Today’s sensational, though not entirely unexpected Commission decision, that Apple has been a beneficiary of state aid from Ireland, in breach of Article 107 of the Treaty on the Functioning of the European Union (TFEU) has resulted the bizarre situation where a massive company has been told to pay the state billions in tax, only for the state to say “we don’t want it!” The decision is hailed as a victory by tax justice campaigners, but the reality is that this decision is a travesty for anyone who believes that rulings about tax liabilities should be based upon what the law is, and not what the arbiters wish the law is.
Article 107(1) TFEU provides that:
Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.
The classic state aid scenario is one in which a government funnels money or resources towards an undertaking (usually a company) it favours in preference to others. However, in recent decades, it has been commonly accepted that such treatment also includes allowing an undertaking not to pay for something that it otherwise would.
It therefore follows that the Commission has to establish that the state in question granted favourable treatment to Apple specifically. However, rather than doing so, the Commission’s statement today provides little more than a tirade of obfuscation and bluster, containing what could only be deliberate misrepresentations of the nature of international tax law, presumably to distract from the fact that their decision appears to built on an extremely shaky legal foundation.
The Commission repeatedly references the allocation of profits to a “head office” (their quotation marks), claiming that no such “head office” actually exists. Such nomenclature is misleading, as no such terminology exists in either Irish or international tax law. Under both international and Irish tax law, profits are not “allocated” to head offices and subsidiaries. The “first bite of the apple” (as we call it) goes to the source of the income – a jurisdiction in which the enterprise has a fixed place of business through which the business of the enterprise is wholly or partly carried on. Only those profits which arise through the activities of that establishment are attributable there, notwithstanding whether or not profits from other activities are also sourced within that state. In other words, the threshold for attributing profits to a permanent establishment is very high, and that is the sole jurisdiction Ireland has to tax the profits of a non-resident enterprise.
The residuary rule in international taxation is that profits that cannot be explicitly attributed to a permanent establishment are taxable only in the jurisdiction in which the enterprise is resident. Ireland, in common with most common law jurisdictions, uses the De Beers test of corporate residence – which is a company’s “place of effective management”. In other words, as a matter of Irish law, those “head office” profits are being allocated to America – the fact that America employs a different test of corporate residence is America’s problem, and not Ireland’s. Contrary to the Commission’s inferences, it is not Ireland’s concern what happens to the profits that fall beyond its jurisdiction.
A further concern is the following paragraph:
The amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by Apple Sales International and Apple Operations Europe for this period. This could be the case if they consider, in view of the information revealed through the Commission’s investigation, that Apple’s commercial risks, sales and other activities should have been recorded in their jurisdictions. This is because the taxable profits of Apple Sales International in Ireland would be reduced if profits were recorded and taxed in other countries instead of being recorded in Ireland.
This is, quite simply, not the case. First, does the Commission seriously think that other EU Member States have simply rolled over and allowed Ireland to tax profits that those Member States think are rightly theirs? Of course not. They have taxed as much of those profits as can be attributed to permanent establishments situated therein – which will primarily be sales from physical Apple Stores. Shifting jurisdiction to tax online sales requires more than simply a unilateral decision to do so by the Comission, the allocation of jurisdiction is enshrined in thousands of tax treaties, which would have to be amended. The European Commission cannot simply decide that the well-established jurisdictional boundaries that are enshrined in international tax law are suddenly not where they’ve always been. In his letter today, Tim Cook claimed that “using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.” Tim Cook is right.
All of this is a smokescreen. The Commission has chosen to focus attention on this irrelevant facts and even more irrelevant opinion to disguise the fairly shaky basis upon which they have reached this ruling. There is no question that a tax advantage offered only to a specific undertaking (in this case Apple) is a breach of EU state aid rules. This therefore raises the question of the specificity of Apple’s tax treatment.
There are two possible approaches that can be taken to deciding whether or not an undertaking has been the recipient of special treatment. The first, is reference to whether or not the state intended to confer special treatment on the undertaking. This approach has been roundly rejected by the ECJ and legal scholars. The second approach, which is normally employed by the Court, is an objective one, which compares the treatment of the undertaking with that which would be considered “normal” treatment. Therefore, the only ground on which Ireland could be considered to have provided state aid to Apple is by offering them treatment that materially differed from other large multinationals.
Did the Irish Revenue Commissioners do a deal with Apple? Yes – and in the minds of irate campaigners that would appear to make this an open-and-shut case. Except that almost every multi-national enterprise trading in almost every developed country will strike a deal with the revenue on how to allocate group expenditure to subsidiaries, such as research and development, intellectual property, and management costs. These deals are called Advance Pricing Agreements, and provide enterprises with a degree of certainty as to what their costs will be (i.e. the state in which they’re investing isn’t going to retrospectively tell them that little of their group expenditure can be deducted from their gross profits). The difficulty in determining the value of these costs (pricing) is that they are dependent upon comparable market values, where no such transactions ever actually take place on an open market. Apple would never license the iPhone brand to anyone, so how the heck are we supposed to work out the actual value of the brand?! For technology companies, intangible assets such as these constitute the overwhelming majority of such companies’ cost base. These Advance Pricing Agreements are normally therefore the product of educated guesswork and tough negotiation. Therefore, the “normal” treatment of advance pricing such companies is not a specific set treatment, but a range. Like with all ranges, there will be companies at either end of this range. As the largest company in the world, you would certainly expect Apple to be at the most favourable end of the range.
The Commission’s statement today contains absolutely no references to comparable Advance Pricing Agreements in Ireland in order to determine what is “normal”, nor does their more detailed preliminary decision of 2014. The 2014 preliminary decision focuses almost entirely upon determining whether or not the Revenue Commissioners intended to confer special treatment upon Apple (by focusing on statements about how many people were employed by Apple in Cork, etc.), which has been conclusively established as irrelevant in determining whether or not Article 107 has been breached.
Having failed to demonstrate in any way why the treatment afforded to Apple differed from “normal” practice, the Commission has sought to justify its decision on a tirade of bluster about “factual or economic justification”, as opposed to, y’know, the law.