EU Commission concludes Ireland granted State Aid to Apple

The EU Commission has decided that Ireland granted State Aid to Apple in the form of tax rulings confirming that Apple's Irish Companies could allocate profits to a non-resident head office.


On 04 October 2017, the EU Commission announced that it had decided to refer Ireland to the ECJ for failing to recover from Apple illegal state aid as required by its 2016 decision.

On 30 August 2016, the EU commission confirmed that in their view, Ireland granted illegal State Aid to Apple. Such State Aid is allegedly granted in the form of a selective tax treatment.

The decision is the latest in the EU Commission’s moves to use State Aid principles in a direct tax context and, in particular, in relation to tax rulings provided by Member States to multinationals. The Commission’s concern, similar to the recent McDonald’s case, is not the existence of tax rulings per se, but in the granting of favourable tax rulings in inappropriate cases where, in the EU Commission’s view, national and international tax principles were not met.


Following the recent stream of EU Commission decisions with respect to State Aid in the form of selective tax benefits granted by EU Member States to multinational corporations (including McDonald’s, FIAT, Starbucks and Amazon), Apple now finds itself the latest multinational in the spotlight.

The latest EU Commission’s decision, follows a formal investigation procedure and contests the transfer pricing applied by Apple group in the context of the allocation of profits between the head office and branches of the Irish companies in the Apple group and requires Ireland to obtain the payment of €13bn of taxes. It is noteworthy again that it is not the ruling practice itself that is the main subject of the decision but rather how a lenient application of transfer pricing rules by an EU Member State can constitute State Aid. As such, the EU Commission decision highlights that the artificial allocation of profits and the manipulation of prices may underlie a selective advantage where firms are permitted to use different transfer prices.

Irish structure

Apple Sales International and Apple Operations Europe (the Apple Irish Companies) are both incorporated in Ireland and are ultimately owned by Apple Inc, a US tax resident company.

The Apple Irish Companies held intellectual property rights allowing them to sell and manufacture Apple’s products. In this context, the Apple Irish Companies made payments to Apple Inc. for the use of intellectual property rights and to fund research and development conducted in the US on behalf of the Irish Companies.

Profits made by the Apple Irish Companies were internally allocated by them to their head offices. These head offices were not based in any country for tax purposes and did not have any real substance being simple “letter boxes”. In practice, the Apple Irish Companies were not subject to significant taxes in Ireland thanks to Irish tax rules applicable at the time to incorporated non-tax resident companies. As a result, only a small percentage of the profits of the Apple Irish Companies were allocated to their Irish branches and taxed in Ireland.

 Apple Inc organsation structure

Source: EU Commission

Alleged tax State Aid

The Apple Irish Companies obtained two advanced pricing agreements (APAs) in 1991 and 2007 issued by the Irish tax authorities in relation to these arrangements. These APAs effectively allowed the Apple Irish Companies to remove profits generated by its Irish operations from the Irish tax net, thereby achieving an effective tax rate ranging between 1% in 2003 to 0.005% in 2014. In broad terms, the Irish rulings authorised a transfer pricing methodology that, according to the EU Commission, does not correspond to "economic reality".

The EU Commission’s reasoned decision notes that the agreed basis in the 1991 advanced pricing agreement (1991 APA) was essentially negotiated rather than substantiated by reference to comparable transactions. Moreover, the Irish tax authorities did not seem to have had any intention of establishing a profit allocation based on transfer pricing. In particular, no transfer pricing report was included in the documents provided to the Irish tax authorities to support the calculation of taxable profits as confirmed in the APA. The fact that the methods used to determine profit allocation to the Apple Irish Companies resulted from negotiation rather than a transfer pricing methodology reinforces the idea that the outcome price of the agreed method was not arm’s length. Indeed, the Commission notes that the arrangements appear to have been reverse engineered so as to arrive at a taxable income of around $28-38m, although that figure did not have any economic basis.

Moreover, the EU Commission notes that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations set certain requirements for the choice of the appropriate transfer pricing method to comply with the arm’s length principle. The method proposed by the taxpayer and accepted by Irish tax authorities APA for profit allocation, used operating costs as a net profit indicator. The choice of that particular net profit indicator is neither explained by the taxpayer nor by Irish tax authorities, compared to a larger cost basis, such as costs of goods sold.

Additionally, the APAs were not subject to any temporal limitation. Indeed the 1991 APA was applied until 2007 when a new APA was filed with the Irish tax administration, which the Commission notes is a very long period when compared to the timeframe applied in other European Union jurisdictions.

The 2007 APA applied different mark-ups for each one of the Apple Irish Companies, which were both very low and did not take into account the changes that the "required remuneration for the type of industry covered" might have justified. Additionally, the EU Commission puts into question the profit allocation method with respect to Apple Sales International, given it did not consider the increase in the volume of sales when compared with the operating costs, and consequently is considered as "inconsistent".

More generally, the "head office" did not have any employees or own premises. The only activities that could be associated with the "head offices" were limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission's assessment, are the only profits which can be attributed to the "head offices".

Similarly, only the Irish branches of the Apple Irish Companies had the capacity to generate any income from trading, ie from the production of certain lines of computers for the Apple group. Therefore, sales profits of these companies should have been recorded with the Irish branch and taxed there.

On this basis, the EU Commission concluded that the APAs issued by Ireland endorsed an artificial allocation of sales profits to the "head offices", where they were not taxed, and were not compliant with the "arm’s length principle". As a result, the APAs provided Apple with a selective advantage, which was illegal under EU state aid rules.

Ireland and US position

Ireland has stated that will undertake measures to avoid recovering the €13bn. It is expected that the Irish authorities will appeal the decision of the EU Commission.

The US Department of Treasury has also expressed resentment concerning the EU Commission decision. Indeed in the US White paper on the European Commission’s recent state aid investigations of transfer pricing rulings it is stressed that the EU Commission decision in cases like Apple undermines the ability of EU Member States to "honor their bilateral treaties with the United States". Additionally, the recovered taxes might be considered "foreign income taxes" which can be credited against US corporate taxes, which would lead effectively to a transfer of "revenue to the EU from the US Government and its tax payers".

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