European Commission orders Ireland to recover up to EUR13 billion in taxes from Apple

European Commission orders Ireland to recover up to EUR13 billion in taxes from Apple

The European Commission has decided that Ireland granted Apple illegal State aid in the form of a selective tax advantage of up to EUR13 billion.

The Commission has found that two tax rulings given by Ireland that endorsed the transfer of profits within Apple’s group substantially reduced the amount of tax that Apple paid in Ireland and amounted to State aid.

The Commission maintains that the tax arrangements conferred a selective advantage on Apple allowing it to pay substantially less tax than other companies in Ireland.  According to the Commission’s 30 August announcement the arrangements allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003 and 0.005% in 2014.

The decision concludes an investigation by the Commission going back to at least 2014.  The decision follows similar rulings in cases involving Fiat Chrysler and Starbucks last year where the Commission ordered the Netherlands and Luxembourg to recover EUR20 million and EUR30 million in unpaid tax from the companies.

The recovery order in the Apple case exceeds the record order of EUR1.37 billion in a state aid case against EDF.  It is the largest sanction to date in the Commission’s competition law enforcement.

Ireland is ordered to calculate the unpaid tax that is due to it according to the Commission’s decision.  However, this assessment will not be straightforward as the Commission says that Ireland may decide that less than EUR13 billion is due to it if it is satisfied that Apple should have paid tax in other countries.

While the application of state aid rules to tax cases is not new the application of the concept of selectivity has given rise to complex issues in state aid cases involving fiscal element. 

The European courts will eventually have to decide whether the Commission has blurred the distinction between the advantage and the selectivity assessment in determining that the arrangements amount to state aid.

There are two concepts which should not be confused. First, is there an advantage? This involves a comparison between the beneficiary’s position with or without the contested measure.  Second, if there is an advantage is it selective?  This involves a comparison between the beneficiary’s position with the contested measure and the position of other taxpayers in a comparable legal and factual position.  Therefore the test is only: Does the measure treat certain undertakings differently by comparison to others who in view of the objective of the measure in question are in a comparable legal and factual situation?

It may be questioned that these recent state aid cases involving individual tax measures represent a legally flawed approach in that inferring selectivity from advantage shifts the burden of proof to the Member States. What is the counterfactual? National rules? The ordinary tax system? What about countervailing effects such as the effect of double tax treaties and the fact that the State benefits from investments?

Among the issues that will be tested will be the question of the appropriate reference framework and the role of discretion by the Member State authorities in formulating their tax policy.

Another issue is whether Apple is entitled to rely on the principle of legitimate expectations since the Commission had not taken action against the measures for two decades.

The rulings will undoubtedly make multinational companies think twice about how they approach the creation of their tax structures.  While the Commission recognises the legitimacy of tax rulings and the freedom for Member States to decide on their tax regimes, companies should be mindful of the state aid risks of relying on those rulings going forward.

Given the significant financial consequences of state aid enforcement, it will be prudent for companies to test the legality of individual rulings they have received or will be applying for.

Since the obligation to notify and seek approval for state aid is on the Member State this places private parties in a difficult position.  The recipient of the aid, rather than the public authority is at risk of having to repay any unlawful aid.  In principle, this includes the situation where aid is granted without having been notified even if it is later deemed compatible with the EU internal market.  As a result a private party should push for proper evaluation of any state aid elements in the proposed measures and, where appropriate, notification of state aid. 

Commission press release IP/16/2923 and Commission STATEMENT/16/2926.