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Ireland’s Tax Deals for Apple Prompt Warning From European Commission Ireland’s Tax Deals for Apple Prompt Warning From European Commission
(about 5 hours later)
BRUSSELS — The European Commission on Tuesday published a warning to Ireland that the country had granted Apple tax advantages that could amount to illegal state aid. BRUSSELS — The European Commission on Tuesday warned that tax advantages Ireland has granted to Apple for more than two decades might amount to illegal state aid that could require the company to pay huge amounts in back taxes.
In its preliminary finding, the commission also told Ireland that it may order its government to collect huge amounts of back taxes from the American technology giant. Tax experts said Tuesday, though, that the financial impact — if any — on the company and Ireland was difficult to predict, as the case could take years to play out. Tax experts said the financial impact — if any — on the company and Ireland was difficult to predict, as the case could take years to play out.
The report was sent to Ireland in mid-June but only published, in redacted form, on Tuesday. But the warning, along with a similar preliminary finding that Luxembourg may have granted too favorable a tax arrangement to a unit of the Italian automaker Fiat, could put multinational corporations on notice that it may become harder to go tax shopping among European Union countries.
The 21-page report follows the formal start of an investigation in June and lays out the commission’s preliminary case claiming that Ireland granted Apple special deals that may have helped the company avoid significant amounts of tax and that created unfair advantages over other European Union member countries. If the European Commission, the union’s administrative arm, eventually finds that Apple’s tax arrangements in Ireland are illegal and must end, Ireland could be required to recover money from the company.
“It’s really hard to get an actual number for how much Apple may have to repay,” said Heather Self, an accountant at Pinsent Masons, a British law firm. “My gut feeling is that it’s going to be a big number, but not a disastrous one, and could range between nothing to hundreds of millions of euros.”
Because of a statute of limitations, a liability for past taxes could go back no further than 2003. But for Apple, which had a profit of $37 billion last year on revenue of $171 billion, any back taxes would probably not be as significant as the company’s need to revamp its international tax strategy — in which Ireland has come to play a prominent role.
The company and Ireland have said there is nothing untoward about their tax dealings. “Apple has received no selective treatment from Irish officials over the years,” the company said in a statement on Tuesday. “We’re subject to the same tax laws as the countless other companies who do business in Ireland.”
Neal Todd, a partner based in London at the law firm Berwin Leighton Paisner, predicted a protracted dispute as Apple and Ireland contest the findings. “You can expect that this will almost certainly end up in court,” he said.
The report was sent to Ireland in mid-June, when an investigation was announced, but it was only published, in redacted form, on Tuesday.
The 21-page report by the European Commission lays out its preliminary case claiming that Ireland granted Apple special deals that may have helped the company avoid significant amounts of tax and that created unfair advantages over other European Union member countries.
The commission, the executive arm of the European Union as well as the bloc’s competition regulator, said it was focusing on rulings by the Irish tax authorities in 1991 and 2007 concerning two wholly owned Apple subsidiaries, Apple Operations Europe and Apple Sales International, which have branches in Ireland.The commission, the executive arm of the European Union as well as the bloc’s competition regulator, said it was focusing on rulings by the Irish tax authorities in 1991 and 2007 concerning two wholly owned Apple subsidiaries, Apple Operations Europe and Apple Sales International, which have branches in Ireland.
The report found that Ireland’s tax authorities in the 1991 agreement with Apple had discussed profit projections from the company as a basis for calculating its taxes, even though Apple’s own tax adviser acknowledged there was “no scientific basis” for the number being cited. The report found that Ireland’s tax authorities in the 1991 agreement with Apple discussed profit projections from the company as a basis for calculating its taxes, even though Apple’s own tax adviser acknowledged there was “no scientific basis” for the number being cited.
And yet, the report said, Ireland allowed that tax arrangement to stay in effect until the 2007 reassessment — a period at least three times longer than most other European Union countries would allow without revisiting the agreement, according to investigators. That long duration, even as Apple was growing and the market for digital technology was rapidly evolving, “calls into question the appropriateness of the method agreed” to, the report said.And yet, the report said, Ireland allowed that tax arrangement to stay in effect until the 2007 reassessment — a period at least three times longer than most other European Union countries would allow without revisiting the agreement, according to investigators. That long duration, even as Apple was growing and the market for digital technology was rapidly evolving, “calls into question the appropriateness of the method agreed” to, the report said.
As a result of its investigation, “the commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple,” the report said. “That advantage is obtained every year and ongoing, when the annual tax liability is agreed upon by the tax authorities in view of that ruling.”As a result of its investigation, “the commission is of the opinion that through those rulings the Irish authorities confer an advantage on Apple,” the report said. “That advantage is obtained every year and ongoing, when the annual tax liability is agreed upon by the tax authorities in view of that ruling.”
European Union law “provides that all unlawful aid may be recovered from the recipient,” Joaquín Almunia, the bloc’s departing commissioner for competition, said in the report.European Union law “provides that all unlawful aid may be recovered from the recipient,” Joaquín Almunia, the bloc’s departing commissioner for competition, said in the report.
Apple on Tuesday defended its tax dealings and said that Ireland had treated it the same way as it had other companies.
“Apple has received no selective treatment from Irish officials over the years,” the company said in a statement on Tuesday. “We’re subject to the same tax laws as the countless other companies who do business in Ireland.”
Ireland has long asserted that it has granted Apple no special tax favors.Ireland has long asserted that it has granted Apple no special tax favors.
In a separate report on Tuesday, the commission — the executive arm of the European Union — issued its preliminary findings in a tax investigation of Luxembourg, saying there was evidence that favorable treatment had been given to Fiat Finance and Trade, a unit of the Italian automaker Fiat. In a separate report on Tuesday, the commission also published preliminary findings in a tax investigation of Luxembourg, saying there was evidence that favorable treatment had been given to Fiat Finance and Trade, a unit of the automaker. That case also formally began in June.
The focus of the case against Apple and Ireland is on so-called transfer pricing — a practice that commonly involves companies moving profits and losses between subsidiaries by labeling them as internal corporate payments for goods or for copyright or patent royalties. The focus of the case against Apple and Ireland is on so-called transfer pricing — a practice that commonly involves companies’ moving profits and losses between subsidiaries by labeling them internal corporate payments for goods or for copyright or patent royalties.
The report includes an organizational chart of Apple’s international operations and some of the findings from the United States Senate subcommittee that has been investigating corporate tax issues, including details of a more than 400 percent increase in sales revenues from 2009 to 2012. The report includes an organizational chart of Apple’s international operations and some of the findings of a United States Senate subcommittee that has been investigating corporate tax issues, including details of a more than 400 percent increase in sales revenue from 2009 to 2012.
“The main question in the present case is whether the rulings confer a selective advantage upon Apple insofar as it results in a lowering of its tax liability in Ireland,” said the report, which was written in the form of a long legal letter from Mr. Almunia, the competition commissioner, to Eamon Gilmore, Ireland’s foreign minister. “The main question in the present case is whether the rulings confer a selective advantage upon Apple insofar as it results in a lowering of its tax liability in Ireland,” said the report, which was written in the form of a long legal letter in June from Mr. Almunia, the competition commissioner, to Eamon Gilmore, who was Ireland’s foreign minister until July.
The commission said it had found “several inconsistencies in the application of the transfer pricing method chosen when determining profit allocation” between the two Apple subsidiaries as well as costs that had been “reverse engineered so as to arrive at a taxable income.” The commission said it had found “several inconsistencies in the application of the transfer pricing method chosen when determining profit allocation” between the two Apple subsidiaries, as well as costs that had been “reverse engineered so as to arrive at a taxable income.”
James Stewart, a financial tax expert at Trinity College Dublin, said that whatever the outcome of the investigation, which could take years, the commission’s report would nonetheless have an impact. James Stewart, a financial tax expert at Trinity College Dublin, said that whatever the outcome of the investigation, the commission’s report would nonetheless have an impact.
“There’s no doubt that this is damaging to Ireland,” Mr. Stewart said. “There’s a deeply held belief that our low corporate tax regime is central to Ireland’s industrial policy. The commission letter gives notice that these types of tax rates are under scrutiny. It will be much more difficult for Ireland to give similar deals to other multinational companies.”“There’s no doubt that this is damaging to Ireland,” Mr. Stewart said. “There’s a deeply held belief that our low corporate tax regime is central to Ireland’s industrial policy. The commission letter gives notice that these types of tax rates are under scrutiny. It will be much more difficult for Ireland to give similar deals to other multinational companies.”
The report cited the unusually long duration of the tax agreement struck in 1991 as an indication that Apple was being granted special treatment. But any liability for collecting back taxes that Ireland may eventually face in its dealings with Apple would be restricted to a period starting early in the past decade because of a statute of limitations. The report cited the unusually long duration of the tax agreement struck in 1991 as an indication that Apple was granted special treatment. And even when Apple and Ireland renegotiated their 1991 tax arrangement in 2007, the report said, officials did not try to calculate the transfer of payments between the parts of Apple’s business as if they were separate companies — as standard accounting principles would require.
And even when Apple and Ireland did renegotiate their 1991 tax arrangement in 2007, the report said, officials did not attempt to calculate the transfer of payments between the parts of Apple’s business as if they were separate companies — as standard accounting principles would require.
Nor, according to the report, did the tax agreement use calculations that would adequately allow for an increase in taxes to reflect the company’s rapidly growing revenue.Nor, according to the report, did the tax agreement use calculations that would adequately allow for an increase in taxes to reflect the company’s rapidly growing revenue.
Investigators said that Apple Sales International recorded a revenue increase of 415 percent during the three years from 2009 to 2011, to $63.9 billion. But during that period, the operating costs used to calculate taxable income in Ireland reportedly grew only by 10 percent to 20 percent, the report said. Investigators said that Apple Sales International recorded a revenue increase of 415 percent during the three years from 2009 to 2011, to $63.9 billion. But during that period, the operating costs used to calculate taxable income in Ireland reportedly grew only 10 percent to 20 percent, the report said.
“As a large part of the operating capacity of ASI as a whole seems to be located in Ireland, the discrepancy between the sales growth and the growth of the Irish operating capacity cannot be explained,” the report found. “As a large part of the operating capacity of A.S.I. as a whole seems to be located in Ireland, the discrepancy between the sales growth and the growth of the Irish operating capacity cannot be explained,” the report found.
​The Irish government said it had sent a letter to the European Commission in September replying to questions by Brussels about Ireland’s tax policy. The Irish document, which was not publicly available on Tuesday, outlined why Ireland believes it has not broken European law, according to Brian Meenan, a spokesman for the country’s Department of Finance. The Irish government said it had sent a letter to the European Commission in September replying to questions about Ireland’s tax policy. The Irish document, which was not publicly available on Tuesday, outlined why Ireland believed it had not broken European law, according to Brian Meenan, a spokesman for the country’s Department of Finance.
“We believe we’re not in breach of any rules,” Mr. Meenan said. Ireland has set its corporate tax rate at just 12.5 percent. That is roughly one-third the tax rate of other European countries, including France, whose policy makers have criticized Ireland for offering incentives to attract global companies to its shores. One country having lower tax rates than its neighbors is not against European Union rules. But it could be a violation if a country granted special deals to certain companies that were not available to others.
​Ireland has set its corporate tax rate at just 12.5 percent. That is roughly one-third the tax rate of other European countries, including France, whose policy makers have criticized Ireland for offering incentives to attract global companies to its shores. “This is not a case of letting bygones be bygones, which tended to be the approach in the past, because the commission has named specific taxpayers like Apple rather than simply go after the tax regime in Ireland,” said Mr. Todd, the tax lawyer. “That suggests that the commission will want to get a cash settlement, rather than simply a change in practice.”
One country having lower tax rates than its neighbors is not against European Union rules. But it could be a violation if a country granted special deals to certain companies that were not available to others.
The analysis by the commission, which was sent to Ireland in June but is only now being made public, is aimed at proving that Irish authorities underestimated the taxable profit of the Irish branches of Apple Sales International and Apple Operations Europe.
The report said that one of the tax rulings by Irish authorities amounted to “a reduction of charges that should normally be borne by the entities concerned in the course of their business” and should be considered state aid.
The separate investigation of Luxembourg’s tax treatment of the Fiat unit focuses on an individual ruling issued by tax authorities and, like the investigation involving Ireland, focuses on whether officials underestimated the company’s taxable profit.
Any finding against Ireland or Luxembourg for inducements to Apple and Fiat could be awkward for Jean-Claude Juncker, the incoming president of the European Commission.
Mr. Juncker has been accused by his opponents of helping to turn Luxembourg into a tax haven during his nearly two decades leading the nation.
Mr. Almunia, the competition commissioner, has previously singled out Luxembourg for offering “only partial” cooperation in preliminary fact-finding related to the Fiat unit.
In a report, also sent to Luxembourg in June but not published until Tuesday, the commission gave the country one month to provide details on its tax treatment of the Fiat unit and to recalculate the amounts involved. Mr. Almunia recently alluded to Luxembourg’s not having reacted promptly enough, in his view.
In a statement, the Finance Ministry of Luxembourg said that the publication of the materials on Tuesday was “a mere formal step in the procedure” that “contains no new elements.”
The government has “submitted all requested information to the commission and is fully cooperating with the commission in the investigation,” the statement said, and it is “confident that the allegations of state aid in this case are unsubstantiated and that it will be able to convince the commission in due time of the legitimacy of the tax ruling concerned.”