European Commission Investigates Apple Tax Deal

According to the reports, Apple may have to repay the tens of millions of euros the company has been receiving as “illegal state aid” via an Irish tax deal with the government from 1991 to 2007. Indeed, the European Commission has formally launched an investigation into the deals. Moreover, the outgoing competition commissioner (well-known Joaquín Almunia) warned that the recipient of any state aid could be forced to repay it.

Not surprisingly, the investigation was started as the European governments became increasingly critical of tax arrangements used by foreign tech giants to shift revenues to various low-tax countries. For example, all of the majors – Apple, Google, Amazon and Facebook – have fallen under scrutiny for the ways used to lower taxes paid on non-US revenues.

The competition commissioner claimed that the preliminary investigation of the European Commission suggested that deals between Apple and the Ireland in 1991 and 2007 were indeed about the state aid, but the doubts remain about the compatibility of such state aid with the internal market. In addition, the deal that replaced it in 2007 was also doubtful.

The matter is that state aid is illegal in the European Union if it interferes with the free internal market. For example, Ryanair was forced to repay about 10m euros of illegal state aid received from 3 airports, because it gave it the competitive advantage over the peers. The company is currently contesting the order.

Apple’s international headquarters are based in Ireland, where the company is the second biggest employer in the region. The tech giant claims that it pays all taxes due, while the EC experts say the company paid only 3.7% tax on non-US profits of $31bn in 2013.

It is known that the Irish government has rejected suggestions of a special deal with the tech giant. Apple has been operating in Ireland since the 1980s when Steve Jobs arranged for a portion of the economic rights to be transferred from the US division to a new Irish Apple company. It is also known that 2/3 of Apple’s global profits for 2011 were attributed to companies registered in Ireland.

However, the investigators claim that the amount repayable is comparatively small compared to Apple’s gigantic revenues. The investigation started informally back in 2013 and is scrutinizing the deals between the Irish government and Apple of the times when the tech giant was a comparatively young company.

The suspicions arose because of the Apple’s complex tax arrangements: a company called Apple Sales International, which until 2012 had no employees and was controlled by the board from the United States, is for some reason based in Ireland. Moreover, it paid taxes of only $10m on revenues of $22bn from non US-based activities, which is about 0.045%.

The experts admit that the legal boundaries around tax planning can be shifting now. They refer to the examples showing that the moral boundaries shift over both corporate and personal tax planning. It is not a secret that such giants as Google and Amazon have been lambasted for developing tax arrangements that are absolutely legal. Apart from Apple, more than 40 multinational companies, including Amazon, Google and McAfee, also have operations in the same region of Ireland, bringing 100,000 jobs to the area.

According to the Irish finance ministry, it was confident that there was no breach of state aid rules in Apple case, pointing that the EC has not formally decided that there is state aid, only that it is formally examining this case.

Apparently, the key concerns of the Commission about the 2007 deal are that Apple had declared too little profit in Ireland – the suggestions were that if the company was declaring too little in Ireland, then it must have been declaring too much somewhere else. In other words, the perception was that Apple funneled its revenues via Ireland, which it wasn’t – as a US company, it was funneling them through the US.

Apple maintains that it has never received any selective treatment from Irish officials, saying that it is subject to the same tax laws as any other company doing business in Ireland. Moreover, since the iPhone’s launch in 2007, the company’s tax payments worldwide (including Ireland) have increased tenfold.