The European Commission has published a letter sent to the Irish government which accuses it of having given illegal state aid to the US technology multinational Apple.
The European Commission has published a letter sent to the Irish government which accuses it of having given illegal state aid to the US technology multinational Apple. In the 21-page letter, sent in June but made public on Tuesday, the EC argued that the Irish Revenue granted tax rulings in favour of the Apple group which were apparently ‘motivated by employment considerations’. Such support may need to be repaid in penalties, which the FT reported ‘would be expected to run to billions of euros, according to people involved in the case’.
The published letter, which includes quotes from the original minutes and notes of meetings between Apple and the Irish government in 1990, states that: ‘The Commission is of the opinion that through [tax rulings in 1991 and 2007] the Irish authorities confer an advantage on Apple … that advantage is also granted in a selective manner.’ The EC’s letter suggests that profit allocation was a result of ‘negotiation rather than a [transfer] pricing methodology’. It says there was a lack of explanation behind the methodology, with the 2007 ruling failing ‘to explain the choice of operating costs as net profit indicator rather than a larger cost basis, such as costs of goods sold’. There were also apparent ‘inconsistencies in the application of the transfer pricing method chosen … that do not appear to comply with the arm’s length principle.’ Furthermore, the open-ended duration of the 1991 ruling ‘calls into question the appropriateness of the method agreed between Irish Revenue and Apple to arrive to that allocation in the latter years of the ruling’s application, given the possible changes to the economic environment and required remuneration levels’.
Apple has denied that it has received any special treatment. Apple CFO Luca Maestri was reported as saying: ‘We know that we didn’t do anything that was against the law and we are very confident that through the investigation it will be shown there were no selective treatments in our favour at any point in time.’ Apple further added in a statement: ‘Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government. Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.’
Heather Self (Pinsent Masons) commented that: ‘This letter should not be understood as the final word on the matter, but they do set out the Commission’s preliminary findings, which will have made extremely uncomfortable reading for those involved. One key area of concern highlighted is the length of the advance pricing arrangements that were agreed with Apple, compared to arrangements in other European countries that the EU cites as typical, lasting for no more than five years. Apple’s 1991 agreement with Ireland lasted 16 years. Clearly during that time, the company changed significantly – the launch of the iPod in 2001 took it into completely new consumer markets.’
Shortly after publication of the letter to Ireland, the EC also published its letter to Luxembourg regarding the transfer pricing arrangements for Fiat Finance & Trade.
The publication of both letters follow the June announcement that the EC is not only investigating Ireland and Luxembourg, but also Netherlands over its tax arrangements for Starbucks. Writing in Tax Journal earlier this year (20 June), Jonathan Schwarz (Temple Tax Chambers) warned that if it was found that there was unlawful aid, ‘the Commission may require the member state to recover the aid from the beneficiary, unless recovery would be contrary to a general principle of Community law.
'Unlawful past transfer pricing arrangements agreed with tax authorities could thus be subject to clawback of tax with interest. Groups that have benefited from similar tax rulings may wish to review those rulings in light of these investigations in the context of the state aid rules,’ Schwarz added.
Frédéric Donnedieu (Taxand) believed the recent announcement through media channels, rather than official routes, showed the EC to be ‘on the back foot’, saying: ‘The EC’s decision to look into the tax affairs of a number of high profile multinationals including Starbucks, Fiat and Apple for violation of state aid is a knee-jerk reaction to appear on the front foot. At the end of the day, the OECD and G20 have been leading the charge to modernise international tax policy and the EC are late to the party.’
Meanwhile, at the Conservative Party Conference, Chancellor George Osborne this week announced a clampdown on the ‘double Irish’ loophole first used by Apple, in what the press has dubbed the ‘Google tax’. In a tweet, Osborne said: ‘We want low taxes but taxes that are paid. Some tech multinationals divert profits offshore to avoid tax. We'll stop that [in the] Autumn Statement.’
Neal Todd (Berwin Leighton Paisner) commented: ‘The EC’s Apple announcement will have widespread ramifications for multinationals, funds and other taxpayers with operations in Europe [and] the chancellor’s observation that technology companies have been abusing the UK tax system is unfortunate. If the chancellor wishes to change the law then he is of course entitled to do so – but multinationals will be naturally concerned that this does not undermine the UK’s hard-earned reputation as being an attractive place to do business.’
The European Commission has published a letter sent to the Irish government which accuses it of having given illegal state aid to the US technology multinational Apple.
The European Commission has published a letter sent to the Irish government which accuses it of having given illegal state aid to the US technology multinational Apple. In the 21-page letter, sent in June but made public on Tuesday, the EC argued that the Irish Revenue granted tax rulings in favour of the Apple group which were apparently ‘motivated by employment considerations’. Such support may need to be repaid in penalties, which the FT reported ‘would be expected to run to billions of euros, according to people involved in the case’.
The published letter, which includes quotes from the original minutes and notes of meetings between Apple and the Irish government in 1990, states that: ‘The Commission is of the opinion that through [tax rulings in 1991 and 2007] the Irish authorities confer an advantage on Apple … that advantage is also granted in a selective manner.’ The EC’s letter suggests that profit allocation was a result of ‘negotiation rather than a [transfer] pricing methodology’. It says there was a lack of explanation behind the methodology, with the 2007 ruling failing ‘to explain the choice of operating costs as net profit indicator rather than a larger cost basis, such as costs of goods sold’. There were also apparent ‘inconsistencies in the application of the transfer pricing method chosen … that do not appear to comply with the arm’s length principle.’ Furthermore, the open-ended duration of the 1991 ruling ‘calls into question the appropriateness of the method agreed between Irish Revenue and Apple to arrive to that allocation in the latter years of the ruling’s application, given the possible changes to the economic environment and required remuneration levels’.
Apple has denied that it has received any special treatment. Apple CFO Luca Maestri was reported as saying: ‘We know that we didn’t do anything that was against the law and we are very confident that through the investigation it will be shown there were no selective treatments in our favour at any point in time.’ Apple further added in a statement: ‘Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government. Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.’
Heather Self (Pinsent Masons) commented that: ‘This letter should not be understood as the final word on the matter, but they do set out the Commission’s preliminary findings, which will have made extremely uncomfortable reading for those involved. One key area of concern highlighted is the length of the advance pricing arrangements that were agreed with Apple, compared to arrangements in other European countries that the EU cites as typical, lasting for no more than five years. Apple’s 1991 agreement with Ireland lasted 16 years. Clearly during that time, the company changed significantly – the launch of the iPod in 2001 took it into completely new consumer markets.’
Shortly after publication of the letter to Ireland, the EC also published its letter to Luxembourg regarding the transfer pricing arrangements for Fiat Finance & Trade.
The publication of both letters follow the June announcement that the EC is not only investigating Ireland and Luxembourg, but also Netherlands over its tax arrangements for Starbucks. Writing in Tax Journal earlier this year (20 June), Jonathan Schwarz (Temple Tax Chambers) warned that if it was found that there was unlawful aid, ‘the Commission may require the member state to recover the aid from the beneficiary, unless recovery would be contrary to a general principle of Community law.
'Unlawful past transfer pricing arrangements agreed with tax authorities could thus be subject to clawback of tax with interest. Groups that have benefited from similar tax rulings may wish to review those rulings in light of these investigations in the context of the state aid rules,’ Schwarz added.
Frédéric Donnedieu (Taxand) believed the recent announcement through media channels, rather than official routes, showed the EC to be ‘on the back foot’, saying: ‘The EC’s decision to look into the tax affairs of a number of high profile multinationals including Starbucks, Fiat and Apple for violation of state aid is a knee-jerk reaction to appear on the front foot. At the end of the day, the OECD and G20 have been leading the charge to modernise international tax policy and the EC are late to the party.’
Meanwhile, at the Conservative Party Conference, Chancellor George Osborne this week announced a clampdown on the ‘double Irish’ loophole first used by Apple, in what the press has dubbed the ‘Google tax’. In a tweet, Osborne said: ‘We want low taxes but taxes that are paid. Some tech multinationals divert profits offshore to avoid tax. We'll stop that [in the] Autumn Statement.’
Neal Todd (Berwin Leighton Paisner) commented: ‘The EC’s Apple announcement will have widespread ramifications for multinationals, funds and other taxpayers with operations in Europe [and] the chancellor’s observation that technology companies have been abusing the UK tax system is unfortunate. If the chancellor wishes to change the law then he is of course entitled to do so – but multinationals will be naturally concerned that this does not undermine the UK’s hard-earned reputation as being an attractive place to do business.’
