The European Commission has issued its final decision on the way Apple paid tax in Ireland, saying that the US multinational received illegal State aid and owes Ireland €13 billion in tax
How did it start?
In 2013 a key subcommittee of the US Senate held hearings into the tax affairs of various big US companies, amid growing controversy about how little tax they paid on profits earned outside the US.
The hearings were chaired by high-profile senators John McCain and Carl Levin, and Apple chief executive Tim Cook was among those called for questioning. The hearings highlighted how two significant Apple subsidiaries in Ireland had paid tax of 2 per cent or less on profits over many years, well below the headline Irish corporation tax rate of 12.5 per cent.
The senators dubbed Ireland a “tax haven”, a point hotly disputed by the Irish Government. Apple said it had got a tax incentive deal when it came to Ireland in the 1980s, but that it had not received any special treatment – and had established huge operations here that were central to its European operations.
Where did the European Commission come in?
In 2014, the European Commission announced that it was opening a formal investigation into the tax arrangement of Apple in Ireland, Starbucks in the Netherlands and Fiat and Amazon in Luxembourg. It had actually started its initial investigation into Apple's tax affairs in Ireland the previous year.
It is important to understand the basis for these investigations. The EU Commission is claiming that EU member states – including Ireland – offered illegal state aid to the US companies involved. In other words, it is saying Ireland offered Apple a deal that was overly generous and not on offer to other companies.
The commission’s decision was thus against Ireland – though obviously it has implications for Apple, which is also now considered a party to case who can also appeal.
So what exactly is the commission looking at?
As with all such investigations, this comes down to specifics. The commission is looking at two so-called “tax rulings” issued by the Revenue Commissioners to Apple in 1991 and 2007.
These rulings are common and give companies some certainty about how the Revenue will impose taxes. However, in the case of Apple, the European Commission argues that a proper basis was not used for agreeing how Apple would be taxed – and that the Irish Revenue effectively gave the US giant an overly-generous deal, in recognition of it providing jobs and investment here.
The details relate to the way Apple accounted for costs and revenues across Europe – and how this led to significant profits for its Irish operations – and the way the profits of its two key subsidiaries here were calculated.
What has the commission concluded?
The commission already issued a preliminary decision in 2014 saying it believed Ireland offered Apple illegal State aid. It confirmed this in its final ruling. It has told Ireland it must collect tax from Apple that the US company should have paid over the years, estimating this to be €13 billion plus interest.
Expectations in Dublin had been that the final figure would be much lower. There is now considerable annoyance with the European Commission, with Ministers here arguing that it has hugely exceeded its powers. In turn the Commission accuses Ireland of a flagrant breach of state aid rules.
What happens next?
There will be a storm of international publicity, given the huge global interest in the issue and the amount of money involved. Rightly or wrongly, other European countries and the US will all feel that some of this tax revenue rightly belongs to them, rather than Ireland – a point hinted at by Margrethe Vestager, the EU Competition Commissioner, in her press conference.
Ireland and Apple are seen as certain to appeal the decision to the European courts – Apple has already confirmed it will do so. However the Government will be obliged to issue a tax demand to Apple in the coming months in any case. The legal appeal process could go on for years.
So is this more cash for the exchequer?
It is a potential windfall – but one that the Government does not want. Ironically, the Government will be appealing a decision that a big company must pay it a load of money. The Government will argue that it has no option, given the impact of the negative decision on Ireland’s long-term drive to attract inward investment and the fears it could create among other companies here. Already Apple has warned about the impact of the decision on US investment in Europe, though making no specific reference to its operation here.
Ministers have been told that if the money is paid to the State at some stage , EU rules would mean that – as it is a once-off payment – it would have to be used to pay down debt, rather than used to fund extra Government spending.
Much will depend on how much cash is involved. The Government will appeal the decision no matter what political flak this involves. But the bigger the amount, the trickier the politics of this will be both at home and abroad.