Apple’s Irish tax affairs return to the spotlight on Thursday as an advocate general at the European Court of Justice (ECJ) issues a key opinion on whether the iPhone maker must pay the State more than €13 billion in tax.
The opinion will give an indication of the final outcome of a drawn-out case as the views of advocate generals in ECJ cases are typically followed by the court when it makes final rulings. The final decision of the ECJ is expected in about six months’ time.
That would mark the final chapter of the world’s biggest antitrust case, which found its way in May to the EU’s highest court, almost a decade after the European Commission started investigating how the iPhone maker pays tax in the Republic, home to its main subsidiaries outside the US.
What the case is about?
Remember the headlines created in August 2016 when the EU competition commissioner Margrethe Vestager ordered Apple to pay the State €13 billion plus back taxes?
Well, the commission’s interest in Apple’s Irish tax practices actually began earlier – in May 2013, when Apple chief executive Tim Cook told a US Senate committee inquiry that the company had had a “tax incentive arrangement” in the Republic from when it set up a manufacturing facility in Cork in 1980. This had resulted in two Irish-based subsidiaries, Apple Sales International (ASI) and Apple Operations Europe (AOE), paying a top rate of 2 per cent on profits in the three years before the hearing in Washington, DC, he said.
The Republic’s headline corporate tax rate has stood at 12.5 per cent for the past two decades.
Cook’s comments prompted immediate denials from the Irish government that Apple had cut special deals with Revenue. Within a week, he had also backtracked, saying the company did not use “tax gimmicks”. But by then, Brussels was asking awkward questions. It would go on to ask member states for details of about 1,000 other tax “rulings” by domestic authorities, resulting in the likes of Starbucks and Amazon also cropping up on its radar.
The Apple investigation turned formal in June 2014, when the commission made an initial finding that Apple’s Irish tax arrangements were improperly designed to give it a financial boost in exchange for jobs.
So, what was the commission’s €13 billion decision in 2016 based on?
The decision centred on two tax opinions – or “rulings” as they are referred to – handed out by Revenue to Apple subsidiaries in Ireland in 1991 and 2007, the year the first iPhone was unveiled and Apple’s profits started to balloon.
The main thrust of the commission’s case was that the rulings gave the US technology giant an unfair and select advantage over other corporate taxpayers, as it allowed the group to channel most European sales through employee-less “head office” parts of the two Cork-based subsidiaries, ASI and AOE, which were non-resident for tax purposes.
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Only the activities of Irish “branches” within the same units were subject to tax in the State.
ASI was responsible for the sales and distribution of iPhones and other products outside of the US, while AOE had a role in manufacturing and assembly. Both fell under the umbrella of an Irish holding company, called Apple Operations International (AOI), which sits over most of Apple’s subsidiaries outside the US.
The commission’s view was that valuable intellectual property (IP) behind Apple products lay inside the Irish branches of ASI and AOE, meaning that most of the profits were taxable by Revenue in Dublin. Apple, on the other hand, argued it was held outside the branches – and ultimately controlled from group headquarters, in Cupertino, California.
A legal appeal by Ireland and Apple in late 2016 against the commission’s decision resulted in a ruling by the EU general court in 2020 that Ms Vestager’s officials failed to prove the tax was owed at all. The commission fell short of demonstrating to “the requisite legal standard” that Apple had received illegal state aid through a “sweetheart” tax deal that gave it an unfair advantage over other companies, the court ruled.
But why did Ireland appeal in the first place? Surely billions of additional taxes are good?
The then government, led by Enda Kenny, decided to lodge the appeal because it saw the commission’s decision as an attack on the Republic’s sovereignty when it comes to taxation.
The view was that anything that questioned the basis of the State’s tax policy could damage its attractiveness for foreign direct investment.
Successive governments have fervently denied that the Republic does tax deals or that it gave favourable treatment to Apple.
But the commission went on to appeal the general court ruling, right?
Yes, it did. Its appeal, heard in at the ECJ in May, was premised on claims that the lower EU court made “legal errors” in its judgment three years ago by confusing aspects of Apple’s corporate structure.
However, senior counsel for Apple, Daniel Beard, told the court that Apple had been paying €20 billion in tax to the US on the same profits in the decade to 2014 that the commission argues was owed to the Irish exchequer.
The advocate general opinion on Thursday is likely to lay a marker for where the ECJ will finally land on the case.
Where are the contested billions currently?
In 2018, the government collected and put into escrow (a kind of holding account) the alleged €14.3 billion of back taxes and interest the commission claimed it was owed from Apple.
The size of that pot, which is mainly made up of investments in European government bonds rather than cash, fell to €13.4 billion by the end of last year. This was down to the effects of pervasive negative rates on European bonds in recent years and Apple being allowed to take out some money to pay taxes in other jurisdictions.
If the commission ultimately wins, will all the funds remaining in escrow go to the exchequer?
Government officials expect that even if the commission ultimately wins its appeal, other states will make claims that they are owed some of the remaining funds in the escrow account.
