See also: Ireland as a tax haven.
| European investigation into Apple's tax deal with Ireland | |
| Type: | State aid investigation under EU rules |
| Owner: | European Commission |
| Key People: | Margrethe Vestager, Tim Cook, Helena Malikova, Michael Noonan |
| Current Status: | finding annulled by European General Court |
| Embed: | yes |
| Court: | EJC |
| Decidedate: | 15 July |
| Decideyear: | 2020 |
| Shortname: | Ireland v Commission |
| Casenumber: | T‑778/16, T‑892/16 |
| Ecli: | ECLI:EU:T:2020:338 |
| Chamber: | Seventh |
| Language: | English |
| Judgerapporteur: | Vesna Tomljenović |
| Judgepresident: | Marc van der Woude |
| Judge1: | Anna Marcoulli |
| Judge2: | Jan M. Passer |
| Judge3: | Alexander Kornezov |
| Keywords: | State aid — Aid implemented by Ireland — Decision declaring the aid incompatible with the internal market and unlawful and ordering recovery of the aid — Advance tax decisions (tax rulings) — Selective tax advantages — Arm's length principle |
Apple's EU tax dispute refers to an investigation by the European Commission into tax arrangements between Apple and Ireland, which allowed the company to pay close to zero corporate tax over 10 years.[1]
On 29 August 2016, after a two-year investigation, Margrethe Vestager of the European Commission announced: "Ireland granted illegal tax benefits to Apple". The Commission ordered Apple to pay €13 billion, plus interest, in unpaid Irish taxes from 2004–14 to the Irish state.[2] It was the largest corporate tax fine (in fact a recovery order, technically not a fine) in history.[3] On 7 September 2016, the Irish State secured a majority in Dáil Éireann to reject payment of the back-taxes,[4] which including penalties could reach €20 billion, or 10% of 2014 Irish GDP. In November 2016, the Irish government formally appealed the ruling, claiming there was no violation of Irish tax law,[5] [6] and that the commission's action was "an intrusion into Irish sovereignty", as national tax policy is excluded from EU treaties.[7] In November 2016, Apple CEO Tim Cook, announced Apple would appeal,[8] and in September 2018, Apple lodged €13 billion to an escrow account, pending appeal. In July 2020, the European General Court struck down EU tax decision as illegal, ruling in favor of Apple.
The issue was Apple's variation of the Double Irish tax system, which, from 2004 to 2014, Apple used to shield €110.8 billion of non–US profits from tax.[9]
On 9 January 2015, Apple informed the Commission that it closed its hybrid–Double Irish, base erosion and profit shifting (BEPS) tool.[10] In Q1 2015, Apple restructured into a new Irish BEPS tool called the Capital Allowances for Intangible Assets (CAIA) tool,[11] [12] also called the Green Jersey. Apple's Q1 2015 restructuring required a 12 July 2016 restatement of Irish 2015 GDP, which increased it by 26.3 per cent (later revised to 34.4 per cent); the restatement was called "leprechaun economics", and led to new EU inquiries in 2017, and accusations in June 2018, that Ireland was the world's largest tax haven.[13]
Ireland's rejection of the EU Commission's "windfall" in back-taxes surprised some.[14]
On 15 July 2020, the European General Court ruled that the Commission "did not succeed in showing to the requisite legal standard" that Apple had received tax advantages from Ireland, and ruled in favour of Apple.
The European Commission appealed the decision of the lower court before the European Court of Justice, the supreme court in matters of EU law.
In November 2023, the advocate general Giovanni Pitruzzella in his role of top adviser to the European Court of Justice, recommended that the European Court of Justice annuls the decision of the lower European General Court. This is because the lower court did not correctly assess "the substance and consequences of certain methodological errors that, according to the Commission decision, vitiated the tax rulings", according to Pitruzzella. The European Court of Justice's final judgement is expected in 2024, the court follows the recommendation of its advocate general around four times out of five.[15]
On 23 December 1980, Apple opened production facilities in Holyhill, Cork.[16] [17] By 1990, the number of jobs had grown from 700 jobs to 1000 permanent jobs, as well as 500 sub-contractors.[18] Interview excerpts, published by European Commission, found that this information was used in the way of background information by a tax adviser representing Apple during meetings with Apple in 1990.[19]
By November 2016, Apple employed 6,000 people in Ireland, almost all of whom were in the Apple Hollyhill Cork plant. The Cork plant is Apple's only self-operated manufacturing plant in the world (Apple otherwise always contracts to third-party manufacturers). Holyhill is considered a low-technology facility, building iMacs to order by hand, and in this regard is more akin to a global logistics hub for Apple (albeit located on the island of Ireland). No research is carried out in the facility.[20] Unusually for a plant, over 700 of the 6,000 employees work from home (the largest remote percentage of any Irish technology company).[21] [22]
Apple's unusual Cork plant should be seen in the context of the job thresholds Ireland places on US multinationals making use of the main Irish BEPS tools, discussed here, which provide effective Irish tax rates of 0–2.5%, but require specific employment quotas; and give more "substance" to the BEPS tool.
In 2014, Apple's Irish structure consisted of two subsidiaries; Apple Operations Ireland ("AOI") an Irish-registered holding company which acts as an internal financing company. AOI claimed tax residence in Bermuda and thus, is not an Irish tax resident (the use of such a company in corporate tax structuring is sometimes referred to as a "Bermuda Black Hole").[23] The EU Commission State Aid recovery order does not pertain to AOI.
Apple Sales International ("ASI"), on the other hand, is the focus of the EU Commission's recovery order(and was the focus of 2013 Senate Investigation). ASI is an Irish-registered subsidiary of Apple Operations Europe ("AOE").[24] Both AOE and ASI are parties to an Irish advanced pricing agreement which took place in 1991.[25] This agreement was updated in 2007.[26] ASI is the vehicle through which Apple routed €110.8 billion in non–US profits from 2004 to 2014, inclusive.[11]
| Year | ASI Profit Shifted (USD m) | Average €/$ rate | ASI Profit Shifted (EUR m) | Irish Corp. Tax Rate | Irish Corp. Tax Avoided (EUR m) | |
|---|---|---|---|---|---|---|
| 2004 | 268 | .805 | 216 | 12.5% | 27 | |
| 2005 | 725 | .804 | 583 | 12.5% | 73 | |
| 2006 | 1,180 | .797 | 940 | 12.5% | 117 | |
| 2007 | 1,844 | .731 | 1,347 | 12.5% | 168 | |
| 2008 | 3,127 | .683 | 2,136 | 12.5% | 267 | |
| 2009 | 4,003 | .719 | 2,878 | 12.5% | 360 | |
| 2010 | 12,095 | .755 | 9,128 | 12.5% | 1,141 | |
| 2011 | 21,855 | .719 | 15,709 | 12.5% | 1,964 | |
| 2012 | 35,877 | .778 | 27,915 | 12.5% | 3,489 | |
| 2013 | 32,099 | .753 | 24,176 | 12.5% | 3,022 | |
| 2014 | 34,229 | .754 | 25,793 | 12.5% | 3,224 | |
| Total | 147,304 | 110,821 | 13,853 |
Apple's unique ASI structure, is believed to be the reason why Apple never had an Apple retail store in the Republic of Ireland (it even has one in smaller Belfast).[28]
In May 2013, Apple's tax practices were examined by a US bipartisan investigation of the Senate Permanent Subcommittee on Investigation.[29] The investigation aimed to examine whether Apple used offshore structures, in conjunction with arrangements, to shift profits from the US to Ireland.[30] Senators Carl Levin and John McCain drew light on what they referred to as a special tax arrangement between Apple and Ireland which allowed Apple to pay a corporate tax rate of less than 2%.[31] [32] [33] [34]
In June 2014, an investigation was opened by the European Commissioner for Competition on behalf of the EU Commission (SA 38373).[35] The Ireland case was opened in conjunction with two other similar cases; involving Starbucks (Netherlands) and Fiat (Luxembourg). The investigation was led for the European Commission by the Slovak national Helena Malikova,[36] together with a small team of four people.[37] The Commissioners noted concerns that discretion in transfer pricing rules had been used to give Apple selective advantage. They believed that this violated Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).[38] Article 107(1) states that aid granted by member states cannot threaten to distort competition.[39] They examined Irish tax rulings from 1991 and 2007 by the Irish Office of the Revenue Commissioners. The Commission referred to taxable profit allocated to the Irish branches of AOE and ASI. The Commission claimed the pricing arrangement between Apple and Ireland was not supported by an economic assessment and was in part supported by employment considerations.[40]
On 30 August 2016, the Commission released a 4-page press release describing its decision and rationale.[41] The EU Commission's full 130-page report on its State aid findings, including partially redacted information on Apple's Irish business (e.g. profits, employees, Board minutes etc.), was released on 19 December 2016.[42] According to PwC, the full report by the European Commission contained very detailed analysis of the transfer pricing methodology used by Apple.
According to the commission, the tax arrangement between Ireland and Apple qualifies as state aid as it meets the European Union's four criteria:[43]
The 30 August 2016 press briefing summarised the following findings from the main report:
The 30 August 2016 press briefing made the following statements regarding the financial implications:
The recovery order for €13 billion was an estimate subject to final ASI accounts. It covers the period 2004 to 2014 inclusive, as the commission is permitted to order a full recovery within a 10-year period from the start of an investigation. The January 2018 updated estimate of the recovery order had risen to €13.85 billion.[11] The Commission recovery order is simply the estimated profits of, mainly, ASI applied, at the prevailing Irish corporate tax rate of 12.5% (see Table 1 above; and full EU Commission report).[2] [44] In addition, Apple will also owe interest penalties at the Irish Revenue penalty rate (was 8% in 2016), which would total circa €6 billion, giving a total recovery order of circa €20 billion.[44]
A fallback position of the EU Commission's State aid case is that if ASI is not an Irish company, then it was a "stateless" company (given it was "legally" registered in Ireland), and Apple has been remitting royalty payments from EU–28 countries to a company in a jurisdiction with no EU tax treaty. Apple would, therefore, owe back-taxes to each individual EU country, from which these royalties were paid (and not to Ireland). As all other EU countries have corporation tax rates materially in excess of Ireland's 12.5% corporation tax rate, the total Apple effective taxes owned, in this scenario, would be materially in excess of €13 billion. Margrethe Vestager appealed to individual EU taxing authorities to assess this aspect of Apple's State aid case for themselves, on a case-by-case basis.[45]
In November 2016, in a letter to the Apple community in Europe, Tim Cook said the company would appeal. In the immediate aftermath of the commission's 29 August 2016 ruling, Ireland's finance minister Michael Noonan stated that Ireland would be appealing the decision, subject to cabinet approval.[46] On 2 September 2016, the Irish cabinet voted to approve the appeal.[47] The minority Fine Gael–led government also had to secure a general Dáil Éireann vote on the matter, which it did on 7 September, by a majority of 93 to 36, securing the support of the other main Irish political party, Fianna Fáil.[4] In November 2016, the Irish government also formally notified the EU Commission it would appeal and reject any claim to the €13 billion "windfall".
The appeal will firstly be heard in the EU's General Court, with any further appeal being taken to the EU's highest court; the European Court of Justice.[48] [49]
In August 2018, it was reported that the appeal would begin before the end of 2018, but could take over 5 years,[50] and that Apple had begun to lodge the €13 billion into an escrow account during Q2 2018.[51] On 18 September 2018, it was reported that Apple had lodged the €13 billion, plus another €1.3 billion, into the Irish State's escrow account.[52] [53] In October 2018, the commission announced that it would drop its legal action against Ireland for failure to recover the amount owed by the deadline laid down in the Commission decision (the deadline was 3 January 2017).[54]
In May 2019, the Irish Public Accounts Committee was told by officials from the Department of Finance that defending the Apple case (i.e. to prevent the payment of the fine to Ireland), had cost the Irish state €7.1 million in mostly legal fees, and that the final case may take a decade to reach a final verdict.[55] [56]
On 15 July 2020, the European General Court (EGC) ruled that the Commission "did not succeed in showing to the requisite legal standard" that Apple had received tax advantages from Ireland, and ruled in favour of Apple.[57] The EGC noted that their ruling[58] can be appealed to the Court of Justice of the European Union, which could take several more years; Apple funds would remain in escrow until such an appeal was concluded.[57]
In September 2020, the European Commission appealed against the court ruling by the European General Court that said Apple did not have to pay €13 billion because the Commission considered that in its judgment the General Court has made a number of errors of law.[59]
See main article: Leprechaun economics. The EU Commission's findings cover the period from 2004 to end 2014, and its report notes that Apple had informed it at the start of 2015 that the controversial hybrid–Double Irish BEPS tool, ASI, had been closed down; which enabled the commission to complete its State aid report, and finalise the recovery order of €13 billion.[2]
In January 2018, economist Seamus Coffey, Chairman of the State's Irish Fiscal Advisory Council,[60] and author of the State's 2017 Review of Ireland's Corporation Tax Code,[61] [62] showed Apple restructured ASI into another Irish IP–based BEPS tool, the Capital Allowances for Intangible Assets ("CAIA"), in Q1 2015.[11] [12]
It is specifically prohibited under Ireland's own corporation tax code (Section 291A(c) of the Irish Taxes and Consolation Act 1997) to use the CAIA BEPS scheme for reasons that are not "commercial bona fide reasons" and in particular for schemes where the main purpose is "... the avoidance of, or reduction in, liability to tax".[63] [64] [65] Given that the CAIA scheme is a deliberate IP–based BEPS tool, it is Ireland tripping over itself trying to maintain OECD-compliance.
The November 2017 Paradise Papers leaks revealed that Apple and its lawyers, Applebys, were looking for a replacement for the ASI structure in 2014. They considered a number of tax havens (especially Jersey). Some of the disclosed documents left little doubt as to the key drivers of Apple's decision making.[66] [67] [68] [69]
If the Irish Revenue waived Section 291A(c) for Apple's 2015 restructuring, it could result in a further EU Commission State Aid investigation.
In January 2018, in a series of articles in The Sunday Business Post, Mr Coffey estimated that since the 2015 restructuring, Apple has avoided Irish corporate taxes totalling circa at €2.5–3bn per annum (at the 12.5% rate).[11] [70] Mr Coffey calculated the potential second EU Apple State aid recovery order for the 2015–2018 (inclusive) period, would therefore reach circa €10bn, excluding any interest penalties.[71] [72]
The Irish financial media further noted that the then Finance Minister Michael Noonan, had increased the tax relief threshold for the Irish CAIA scheme from 80% to 100% in the 2015 budget (i.e. reduce the effective Irish corporate tax rate from 2.5% to 0%). This was changed back in the subsequent 2017 budget by Finance Minister Paschal Donohoe, however firms which had started their Irish CAIA scheme in 2015 (like Apple), were allowed to stay at the 100% relief level for the duration of their scheme,[73] [74] which can, under certain conditions, be extended indefinitely.[65]
In November 2017, it was reported that the EU Commission had already asked for details on Apple's Irish structure post its January 2015 ruling.
In February 2019, Sinn Féin MEP Matt Carthy discussed Apple's use of the CAIA Irish BEPS tool with Margrethe Vestager.[75]
At a tax conference in 2023, Helena Malikova put forward the idea that Ireland and other States had decided not to gather relevant information on tax planning schemes, including on the Apple tax planning scheme. Malikova described this approach to tax matters as a sovereign “right not to know”. Without such information on the activities of Irish companies outside of Ireland, it is difficult to find a basis on which to challenge corporations on their Irish tax base.[76]
Speaking at the same conference, judge Vesna Tomljenović, who presided over the European General Court decision of 2020 in the Apple case, criticized the use of transfer pricing rules as a tool for tax planning, including in the case of Apple.[76]
After 29 August 2016 ruling, the EU Commission followed up on 31 August to counter statements from the Irish Government that Ireland would have to use the proceeds of any Apple recovery to pay down public sector debt (in line with agreed EU budgetary rules), and to clarify that Ireland could allocate the money in whichever way the Irish Government lawfully saw fit.[77] Regardless however, on 7 September, the Irish minority Government, with material opposition support,[78] rejected the EU Commission's ruling on Apple, and the payment of €13 billion, plus penalties, to the Irish State.[4] [79]
The role of the Irish media in "framing" the debate around the ethical issues of helping global multinational corporations avoid taxes has been noted.[80] In April 2019, academic research found that "Irish respondents exposed to treatments questioning the morality and fairness of Ireland's facilitation of Apple tax avoidance are more likely to acknowledge the negative impact on Ireland's EU neighbours".[81]