Apple, Ireland lines of defence diverge in state aid case

Willing to acknowledge EU claims to Apple's tax debt: Enda Kenny. [European Council]

In its challenge of the European Commission’s €13bn recovery decision, Ireland does not agree with Apple’s position that almost the entirety of its profits are generated by R&D, and should therefore be taxed in the US, PaRR has learned.

It is understood that Ireland stands by its assessment of taxes due for Apple’s relatively limited activities on Irish territory. However, it agrees with the Commission that the remaining untaxed profits (more than 97%) could be claimed by countries other than the US.

On 30 August, the executive concluded that two tax rulings adopted by Ireland substantially and artificially lowered tax paid by Apple in the country since 1991.

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Apple Sales International and Apple Operations Europe, two Irish subsidiaries of the US parent, hold the IP rights to sell and manufacture Apple products outside North and South America. The rulings claimed almost all the sales profits booked by these subsidiaries were internally attributed to a head office that had no premises and were not subject to tax.

The Juncker Commission held that in 2011, 97% of the €16bn profit reported by Apple Sales International was allocated to the untaxed head office in Ireland.

This percentage increased to 99% in 2014. Together with the US government, Apple is arguing that these profits will be taxed upon repatriation to the US.

PaRR previously reported that the US plans to claim a substantial amount of the profits generated through sales in Europe, Middle East and Africa (EMEA) are based on the argument that most of the added value of Apple products lie in software and design, which is the work of the company’s California-based headquarters.

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Ireland is understood to believe that its rulings correctly reflect the value added by Apple’s operations in the country. A salary comparison between Cork factory workers and US executives of the companies could be an element to demonstrate the limited nature of Apple’s Irish activities.

The Irish finance ministry, which is representing Ireland in the case, did not respond to a request for comment by press time. Apple declined to comment.

While ordering Ireland to recover €13bn in illegal tax benefits, the European Commission — for the first time in a state aid case — left the door open for other tax authorities to claim for activities that have taken place in their countries. Italy, Spain and Austria have already expressed interest in doing so, a lawyer familiar with state aid cases involving tax rulings told PaRR.

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Since these profits relate to sales of Apple products in the EMEA region, the US could only claim a percentage that is related to IP. But it is understood that Ireland and the US are not in agreement in determining how high that percentage might be.

In addition, in Ireland’s view, the claim-back mechanism would contradict the notion of the Juncker Commission holding Ireland responsible for Apple’s non-taxation. It is understood that Ireland will argue that the question of whether the remaining 97% (or more) of the profits should be taxed in the US is not an assessment for Ireland to make. But if that were not the case, and other EU member states claimed their part of the €13bn, it is understood Ireland would question whether it can be held responsible for giving illegal tax benefits.

Ireland filed its challenge against the Commission decision with the EU General Court on 9 November. Apple has two months and 10 days to submit its challenge once the non-confidential version of the decision is published in the Official Journal. A lawyer familiar with the case told PaRR that publication is expected “in the next few weeks”.

Last Week (1 December), Irish head of government Enda Kenny met with Apple CEO Tim Cook at the company’s headquarters in Cupertino, California, to discuss Apple’s investment and operations in Ireland.

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