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The European Commission has published its final decision on two tax rulings granted by Ireland to Apple, in which it explains why it concluded that these measures constituted illegal state aid.
The decision concerns two Opinions issued by the Irish Revenue on January 29, 1991, and May 23, 2007, to Apple Sales International (ASI) and Apple Operations Europe (AOE). The rulings concern the method by which ASI and AOE allocate profit to their respective Irish branches. The 1991 ruling was in force until 2007, when it was replaced by the 2007 ruling. The 2007 ruling was in force until Apple's new corporate structure in Ireland was put into place.
According to Article 107(1) of the Treaty of the Functioning of the European Union, any aid granted by a member state or through state resources that distorts or threatens to distort competition is incompatible with the internal market. The Commission explained that for a measure to be categorized as state aid, there must be an intervention by a state or through state resources, which is liable to affect trade between member states and confers a selective advantage on an undertaking, and must distort or threaten to distort competition.
In assessing the rulings' compatibility with this criteria, Commission noted that the contested rulings were issued by Irish Revenue and used by ASI and AOE to calculate their yearly corporation tax liability in Ireland. "The contested tax rulings are therefore imputable to Ireland," it said.
The Commission also stated that the Court of Justice holds that "a measure by which the public authorities grant certain undertakings a tax exemption which, although not involving a positive transfer of state resources, places the persons to whom it applies in a more favorable financial situation than other taxpayers constitutes state aid." According to the Commission, the contested rulings lowered ASI's and AOE's tax liability in Ireland "by deviating from the tax that those undertakings would otherwise have been obliged to pay under the ordinary rules of taxation of corporate profit in Ireland."
The Commission added that, to the extent that the rulings relieved ASI and AOE of a tax liability they would otherwise have been obliged to pay, "the aid granted under those rulings constitutes operating aid," by relieving them from a charge "they would normally have had to bear in their day-to-day management or normal activities." It argued that, in turn, these rulings freed up resources for ASI and AOE to invest in their business operations, thereby distorting competition in the market.
The Commission further determined that the rulings had conferred an economic advantage on ASI and AOE by reducing their "annual taxable profits, and thus their taxable bases."
EU regulations stipulate that the Commission is obliged to recover unlawful and incompatible aid, and that the member state concerned must take all necessary steps in this process. The power of the Commission to recover aid is subject to a limitation period of 10 years. The Commission said that, in this case, recovery should include aid granted from June 12, 2003, onwards and, since according to Apple the 2014 fiscal year is the last in which the 2007 ruling was applied by ASI and AOE to calculate their taxable profit in Ireland, should continue until September 27, 2014, the date on which their financial year ended.
The Commission concluded that all profits from the business activities of ASI and AOE should be allocated to their respective Irish branches for the period June 12, 2003, to September 27, 2014, "for the purposes of calculating ASI's and AOE's corporation tax liability under the ordinary rules of taxation of corporate profit in Ireland." Interest income from property of the Irish branches should also be allocated to the Irish branches of ASI and AOE.
The Commission said that Apple may claim deductions for certain interest and investment income attributable to ASI's and AOE's head offices, capital allowances under the 1991 ruling, and the profits of AOE's Singapore branch that were subject to taxation in Singapore. It added that the trading profits to be subjected to taxation in Ireland may also be adjusted following "an effective restatement of the statutory accounts or tax returns of ASI and AOE following corresponding payments and adjustments to the statutory accounts of other Apple group companies."
The Irish Government this week published the legal grounds on which it has appealed the Commission's decision. It said that the Opinions simply applied Section 25 of the Taxes Consolidation Act 1997, "which in accordance with the territoriality principle, taxes only the profits attributable to the branch, not the non-Irish profits of the company."
The Government emphasized that while the Irish branches of ASI and AOE carried out routine functions, all important decisions were made in the US, and the profits deriving from these decisions were not properly attributable to the Irish branches. It also argued that the Opinions did not depart from "normal" taxation, because ASI and AOE did not pay any less tax than was due under Section 25.
The US Treasury has responded to the Commission's publication. A spokesperson stated: "Treasury has reviewed the European Commission's decision against Apple. We continue to believe the Commission is retroactively applying a sweeping new state aid theory that is contrary to well-established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe. Moreover, it threatens to erode America's corporate tax base."
"To be clear, we agree that tax avoidance is a serious problem around the world. We are committed to continuing to work with the Commission and other international partners, such as through the OECD, toward our shared objective of preventing the erosion of our corporate tax bases."
Commenting on the latest developments, the American Chamber of Commerce Ireland said: "The Chamber is fully supportive of the Irish Government's decision to appeal this ruling and the independence of Ireland's Revenue authority to operate to the highest international standards. The Chamber believes that Ireland, and every other EU member state, should not have its tax policy and administration second guessed retrospectively."
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