I’ve written a number of pieces about Apple, Google and the Double Irish structure. So I thought that I had better comment on the state aid judgement on Apple. There has been a lot of heat in comments but most have not focussed on the fact that this is a state aid judgement not a tax judgement.
My first experience of state aid came during the revision of the Energy Tax Directive. DG Competition became involved in the process. What was clear from the dialogue is that Competition are the keepers of the Holy Grail when it comes to the common market within the EU and their view on competition trumps other DGs like Taxud when it comes to the development of policy. During our discussions, a number of exemptions were discussed that it was accepted would have good environmental outcomes, however they could be construed as state aid and as such were rejected despite their environmental benefits – state aid was a more important issue.
The Apple judgement has to be seen in this light. It is a judgement about state aid first and a judgement about tax secondarily.
US Treasury is quoted as saying “This . . . approach appears to expand the role of the [competition directorate] . . . into that of a supranational tax authority.” (FT) Well this is completely incorrect and misleading.
Tim Cook (Apple’s CEO) is quoted in the FT as saying that the decision was “invalid” and “crap” !
The DG Competition judgement is not about the Irish 12.5% corporation tax rate. However much some EU member countries might dislike this (France) that 12.5% tax rate is valid under EU law if its applied to all corporate taxpayers as the various codes of conduct on harmful tax competition make clear. The decision was about the inconsistent treatment of taxpayers by Ireland. For Ireland to challenge it they would have to show that all taxpayers with the same activities as Apple were provided with the same tax regime.
Back in August 2014 I wrote about the letter which the EU sent to Apple which set out some of the issues that needed to be addressed. The letter made clear that the basis of taxation of the Apple subsidiaries in Ireland seemed to be based on an unusual approach to transfer pricing. I wrote about that basis:
“But here another contradiction comes into play, this is an APA (advance pricing agreement) which provides for certainty for a period of time (if the facts remain the same) for the tax treatment of a transaction or transactions. Normally APAs last for 3 to 5 years and are then renegotiated. This agreement lasted 16 years! The agreement isn’t supported by a transfer pricing report – which is standard procedure in an APA.
So what we have is an APA which applies for a period far in excess of a conventional APA, which isn’t renegotiable if the facts change and which is not supported by a transfer pricing report. The agreement isn’t based on transfer pricing principles appropriate to the transaction and there is a filter to ensure the taxpayer doesn’t pay too much tax if the fact pattern changes.”
Does Ireland offer this tax treatment to all other similar taxpayers? It is, I think, unlikely. How many of their APAs last for this period of time and have this basis? In my experience of transfer pricing, these are very unusual approaches to take to an APA.
So the real issue here is that within the EU there is a body of law which looks at state aid which includes tax. Tax subsidies which are only selectively available will be challenged as providing state aid. DG Competition is not a “supranational tax authority” but it is an organisation which polices a single market to ensure it operates competitively.
I will write shortly about the claims that the tax involved will be repatriated to the US.