Why may Apple now owe €13 billion to Ireland?
The European Commission's Apple State aid decision in a nutshell
14 December 2018
On 6 September 2016, the European Commission ordered Ireland to recover up to €13 billion from Apple. After a two-year investigation, the Commission found that advance tax rulings issued by the Irish tax authorities allowed profits recorded by Apple's Irish companies to be exempted artificially from tax in Ireland.
What's wrong with Apple's rulings in Ireland?
Issuing tax rulings is a normal and legitimate practice for tax authorities. Their purpose is to give legal certainty on the application of national tax rules to a taxpayer, especially in factually or legally complex situations.
The rulings granted to Apple by the Irish tax authorities determine the portion of Apple's Irish entities' profits that should be subject to tax in Ireland. The Commission found that the tax authorities agreed to the lion's share of Apple's profits being allocated outside of Ireland without any factual or economic justification. According to the Commission, as a result of the rulings, the majority of Apple's profits were not taxed in Ireland (or anywhere else).
EU competition rules prohibit Member States from selectively favouring certain companies by offering them targeted advantages such as subsidies or tax breaks. The Commission considered that by approving an artificial mechanism allocating profits away from Ireland, the Irish tax authorities accepted to forego tax revenues Apple should normally have paid in Ireland, and has therefore ordered Ireland to recover the illegal advantage that had been granted to Apple.
How much will Apple ultimately have to pay?
The billions of Euro that Apple may ultimately be required to disburse is not a fine to be paid to the Commission. It is the Commission's estimate of the amount of taxes that Apple should have paid between 2003 and 2014 absent the illegal rulings, which Ireland is required to claim back from Apple. The decision did not specify the exact amount to be paid by Apple, but indicated the methodology that Ireland has to follow when calculating the sums to be recovered. Having said this, the Commission estimated that up to €13 billion may need to be recovered. This figure may change (although most likely not in degree of magnitude) following discussions between Ireland and the Commission over the proper application of the methodology used to calculate the recovery amount, and could grow considerably as a result of compound interest being applied.
The estimated €13 billion amount, the highest recovery order ever imposed in a State aid case, is impressive on its own, but even more so when put in perspective: Ireland's overall revenues from corporation tax reached a historical high of €6.5 billion in 2015. The reason that the amount to be recovered from Apple could be double this amount (or even higher) is due to the structure of Apple's operations, under which nearly all EU sales are recorded by Apple's Irish entities regardless of where customers actually buy Apple products. As such, the amount of taxes to be claimed back by Ireland is calculated on profits generated from sales of Apple's product across the EU, and not in Ireland alone.
The Commission mentioned two factors that could further impact that amount to be recovered. First, the US tax authorities could find that Apple's Irish entities should have made higher yearly payments to fund the group's R&D activities in the US. Such payments are deducted from Apple's taxable base in Ireland, and, if they were increased for the past, the amount of taxes which Ireland would need to recover would be decreased accordingly.
Second, other EU Member States could use the Commission's findings to attack Apple's structure, under which European sales were recorded by Apple's Irish entities. If any Member State were to claim due taxes on the grounds that Apple illegally shifted its profits from that Member State to Ireland, this would also decrease the amount of taxes for Ireland to recover.
Thus, Ireland could have to recover significantly less than €13 billion.
Apple's total bill, on the other hand, could increase considerably. This can be illustrated by the following fictive and simplified example.
Let's assume that according to the Commission €100 billion of Apple's Irish entities' profits should have been taxed by Ireland. Applying Ireland's nominal tax rate, this gives an amount of due taxes of €12.5 billion. Now, imagine that Spain considers that €20 billion of Apple's profits should have been taxed in Spain instead of Ireland. Ireland's 12.5% tax rate would apply to a taxable base of €80 billion, whereas the remaining €20 billion of Apple's profits would be taxable at Spain's 30 to 35% tax rate (depending on the year).
Under this scenario, Apple would have to pay €10 billion in due taxes to Ireland, and between €6 and 7 billion to Spain, bringing the total amount to be disbursed by Apple to €16-17 billion.