In August 2016, the European Commission ruled that Ireland provided illegal state aid to the Irish subsidiaries of Apple, Inc. between 2003 and 2014, which amounted to approximately €13 billion. The Commission determined that Ireland’s illegal state aid took the form of “undue tax benefits” provided exclusively to Apple’s Irish subsidiaries: Apple Sales International (ASI) and Apple Operations Europe (AOE). Notably, ASI and AOE hold the rights to use Apple’s intellectual property to sell and manufacture Apple products outside North and South America under a cost-sharing agreement with Apple, Inc. The sales from such usage, nearly 60% of Apple’s total profits, are routed through these subsidiaries.
In 1991 and 2007, the Irish government issued two tax rulings that permitted Apple to artificially allocate the taxable profits of ASI and AOE. The method of determining Apple’s corporate tax liability in Ireland did not correspond with economic reality as almost all of the sales profits recorded by ASI and AOE were internally attributed to a “head office” that existed only on paper. The “head office” was not located in any state for tax purpose, it did not have any employees or operations, and it could not have possibly earned the sales profits that Ireland’s tax rulings permitted it to claim. Additionally, ASI and AOE sent yearly payments of approximately $2 billion to their parent corporation, Apple, Inc., for research and development (R&D) purposes. R&D payments are deductible expenses under Irish tax law, and so these amounts were not included in ASI or AOE’s annual taxable profits. As a result, Apple’s effective tax rate (ETR) in Ireland during the identified years amounted to 1% or less, compared with the statutory rate of 12.5%.
Under Article 107 of the Treaty on the Functioning of the European Union (TFEU), “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings … shall, in so far as it affects trade between Member States, be incompatible with the internal market.” The EU Commission determined that Ireland’s tax rulings permitted Apple to artificially determine its tax liability in a manner that did not reflect economic reality. This gave Apple an undue advantage over competitors in the EU marketplace.
TFEU Article 108(2) provides that the Commission decision may direct the violating Member State to abolish such aid and practices and recover the illegal aid “within a period of time determined by the Commission.” Traditionally, the Commission provides the violating Member States with four months from the date the decision was issued to recover the specified amounts of illegal state aid. The recovery time must be speedy so that the corporation does not continue to receive further illegal state aid for a prolonged period. The deadline for Ireland to implement the Commission’s ruling and recover the €13 billion from ASI and AOE was January 3, 2017. Over a year has passed since the decision was issued and Ireland has not recovered a cent of the €13 billion. Ireland has, however, identified its methods of calculating the precise amount of illegal state aid owed, and it seeks to recover the full amount from Apple amount by March 2018. Despite both Ireland and Apple’s appeal from the Commission’s decision, the €13 billion still must be recovered. The disputed sum plus interest should be held by a third party in an escrow account until all appeals are finalized.
Ireland’s failure to recover the €13 billion in the time provided by the Commission constitutes a violation of Article 108 of the TFEU. As such, the Commission is permitted to bring the matter before the European Court of Justice (ECJ). Per TFEU Article 108(2), “if the State concerned does not comply with this decision within the prescribed time, the Commission … [may] refer the matter to the Court of Justice of the European Union direct.” The Commission did exactly that on October 4, 2017 when it moved to refer Ireland’s violations to the ECJ. EU rules provide that the Commission can first seek a declaratory ruling that Ireland failed to comply with the Commission’s decision. If Ireland still fails to recover the amount in dispute after an ECJ declaration, then the Commission may bring a second case that could result in fines.
The Commission’s recent referral of the Ireland-Apple decision to the ECJ has put pressure on the divided Irish government. Many politicians hope to maintain Ireland’s reputation for having a corporation-friendly tax system, which will continue to incentivize multinational companies to set up subsidiaries, branches, and offices in Ireland. This in turn, is beneficial for Irish citizens as it brings in new jobs and economic growth. Others argue, however, that the corporate taxation scheme favors rich, foreign companies to the disadvantage of Ireland’s poor. Recovering €13 billion in alleged illegal state aid would fully cover Ireland’s health services for one year and permit rampant infrastructure upgrades nationwide. The Apple tax ruling puts Ireland in hot water as it continues to lure in multinational corporations, attempts to comply with EU law, and seeks to appease the demands of its divided population. Until the ECJ issues its decision, however, Ireland certainly ought to continue collecting the alleged illegal state aid from Apple.