As Ireland gets hit by the European Commission's ruling on illegal State aid to Apple - is Brexit just the beginning?
Wednesday, 31st August 2016
The European Commission (the "EC") released its decision yesterday, following a three year investigation into Ireland's tax treatment of Apple's Irish incorporated companies. That tax treatment, the EC ruled, "enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU single market".
The two companies, Apple Sales International and Apple Operations Europe, are wholly owned by Apple and controlled by Apple Inc. the US parent company. All European sales of Apple products were contractually arranged so that the legal contract was between the purchaser and Apple Sales International in Ireland, rather than the individual retail outlet. Apple Operations Europe manufactured computers for the Apple group. In both cases a large proportion of the profits for both companies were allocated to a head office which was "outside of Ireland" but in fact was not based in any country, had no premises and no employees, just periodic board meetings. As a result these profits were untaxed. Ireland made a tax ruling in 1991 and again in 2007 endorsing such arrangements.
The decision requires Ireland to recover the illegal State aid, valued at around €13 billion, from Apple. Apple has vowed to appeal the decision, which it states will have "a profound and harmful effect on investment and job creation in Europe".
The effect of this decision, however, goes further than just Ireland and Apple. In 2015, the EC decided that tax rulings made by Luxembourg in relation to Fiat and by the Netherlands in relation to Starbucks amounted to illegal State aid, forcing the recovery of between €20 to €30 million from each company.
The Apple decision has been long awaited, in the context of the Fiat and Starbucks decisions and, of course, Brexit. There is no doubt that these rulings have a strong disincentive effect on large multi-nationals basing their offices in countries that are part of the EU. As the impact of the Brexit vote hits, and the aftershock ripples through Europe, such decisions can only further rock the confidence of the EU Member States.
Where the EC seeks to interfere with the sovereignty of Member States, however, concerns are also shown from further afield. The United States will also be watching the outcome of the Apple investigation closely. The US Treasury recognises the need to work with the international community, including the EU, to address tax avoidance issues through international agreements.
A recent report from the US Treasury, however, expressed concern in the light of the Fiat and Starbucks decisions. It commented that the decisions appear to expand the role of the EC into a supra-national tax authority. It criticised the EC for challenging Member States' tax rulings based on its own arm's length standard rather than that of a Member State's own law. The Apple ruling will presumably only further fuel the US Treasury's concerns.
For the UK, with Brexit pending, these State aid decisions will have relevance to our negotiations on the lateral agreements with the EU that will be needed to keep our markets open. For many, Brexit is seen as offering the advantage of no longer having to be concerned about the State aid rules, however in practice some level of control will no doubt need to be put in place and the impact of the Apple ruling may affect such negotiations.