EU illegal State aid case against Apple in Ireland

On 23 December 1980, Apple opened production facilities in Holyhill, Cork.[24][25] By 1990, the number of jobs had grown from 700 jobs to 1000 permanent jobs, as well as 500 sub-contractors.[26] 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.[27]

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.[28] Unusually for a plant, over 700 of the 6,000 employees work from home (the largest remote percentage of any Irish technology company).[29][30]

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.

Apple's IP–based BEPS tools, which was mainly the Double Irish BEPS scheme (2013 Senate Report)

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").[31] The EU Commission State Aid fine does not pertain to AOI.

Apple Sales International ("ASI"), on the other hand, is the focus of the EU Commission's fine (and was the focus of 2013 Senate Investigation). ASI is an Irish-registered subsidiary of Apple Operations Europe ("AOE").[32] Both AOE and ASI are parties to an Irish advanced pricing agreement which took place in 1991.[33] This agreement was updated in 2007.[34] ASI is the vehicle through which Apple routed €110.8 billion in non–US profits from 2004 to 2014, inclusive.[12]

ASI's 2014 structure was an adaptation of a Double Irish scheme, an Irish IP–based BEPS tool used by many US multinationals. Apple did not follow the traditional Double Irish structure of using two separate Irish companies. Instead, Apple used two separate "branches" inside one single company, namely ASI.[11] It is this "branch structure" the EU Commission alleged was illegal State aid, as it was not offered to other multinationals in Ireland, which had used the traditional "two separate companies" version of the Double Irish BEPS tool.

Under the Double Irish structure, one Irish subsidiary (IRL1) is an Irish registered company selling products to non–US locations from Ireland. The other Irish subsidiary (IRL2) is "registered" in Ireland, but "managed and controlled" from a tax haven such as Bermuda. The Irish tax code considers IRL2 a Bermuda company (used the "managed and controlled" test), but the US tax code considers IRL2 an Irish company (uses the registration test). Neither taxes it. Apple's subsidiary, ASI, behaved like it was IRL2, it was "managed and controlled" via ASI Board meetings in Bermuda, so Irish Revenue did not tax it. But ASI also did all the functions of IRL1, making circa €110.8 billion[5] of profits from non–US sales. The EU Commission contest IRL1's actions made ASI Irish, and the functions of IRL1 over-rode the Bermuda Board meetings in deciding the "managed and controlled" test. The Commission had not brought any cases against US multinationals using the standard double two separate companies Irish BEPS tool.

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).[35]

On 14 September 2016, former Irish Taoiseach Bertie Ahern (from 1997 to 2008), said that the Irish Revenue Commissioners kept the Apple 1991 and 2007 tax rulings secret from the Irish Cabinet.[36]

In May 2013, Apple's tax practices were examined by a US bipartisan investigation of the Senate Permanent Subcommittee on Investigation.[37] The investigation aimed to examine whether Apple used offshore structures, in conjunction with arrangements, to shift profits from the US to Ireland.[38] 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%.[39][40][41][42]

In June 2014, an investigation was opened by the European Commissioner for Competition on behalf of the EU Commission (SA 38373).[43] The Ireland case was opened in conjunction with two other similar cases; involving Starbucks (Netherlands) and Fiat (Luxembourg). 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).[44] Article 107(1) states that aid granted by member states cannot threaten to distort competition.[45] 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.[46]

On 2 September 2016, the acting Irish Finance Minister Michael Noonan, described the EU Commission ruling as an attempt to establish a "bridgehead, to bring down Ireland's 12.5% corporate tax rate".[47]

On 30 August 2016, the Commission released a 4-page press release describing its decision and rationale.[1] 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 30 August 2016.[2]

According to the Commission, the tax arrangement between Ireland and Apple qualifies as state aid as it meets the European Union's four criteria:[48]

• There has been an intervention by the State
• This intervention gives the benefactor a competitive advantage on a selective basis
• As a result, competition has been or may be distorted
• The intervention is likely to affect trade between the Member States

Member States cannot give tax benefits to selected companies – this is illegal under EU state aid rules. The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.

— Margrethe Vestager, "State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion", 30 August 2016.[1]

The 30 August 2016 press briefing summarised the following findings from the main report:[1]

The 30 August 2016 press briefing made the following statements regarding the financial implications:[1]

On 3 September 2016, the acting Irish Taoiseach Enda Kenny, pictured with US President Barack Obama, called the EU Commission's €13 billion fine an attempt by the EU to "bully" Ireland, and that: "This is about the right of a small nation".[49][50]

The fine of €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 fine had risen to €13.85 billion[12]). The Commission fine 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][5] 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 fine of circa €20 billion.[5]

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.[51]

In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.

— Margrethe Vestager, "State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion", 30 August 2016.[1]

In November 2016, in a letter to the Apple community in Europe, Tim Cook said the company would appeal.[9] 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.[52] On 2 September 2016, the Irish cabinet voted to approve the appeal.[53] The minority Fine Gael–led government also had to secure a general Dail Eireann 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][54] 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.[55][56]

In August 2018, it was reported that the appeal would begin before the end of 2018, but could take over 5 years,[57] and that Apple had begun to lodge the €13 billion into an escrow account during Q2 2018.[10] On 18 September 2018, it was reported that Apple had lodged the €13 billion, plus another €1.3 billion,[lower-alpha 3] into the Irish State's escrow account.[58][59] In October 2018, the Commission announced that it would drop its legal action against Ireland for late payment of the fine (the deadline was 3 January 2017).[60]

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.[61][62]

American multinationals play a substantial role in Ireland's economy, attracted by Ireland's BEPS tools, that shield their non–US profits from the historical US "worldwide" corporate tax system. In contrast, multinationals from countries with "territorial" tax systems, by far the most common corporate tax system in the world, don't need to use corporate–tax havens such as Ireland, as their foreign income is taxed at much lower rates.[81]

For example, in 2016–17, US–controlled multinationals in Ireland:

• Directly employed one–quarter of the Irish private sector workforce;[22]
• Created "higher-value" jobs at an average wage of €85k (€17.9 billion wage roll for 210,443 staff) vs. Irish domestic industrial wage of €35k;[82]
• Paid €28.3 billion in 2016 in taxes (€5.5 billion), wages (€17.9 billion on 210,443 staff) and capital spending (€4.9 billion);[21][82]
• Paid 80 per cent of Irish corporation and business taxes, which totalled just over €8 billion;[20]
• Paid circa 50 percent of Irish salary taxes (due to higher paying jobs), 50 per cent of Irish VAT, and 92 per cent of Irish customs and excise duties;
  (this was claimed by a leading Irish tax expert (and Past President of the Irish Tax Institute), but is not fully verifiable)[83]
• Created 57 percent of private sector non-farm value-add (40% of value-add in Irish services and 80% of value-add in Irish manufacturing);[22][84]
• Made up 25 of the top 50 Irish companies, by 2017 turnover (see Table 2, below); the only non–U.S/non–Irish other companies are UK companies which either sell into Ireland, like Tesco, or date from pre–2009, when the UK reformed its corporate tax system to a "territorial" regime.[85]
• American–Ireland Chamber of Commerce estimated the value of US investment in Ireland in 2018 was €334 billion, exceeding Irish GDP (€291 billion in 2016).[23]

From the above table:

The role of the Irish media in "framing" the debate around the ethical issues of helping global multinational corporations avoid taxes has been noted.[88] 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".[89]