A few days ago, an article appeared in the Financial Times (paywall) alluding to a ruling by the European Commission that Apple benefited from a favorable Irish tax rate:
Apple will be accused of prospering from illegal tax deals with the Irish government for more than two decades when Brussels this week unveils details of a probe that could leave the iPhone maker with a record fine of as much as several billions of euros.
Today, the PDF of the ruling itself was posted. If you really want to understand the nature of the European Commission’s ruling, this document is the place to go. It is well-written (though slightly redacted) and makes its case, step-by-step.
Two key points from the document. First, from section 58:
The fact that the methods used to determine profit allocation to ASI and AOE result from a negotiation rather than a pricing methodology, reinforces the idea that the outcome of the agreed method is not arm’s length and that a prudent independent market operator would not have accepted the remuneration allocated to the branches of ASI and AOE in the same situation, which serve as a basis for calculating the tax liability.
ASI is Apple Sales International and AOE is Apple Operations Europe. Both are wholly owned subsidiaries of Apple, Inc.
In my opinion, the paragraph above is basically saying that Apple negotiated a favorable tax deal as opposed to accepting more traditional terms. The framework of the entire document lays out all the details but, to me, this is the heart of the matter.
Then, at the end of the document, comes the decision:
In the light of the foregoing considerations, the Commission’s preliminary view is that the tax ruling of 1990 (effectively agreed in 1991) and of 2007 in favour of the Apple group constitute State aid according to Article 107(1) TFEU. The Commission has doubts about the compatibility of such State aid with the internal market. The Commission has therefore decided to initiate the procedure laid down in Article 108(2) TFEU with respect to the measures in question.
Article 108(2) TFEU refers to a section of the Treaty on the Functioning of the European Union (TFEU) which lays out the rules for adjudicating matters like this. Here’s a reader-friendly version of the TFEU.
Next step is, in effect, an audit. The EC is requesting comments from Ireland as well as all relevant tax-related documents. Those are due in a month.
From the Financial Times article:
Apple, which has operated in Ireland since 1980, maintains that its agreements with Ireland did not break any laws. “There’s never been any special deal, there’s never been anything that would be construed as state aid,” Luca Maestri, Apple’s chief financial officer, told the Financial Times.
“We were simply trying to understand what was the right amount of taxes that we would have to pay in Ireland,” Mr Maestri said of the agreements, describing Apple’s approach as “very responsible, transparent and prudent”.
Apple’s official statement (via Business Insider):
Apple is proud of its long history in Ireland and the 4,000 people we employ in Cork. They serve our customers through manufacturing, tech support and other important functions. Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government. Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland.
Since the iPhone launched in 2007, our tax payments in Ireland and around the world have increased tenfold. To continue that growth and the benefits it brings to the communities where we work and live, we believe comprehensive corporate tax reform is badly needed.”