apple has contributed to a surge in tax payments to the Irish exchequer by the multinationals

Centrally at issue in Luxembourg is not the level of tax levied by Ireland – our 12.5 per cent rate is a “national competence” – but what is seen as a discriminatory approach arising from “tax rulings” issued by Ireland to Apple in 1991 and 2007 which, it is alleged, artificially lowered the tax liability – and the related approval of the group accounting arrangements.

These rulings, a standard mechanism in states’ dealings with businesses to clarify their likely liabilities, represent, the Commission will argue, a serious breach of single market level-playing field rules, providing a special deal for one company which advantages them against competitors.

Crucially the rulings are supposed to uphold the principle that profits are allocated between companies in a corporate group, and between different parts of the same company, in a way that reflects economic reality.

For the Government, supported by a broad political consensus in a Dáil vote in September 2016, the Commission ruling was seen as a serious threat to the State’s strategic policy of attracting multinationals to Ireland with promises of a low-tax environment, the huge potential windfall gain notwithstanding.

In its pleadings to the court, it will argue that the Commission, in intruding on a tax competence reserved to member states, has egregiously exceeded its powers.

The context, Dublin will argue, is the determination of the Commission and some member states to browbeat Ireland into accepting tax harmonisation and the principle of a common tax base. The treaties do not support them.

Political appetite

Much has changed in the Irish tax landscape since the Commission ruling. Internationally, the political appetite for clamping down on “tax havens” – Ireland vehemently denies it can be so described – will see important reforms proposed this year by the OECD as part of the so-called Base Erosion and Profit Shifting (Beps) process.

Only too well aware of the changing climate on the issue and beginning to acknowledge that its tax strategy for attracting investment will have to evolve, Ireland abolished its "double Irish" arrangement that allowed companies to register a subsidiary here but have it tax resident elsewhere – a form of which was exemplified by Apple Sales International – although it has been criticised over the lengthy phasing out period for the measure.

The Government has also enthusiastically supported the Commission’s 2015 transparency regime, which provides automatic exchange of information on tax rulings between member states. And it has accepted the rationale that international co-ordination and agreement on tax base definitions is both necessary and inevitable, and pledged to embrace the reforms which will come out of the OECD process.

Apple has changed its own corporate structure, restructured a new Irish Beps tool called Capital Allowances for Intangible Assets (CAIA), also nicknamed the “Green Jersey”. The bookkeeping change was so significant that it contributed to the extraordinary one-off revision in Irish GDP for 2015 by 26 per cent (later revised to 34.4 per cent).

And Apple has contributed to a surge in tax payments to the Irish exchequer by the multinationals.

But the tech giant is confident in fighting its case alongside the Government (with Luxembourg also in support, though the United States was refused permission by the court to join as a supporting party). The legal argument of the digital giant has three main elements.

Insisting that nothing it did, in good faith, at the time broke any of the existing rules, Apple alleges firstly that the Commission is attempting retrospectively to rewrite EU law, to “retrofit” interpretations to EU law in a bid to bolster a political agenda.

It warns that the absence of “legal certainty” in the application of the law threatens the rule of law in the EU and is likely to jeopardise inward investment. Business needs consistency and certainty above all, the company says, insisting that, if the rules are changed, it will happily adhere to them going forward.

And it hotly disputes the Commission figures for its international tax contributions, arguing that it also paid substantial amounts to Ireland and other European countries through other Apple affiliated companies.

In particular, the company says the Commission takes no account of the fact that, in the disputed 10-year period, Apple was making provision in its accounts for huge deferred US tax liabilities. When these were eventually paid in 2014 the bill from the US taxman at $21 billion fortuitously matched the scale of those provisions and significantly exceeded the Commission “fine”.

The case next week will also hinge on an argument about where tax should be paid – in Ireland or the US. Apple argues, in line with US thinking, that tax should be paid where the intellectual property (IP) – the patents, copyrights and trademarks behind major products on which its sales are based – resides. Allocating the value of the IP input to the added value in Apple sales is the accounting challenge – almost a philosophical challenge – which was resolved controversially in the Irish tax rulings.

Royalty payments related to the use of IP were central to multinational tax planning. By charging their European operations for the use of this IP, they reduced profits declared in Europe.

‘Head office’

The contested tax rulings, seen as a form of state aid, 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, the Commission claims, did not correspond to economic reality. Almost all sales profits recorded by the two companies were internally attributed to a "head office".

Apple Sales International and Apple Operations Europe, whose structure has since changed, held the rights to use Apple’s intellectual property to sell and manufacture Apple products outside North and South America.

The Commission’s assessment showed that these “head offices” existed only on paper and could not have generated such profits. The profits allocated to the “head offices” were not subject to tax in any country under specific provisions of the then Irish tax law. As a result, the Commission says, Apple only paid an effective corporate tax rate in Ireland of 0.005 per cent in 2014, down from 1 per cent in 2003 on the Europe-wide profits of Apple Sales International.

In 2011, for example (according to figures released at US Senate public hearings), Apple Sales International recorded profits of about €16 billion but, under the terms of the tax ruling only about €50 million was considered taxable in Ireland, leaving €15.95 billion of profits untaxed.

Apple Sales International paid less than €10 million of corporate tax in Ireland in 2011.

There is also likely to be an argument in the court about how the €13 billion state aid figure was calculated. The Commission figure is based on the assumption that all the “state aid” was Irish but the amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries had required Apple to pay more taxes on the profits recorded by Apple Sales International and Apple Operations Europe for this period.

The appeal has huge implications not only for the potential Irish windfall, but for the scope and powers of the Commission’s policing of state aids. It will be watched closely right across Europe and the US.