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Comparing “Apple” with Oranges

Comparing “Apple” with Oranges

By Rob Gehring

The European Commission (EC) announced that it has decided that Apple received illegal State aid from Ireland in the form of undue tax benefits of up to €13 billion. Following an in-depth state aid investigation launched in June 2014, the European Commission has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991. These rulings do not appear to have been based on any comparability analysis, but instead were the result of negotiation aimed at fixing a narrow range of taxable profits in Ireland.

Although the decision hasn’t been published yet, the question remains: is the EC comparing Apple with companies which are in a similar legal and factual situation or with ‘oranges’?

Basically, EU-law considers aid to be incompatible if:

  • it is imputable to the Member State and financed through State resources;
  • it confers an advantage on its recipient;
  • the advantage is selective; and
  • it distorts or threatens to distort competition and has the potential to affect trade between Member States.

The Bite in The Apple

The EC concluded that Apple had set up sales arrangements across the EU which meant that sales were regarded for tax purposes as effected in Ireland.  Ireland agreed, in tax rulings in 1991 and 2007, with “artificial” arrangements which allowed profits from those sales to be allocated to a head office “not based in any country”. The head office, however, had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter, nor did it have any employees. Therefore, the ruled that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which has no factual or economic justification. Hence, Ireland granted a selective advantage to Apple, reducing its tax burden below the level it should pay based on a correct application of the tax rules.

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On this basis, the Commission concluded that the tax rulings issued by Ireland endorsed an artificial allocation sales profits of two Irish incorporated companies that are fully-owned by the Apple group (Apple Sales International and Apple Operations Europe) to their “head offices”, where they were not taxed. As a result, the tax rulings enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules. Ireland must therefore recover from Apple the unpaid tax for the period since 2003, which amounts to up to €13 billion, plus interest. Around €50 million in unpaid taxes relate to the undue allocation of profits to the “head office” of Apple Operations Europe.

“In 2011, for example (according to figures released at US Senate public hearings), Apple Sales International recorded profits of US$ 22 billion (c.a. €16 billion) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland, leaving €15.95 billion of profits untaxed. As a result, Apple Sales International paid less than €10 million of corporate tax in Ireland in 2011 – an effective tax rate of about 0.05% on its overall annual profits. In subsequent years, Apple Sales International’s recorded profits continued to increase but the profits considered taxable in Ireland under the terms of the tax ruling did not. Thus this effective tax rate decreased further to only 0.005% in 2014.”


Despite some newspapers proclaiming that this decision does call into question Ireland’s general tax system and the system of tax rulings as well, this decision does not raise any doubt about the legality of Irelands tax system (the corporate tax rate included) nor does it emphasise that tax result per se in incompatible state aid.

The Selective Advantage

However, to my opinion, the so-called elephant in the room is the ‘selectivity’ issue. Did Ireland give Apple a selective tax treatment?

To be selective, a measure must provide a benefit to certain undertakings in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question.

To be selective, a measure must provide a benefit to certain undertakings in comparison with other undertakings which are in a legal and factual situation that is comparable in the light of the objective pursued by the measure in question. From the Commission Notice of State aid, it follows that the selectivity of the measures should normally be assessed by means of a three-step analysis. First, the system of reference must be identified. Second, it should be determined whether a given measure constitutes a derogation from that system insofar as it differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. Third, if there is a derogation (and therefore is prima facie selective), is must be examined whether the derogation is justified by the nature or the general scheme of the (reference) system.

According to the EC, the advantage was selective: “because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.”

However, the mere finding that a given measure could be treated as selective solely because it resulted in disparate treatment between multinational groups and standalone companies, raises the question: is the EC comparing Apple with similar companies or with ‘oranges’? Is a tax measure that benefits only multinational companies (prima facie) selective or are multinational in a different legal and/or factual position than standalone companies (eg. active in different countries with different tax systems, cross-border intra group transactions etc.)? In Technolease decision, the Commission noted that “another way to establish whether general tax rules have been applied is by checking whether other enterprises actually could avail themselves of the scheme.” And if a standalone company could obtain a similar tax treatment simply by forming or acquiring a foreign affiliate, or operating cross border through a branch, is the tax measure still ‘selective’?

The question I try to raise is not whether tax avoidance should be supported or not, the question is, does the EC impose penalties retroactively based on a new and expansive interpretation of state aid rules or not? And if Ireland would have given the same treatment to all other multinational companies, is the tax treatment of Apple still ‘selective’ and illegal under State aid rules?

It seems as if the EC has introduced a new strict requirement that EU states, especially tax ruling, must endorse a method to calculate taxable profits of a business that reflect economic reality into the ‘selectivity’ test, irrespective of national laws, OECD guidelines etc. Although many people would support such a requirement, it is all but certain whether this requirement falls within the scope of EU State aid law.

We probably will know soon whether the Apple-decision was correct or not, if the ECJ follows AG Wathelet (and set aside the judgement of the GC) in the Banco Santader-case. AG Wathelet argues that: “a tax measure is selective if it benefits undertakings carrying out cross-border transactions but not undertakings carrying out comparable transactions at national level”.

Now it’s up to the EU Courts to decide…

Rob Gehring is a Lawyer and economist specialized in European law, competition/antitrust law and free market economics.

Featured Image Courtesy : INC

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