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Apple Tax: Battle lines are drawn

Definitive legal ruling may be years away

Two sides in a major international tax dispute – now leading to a court case - could hardly be further apart; given the respective positions adopted by the Irish Government and Apple as defendants, and those of the plaintiff, the European Commission.

The Government has insisted the commission greatly exceeded its powers in demanding that it should collect €13 billion in tax owed by Apple. The commission in its ruling last August claimed the tax due amounted to illegal state aid, citing a special tax deal in 1991 and 2007, which it said was arranged for Apple’s unique benefit.

Having decided to appeal the commission ruling, the Government has set out the grounds for its legal action. The commission has also published its full decision in detail, and argues that Ireland has failed to justify the “special treatment” that Apple received. The US multinational has also vigorously rejected the commission’s ruling, and is expected to file its appeal shortly.

Ireland’s defence of its tax decisions has been to insist that they did not involve a breach of EU state aid rules, and were fully in conformity with Irish tax law. Minister for Finance Michael Noonan has been forthright in his view that the commission was politically motivated in taking the case against Ireland, and had done so to undermine Ireland’s low corporate tax regime.

A key difference between the Government, Apple and the commission centres on where some of Apple’s profits should have been taxed. The commission’s case is that these should have been taxed in Ireland: both the Government and Apple’s defence is that those profits were not liable for Irish tax.

This, ultimately, is a matter for determination by the European Court of Justice in deciding on the roles played by two Apple subsidiaries in Ireland with offshore branches, to which profits were transferred.

Were these subsidiary companies – Apple Sales International and Apple Operations International – set up simply as a means of tax avoidance, and did the Revenue Commissioners in making their tax assessments apply the rules correctly by not taxing them here? The commission claims the profits that flowed back through these Irish subsidiaries should have been taxed in Ireland, but that this was avoided by aggressive tax planning, involving the use of “stateless” companies for tax residency purposes.

A tax controversy that began in 2013, when a US Senate subcommittee highlighted Apple’s low – 2 per cent – tax rate in Ireland, with claims that the country was a “tax haven”, later prompted the European commission’s subsequent investigation.

The Government had no option but to appeal the commission’s ruling, as Mr Noonan has said, “both to defend the integrity of our tax system, to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation”. A definitive legal ruling, however, may still be some years away.