Apple tax ruling: ‘Member states cannot give unfair tax benefits’

EU Competition Commissioner Margrethe Vestager.

European competition commissioner Margarethe Vestager didn’t hold back in her criticisms of Ireland and Apple in her statement on the findings of the investigation into alleged breaches of state aid rules and their implications

THE European Commission has today adopted a decision that Apple’s tax benefits in Ireland are illegal.

Two tax rulings granted by Ireland have artificially reduced Apple’s tax burden for over two decades in breach of EU state aid rules. Apple now have to repay the benefits worth up to €13bn plus interest.

This decision sends a clear message that member states can not give unfair tax benefits to selected companies, no matter if they are European or foreign, large or small, part of a group or not.

This has been long confirmed by the EU courts and the commissions’ case practice. EU state aid rules have been in force since 1958 and apply to all companies that decide to operate in the EU single market.

State aid rules ensure that companies can compete on equal terms also as regards to taxation in each member state and these rules protect European taxpayers.


Today’s decision concerns two companies in the Apple group, Apple Sales International and Apple Operations Europe. Both are incorporated in Ireland and have been set up by Apple to record profits there. Their ultimate parent is Apple Inc in the US.

The first company, Apple Sales International (ASI), accounts for almost all of the unpaid taxes Ireland now needs to recover. So how does this fit into the Apple group?

ASI holds the rights to use Apple’s intellectual property to sell and to manufacture Apple’s products outside of North and South America. In exchange for these rights, it makes payments to Apple in the US to contribute to the development of this intellectual property, often more than $2bn (€1.8bn) per year.

In practice, ASI buys Apple products from their manufacturers. It sells these products throughout Europe as well as in the Middle East, in Africa and in India. No matter if you buy your iPhone in Berlin or Rome or elsewhere in these regions, contractually you buy it from ASI in Cork in Ireland. This is how Apple decided to set it up.

This means that all profits coming from all these sales are recorded in Ireland. That arrangement, however, is not a matter for state aid rules and we did not look into it as part of our investigation. Our state aid investigation focused on the allocation of profits recorded in Ireland within ASI.

Apple tax ruling: ‘Member states cannot give unfair tax benefits’


We looked into two tax rulings issued by Ireland to Apple, the first from 1991. It was replaced in 2007 by a similar second ruling. Both rulings endorsed an internal split of ASI profits for tax purposes.

They allocated the profits between each Irish branch and the company’s head office, or I should say so-called head office, because this so-called head office only existed on paper. It has no employees, it has no premises and it has no real activities.

The Irish branch was subject to normal Irish corporation tax. However, the head office was subject to no tax in Ireland or elsewhere. This was possible under Irish law which until 2013 allowed for so-called stateless companies.

As a result of the allocation method in the tax rulings, only a fraction of the profits from the Apple sales internationally were attributed to the Irish branch. The remaining, the vast majority, of profits, was attributed to the so-called head office.


This means that ASI as a whole paid very little tax on its profits. Let me illustrate. For one tax year, in 2011, ASI made a profit of €16bn. Less than €50m were allocated to the Irish branch. The rest, the huge majority, were allocated to the so-called head office where they remained untaxed.

This means that Apple’s effective tax rate in 2011 was 0.05%. To put that in perspective, it means that for every million euro of profits, it paid just €500 in taxes.

This effective tax rate dropped further to as little as 0.005% in 2014 which means that even less was paid in taxes. It was €50 per million in profits.


Our decision concluded that splitting the profits did not have any factual or economic justification. As mentioned, the so-called head office had no employees, no premises, no real activities. Only the Irish branch of ASI had any resources and facilities to sell Apple’s products.

But under the tax ruling, the so-called head office was attributed almost all of the company’s profits. In fact, due to Apple’s set-up, it was attributed almost all of the profits made from selling products throughout Europe, the Middle East, Africa and India.

The second company, Apple Operations Europe (AOE), makes certain Apple computers in Ireland. Under the same two tax rulings the majority of its profits was also artificially attributed to a so-called head office that only existed on paper and whose profits were not taxed.

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules. It gave Apple a significant benefit compared to other businesses. Tax rulings can not endorse a methodology or a method to calculate taxable profits for a business that fails to reflect economic activity, or the reality for that matter.

Apple tax ruling: ‘Member states cannot give unfair tax benefits’


So what are the consequences of this decision for Ireland and for Apple? To restore fair competition, Ireland must recover up to €13bn in unpaid taxes from Apple plus interest.

This amount covers the period 2003 until 2014. It starts 10 years before we made the first enquiries to the Irish authorities in 2013.

It is for the Irish authorities to now determine the exact amount and the modalities of payment. The recovered amount can for example be put in an escrow account in case of an appeal in front of the EU courts.

Also, Apple would no longer be allowed to benefit from this tax treatment in Ireland. The two tax rulings under investigation were in any event terminated last year by the company.

It is up to the Irish authorities to ensure that the company, under its new set-up, pays taxes in line with both Irish tax law and EU state aid rules.


Finally, it may not be that all the unpaid taxes are due in Ireland. ASI is based in Ireland where it records all profits on sales of Apple products throughout Europe, Africa, the Middle East and India.

As I have already mentioned, this recording of profits in itself is not matter for state aid rules. It results from Apple’s choice of structure.

But other countries in the EU or elsewhere can look into our investigation, they can use our data, our reasoning. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax in that country. That would reduce the amount to be paid back to Ireland.

The amount to be paid back to Ireland would also be reduced if the two companies were required to pay larger amounts of money to their US parent company to fund research and development efforts in addition to the annual payments they already have made.

As I mentioned, these are conducted by the US parents on behalf of ASI and AOE.

[timgcapApple CEO Tim Cook at Apple HQ in Hollyhill, Cork, during his visit on November 11, 2015.]TimCookInCork1_large.jpg[/timgcap]


Finally, I do hope that it is obvious that there are many good and transparent ways for EU countries to support and encourage investment, and many, many good reasons to invest in Europe. For one, we have a single market with more than 500m potential customers.

Today’s decision shows that we can act when a member state gives illegal state aid to a company. It is a good thing since illegal state aid harms competition. It is unfair.

Looking ahead, the ultimate goal should of course be that all companies, big or small, pay taxes where they generate their profits.

Enforcement of EU state aid rules can not do this alone that is why we need changes both in corporate philosophies and we need changes in legislation to address loopholes and to ensure transparency.

On the international level, both G20 and the OECD have taken important steps to reach this objective.

Also in the EU, under the responsibility of my colleagues, Valdis Dombrovskis and Pierre Moscovici, significant changes have been made.

It has been new legislation proposed, decided and now under implementation, with more to come. This is real change and it is change for the better.

The commission still have two in-depth state aid investigations under way into the tax treatment of Amazon and McDonalds in Luxembourg and we are continuing our work on reviewing more than 1,000 tax rulings from all EU countries that make use of them.

So we still have some work ahead of us to ensure that companies compete on equal terms and not on the expense of EU taxpayers, whether they be other companies or citizens.

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