On 30 August 2016, the European Commission “concluded that Ireland granted undue tax benefits of up to €13 billion to Apple”, the multinational technology company. This is considered by the Commission to be illegal under EU state aid rules as it allowed Apple to pay significantly less tax than other businesses. The Commission has instructed Ireland to recover the €13 billion plus interest. On 2 September 2016, the Irish government announced its decision to appeal the ruling.
State aid is understood to be a form of state intervention used to promote a certain economic activity, meaning that certain economic sectors, regions or activities are treated more favourably than others. In so doing, state aid distorts competition in the EU Single Market because it discriminates between companies.
According to the European Commission, to be deemed illegal, state aid must fulfil the following criteria:
- Measures must involve a transfer of state resources;
- The aid must constitute an economic advantage that would not have been granted in the normal course of business;
- The aid must be selective, thereby affecting the balance between certain companies and their competitors – this criterion is what differentiates state aid from general measures;
- The aid must have a potential effect on competition and trade between Member States.
Small amounts of aid, up to €200 000 per undertaking over a three year period, do not have a potential effect on competition and trade between Member States and therefore fall outside the scope of the Treaty on the Functioning of the European Union.
Background to the Investigation
Since June 2013, the Commission has been investigating the tax ruling practices of Member States.
In June 2014, the European Commission began in-depth investigations in Ireland, the Netherlands and Luxembourg to see if the corporate income tax paid by Apple, Starbucks and Fiat respectively amounted to ‘illegal state aid’. The Apple state aid ruling is the culmination of the Irish investigation. In October 2015, the Commission had concluded that the Netherlands and Luxembourg had granted selective tax advantage to Starbucks and Fiat and ordered the recovery of €20-€30 million of unpaid tax from each company. Both governments have since appealed the rulings.
These rulings are not the first of their kind. The Commission has been investigating cases of state aid for decades. There are also two other ongoing investigations into tax rulings that may constitute state aid, in Luxembourg involving the McDonald’s company, which was launched in December 2015, and Amazon, the ruling of which is expected in the coming months.
The Conclusion of the Investigation
In a press conference given by Margrethe Vestager, the Commissioner in charge of competition policy, the European Commission announced its conclusion that two tax rulings issued by Ireland to Apple in 1991 and 2007 “substantially and artificially lowered the tax paid by Apple in Ireland since 1991”.
The Commission found that two companies of the Apple group registered in Ireland, Apple Sales International, and Apple Operations Europe, recorded the majority of their sales profits in a head office that “existed only on paper”. Under specific provisions of the Irish tax rulings, which are no longer in force, these profits were not subject to tax in any country. The Commission concluded that, as a result of these provisions which were in force at the time, Apple paid a far lower effective corporate tax rate on its European profits, estimated by the Commission as 1% in 2003, declining to 0.005% in 2014 on the profits of Apple Sales International.
The tax rulings were classified as illegal state aid under EU law because they gave Apple an unfair competitive advantage over other companies that are subject to the same national taxation rules in Ireland. The Commission stated that “this decision does not call into question Ireland’s general tax system or its corporate tax rate”.
Covering the ten-year period leading up to the Commission’s first request for information in 2013, Ireland has been instructed to recover the unpaid taxes from Apple for the years 2003-2014 of up to €13 billion, plus interest. The amount of unpaid taxes to be recovered by Ireland would be reduced if other countries were to require Apple to pay more taxes on the profits recorded during this period.
As is standard practice for Commission decisions on state aid, the full decision has been deemed confidential. It now falls to Ireland and Apple to clear the decision of sensitive information and decide when it can be published. In other cases, Commission decisions have been published months after the decisions were. For example, the Commission’s decision regarding the Netherlands and Starbucks was announced on 21 October 2015, and not published in full until 27 June 2016.
After the Commission’s ruling on 30 August 2016, the Irish Department of Finance issued a press release stating that “Ireland’s position remains that the full amount of tax was paid… and no state aid was provided”. It rejected the claim that Apple had been given favourable tax treatment, and went on to say “It is not appropriate that EU State aid competition rules are being used in this new and unprecedented way in the area of taxation, which is a Member State competence and a fundamental matter of sovereignty.”
The Irish Cabinet met on Wednesday 31 August 2016 to discuss the implications of the ruling. The Taoiseach, Enda Kenny TD, and Minister for Finance, Michael Noonan TD, indicated their intention to appeal the ruling. On Friday 2 September, the Cabinet agreed to launch an appeal, which it will ask the Dáil to endorse when it is recalled, earlier than had been scheduled, on Wednesday 7 September.
Apple CEO, Tim Cook, stated “This is a huge overreach that represents retrospective activity and is completely unfair.” Former Commissioner in charge of the Digital Agenda, Neelie Kroes, argued that the Commission appeared to be using state aid investigations into tax rulings in order to rewrite the sovereign right of Member States to determine their own tax laws. Others, such as Italian MEP Gianni Pittella, president of the Progressive Alliance of Socialists and Democrats (S&D) has praised the Commission for taking a tough stance on multinational corporations.
European Commission President, Jean-Claude Juncker, has responded by saying that the ruling was made “without discrimination and without bias” in order to defend a “level playing field”.
The appeals launched by the Irish government and Apple will first go to the General Court of the European Court of Justice (ECJ) in Luxembourg. Based on existing case law, it is likely that the third criterion of illegal state aid – that aid must be ‘selective’ – will be pivotal in the decision. Despite the pending appeals, Ireland must still recover the €13 billion and this may be placed in a ring-fenced escrow account.
In 2007, the European Commission concluded that Spain was giving certain firms illegal state aid through a provision in the Spanish tax code, and it was ordered to recover the aid. The decision was appealed in 2010 by three companies which had availed of the provision: Santander Bank, Santusa, and Autogrill. The General Court found in favour of the companies finding that the Commission hadn’t proved that the provision was selective, because it was theoretically available to everyone. This was based on the General Court’s understanding that the provision was applied to a certain category of economic transactions rather than to specific companies.
The Commission appealed this decision. Ireland submitted written and oral submissions to the hearing, backing the companies. In the appeal, Santander argued that the Commission had contradicted itself by stating that tax rulings were not illegal, but that multinational and domestic companies should be treated the same in tax law.
In July 2016, the ECJ Advocate General, Melchior Wathelet, issued a legal opinion on the case in which he rejected the General Court’s ruling. The final decision is likely to be announced in the coming months. It is worth noting that the majority of final ECJ judgements usually agree with the Advocate General’s opinions. If the Spanish case is ruled in favour of the Commission, the judgement would supersede all other EU state aid case law.