Should profits on the sale of an iPhone in the UK or an iPad in the Netherlands be taxed in Ireland or in the US? Or anywhere? Where such profit should have been taxed will be at the heart of the battle between the Government, Apple and the European Commission in a complex legal fight which is already hotting up.
The nature of this battle is starting to become clearer, with the Government publishing some of the grounds of its appeal on Monday. This was followed by the European Commission’s publication of its full decision in the Apple case.
The core of the Government’s argument is that the Apple profits, which the commission says should have been taxed in Ireland, were not, in any way, attributable for taxation here.
The commission disagrees. It argues that the Government and the Revenue Commissioners effectively agreed not to collect tax revenue that should have been payable and thus granted Apple as “selective advantage.”
Ireland – and Apple – are appealing against the judgment to the General Court of the European Union. Given the sums of money involved and the scale of criticism of the Irish tax authorities in this case, it looks certain to end up before the highest court, the European Court of Justice.
How these European courts rule will depend, in large part, on how they judge the roles of the two key Apple subsidiaries, Apple Sales International and Apple Operations International, and the offshore branches of these companies to which profits were transferred.
This is vital to the decision of what tax was attributable to Ireland. Were these two entities designed as vehicles established purely for tax avoidance? And were the proper tax rules followed in how they were treated by the Irish authorities ?
Intellectual property
Ireland’s case is that the money was not taxable in Ireland. In plain terms, the case will be that the profits on an iPhone designed in California, assembled in China and sold in London, Paris or wherever, are not taxable in Ireland, even if the money involved did pass through Irish-registered subsidiaries.
In particular, the State’s case will lean on the fact that the intellectual property driving Apple’s sales – the design and development of key products such as the iPhone and iPad – were all undertaken in the US. The Government will argue that the Irish subsidiaries carried out only “routine” functions. For this reason they will hold that the tax was payable in the US, where the real “ value” was created.
The Commission, in its full document published on Monday, fundamentally disagrees. It says that the Irish companies were an important cog in Apple’s global chain and that the profits slowing through them should have been taxed here.
At the heart of this is whether Ireland should have levied tax on the profits from the sale of Apple products across European and other non-US markets served from Dublin. These profits flowed back through the Irish subsidiaries, using a controversial structure under which a branch of the two key subsidiaries were not tax-resident anywhere. As the Commission put it, they were “stateless” for tax residency purposes. It was tax planning at its most aggressive.
What the courts must decide is whether Ireland offered some selective, or special, advantage to Apple which allowed this to happen.
Ireland will argue that it was not obliged to collect tax on non-resident companies. The commission will say that Ireland was the appropriate place of collection and that the Revenue Commissioners effectively engineered an arrangement which allowed Apple to pay a very low tax rate on profits earned outside the US.
Its case is that Ireland should not have allowed Apple to allocate such a large part of its profits to company branches with no tax residency and that it did not ensure that proper rules were followed in doing this, specifically on the need to have a genuine “arm’s-length relationship” between entities undertaking such transactions.
There are a couple of key points behind the complex tax arguments. The first is the enormous damage done to Ireland by the scale of the judgment, which says that Ireland should collect €13 billion in tax from the US multinational.
Everyone expected the commission's competition directorate to rule against us, but competition commissioner Margrethe Vestager decided to make a big call on Apple and Ireland.
Whatever the eventual outcome in the European courts, this judgment, by highlighting the massive sums involved, shows the scale of profits moving through Ireland. It has also seriously damaged relations between the Government and the European Commission.
Tax opinions Apple’s tax avoidance strategy was rooted in US company tax law , which, broadly speaking, allows companies to avoid paying tax once money remains offshore.
However, Ireland was an important link in the chain and the accusation that the Revenue Commissioners effectively helped to set up the arrangement here in return for the promise of jobs is damaging. The Government strongly rejects this and says the ordinary tax rules were applied. It also says that the tax opinions granted to Apple simply applied Irish law.
With this amount of damage already shipped – and no final decision from the European courts due for years – it is vital for Ireland that the Apple case is ringfenced. The emergence of further investigations here would be hugely damaging.
The commission asked for and was given details of more than 300 tax opinions given to multinationals between 2010 and 2012. It is also sought and was given details of nine other companies with similar structures here to Apple, as part of its probe into that company’s tax affairs.
Apple’s structure was unusual, though probably not unique. Most companies used the so-called double-Irish structure in which money was transferred between two companies. Apple was unusual in that the vast bulk of the transfers happened between two branches of two companies incorporated in Ireland. Examining other similar cases - where the branch structure was used - the Commission finds that there was no consistent basis in the tax treatment of these companies by the Irish Revenue.
The Commission has not given any indication that it will investigate the tax affairs of any of these other companies - but has certainly not ruled out doing so. The Government has repeatedly and angrily denied that there were any other investigations under way or that it had indications that any were likely.
For the moment, the Government must hope that it can contain the fight to Apple and that having delivered such a hammer blow, the commission will not try to draw in other companies with Irish bases. Meantime the legal battle will have years to run.
