In advance of the expected publication today of the full European Commission ruling on Apple's tax agreements with Ireland, the Irish Government published early Monday morning a summary of its appeal to the European Court of Justice. In a nutshell, the result it is seeking is a Lawyers 1 Commonsense 0 win in respect of arrangements that would be considered massive fraud if the case involved a typical European SME (small and medium enterprises).


Update: See here a non-confidential version of the ruling issued today. See also last section below.

Last August the Government was ordered by the European Commission to recover up to €13bn in unpaid taxes, plus interest, on the basis that Apple had been given preferential treatment by Ireland through two tax rulings in 1991 and 2007.

"Look at the small print" on an iPhone, Michael Noonan, finance minister, said after the Commission released its ruling in August. "It says designed in California, manufactured in China. That means any profits that accrued didn't accrue in Ireland, so I can't see why the tax liability is in Ireland."

What Noonan and other apologists conveniently ignore is that Ireland provided the companies where Apple recorded the sales in Ireland not where the products were sold. Apple then decided that these companies were stateless or not tax-resident anywhere and the Irish authorities were likely aware of it.

Apple's stateless firm tax claims likely broke Irish law

The apologists also say it doesn't matter that Apple doesn't pay tax overseas as tax would eventually be paid in the United States — "In the long run we are all dead," John Maynard Keynes famously wrote in a 1923 publication.   

Noonan should look at the small print in Apple's filings with the US Securities and Exchange Commission.

For example Apple's international revenues/ net sales ratio in fiscal 2012 was at 61% and Apple classified $36.8bn of $55.8bn in earnings before taxes as "foreign pretax earnings."

It was Apple that said 65% of its 2012 earnings were "foreign pretax earnings" and it paid $713m in foreign taxes — a rate of 1.9%.

Apple's foreign tax rate was 12% in 2002.

In its ruling the Commission said Apple's agreements with Ireland enabled it to avoid taxation on virtually all profits generated by sales of its products in the EU single market.

Apple and the Irish authorities agreed an earnings were split with the vast majority attributed to a "so-called head office" with no employees, no premises and no real activities other than board meetings.

Only a fraction of the profits of Apple Sales International, an Irish nonresident company, were allocated to its Irish branch and subject to tax in Ireland while the “remaining vast majority of profits were allocated to the ‘head office'  where they remained untaxed,” the Commission said.

In 2011, according to data released in 2013 by the US Senate Permanent Subcommittee on Investigations, Apple Sales International (ASI) posted profits of $22bn (€16bn). However, only about €50m were considered taxable in Ireland, leaving the balance untaxed.

ASI paid less than €10m in corporation tax in Ireland in 2011 giving an effective rate of about 0.05% on its overall annual profits.

The Commission said that by 2014 Apple had reduced its effective corporate tax rate to as little as 0.005%.

Margrethe Vestager, European commissioner in charge of competition policy, said at a press conference on 30 August: “Member States cannot give tax benefits to selected companies — this is illegal under EU state aid rules. The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.

“In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003 down to 0.005% in 2014.

Vestager added: "If my effective tax rate was 0.05%, then falling to 0.005%, I would have the feeling that maybe I should have a second look at my tax bill."

Tim Cook, Apple, tax, Ireland, EU

@EndaKennyTD 2 December 2016: Great discussion w @tim_cook in Silicon Valley this am.
Also met many impressive Irish companies here that are ready to take on the world.

Why Apple is different

It's important to understand in respect of Irish nonresident companies that there is a significant difference between Apple and for example Google, Microsoft and Facebook.

Apple ceased using the Double Irish tax dodge more a decade ago — this involved Irish resident companies and related Irish nonresident companies typically based in Bermuda and the Cayman Islands.

Apple's Irish activities are branch operations of nonresident companies that have addresses at the Cork campus and it would not have been generally known which was which.

How Apple found a bigger tax loophole than the Double Irish

Ireland's case

Ireland launched its appeal last month against the Commission's ruling at Europe's second highest court, the General Court, a constituent court of the Court of Justice of the European Union. The Department of Finance published Ireland's main legal arguments against the Commission on Monday.

1. The Commission has misapplied State Aid law;

2. The Commission has wrongly applied the arm’s length principle;

3. The Commission has wrongly concluded that the tax treatment of ASI and AOE (Apple Operations Europe) was not consistent with arm’s length principle;

4. The Commission’s alternative line of reasoning misunderstands Irish law;

6. The Commission wrongly invokes novel legal rules;

7. The Commission has exceeded its powers and interfered with national tax sovereignty;

8. The Commission has failed to provide proper reasons for its decision;

Apple Operations International (AOI), Apple's principal overseas subsidiary which is an Irish nonresident company was established in 1980 and the US Senate Permanent Subcommittee on Investigations said in 2013:

When asked whether AOI was instead managed and controlled in the United States, where the majority of its directors, assets, and records are located, Apple responded that it had not determined the answer to that question.

Apple did gain enormously from its Irish companies and the Irish authorities were directly involved in agreements on the allocation of profits between the real world branch operations of the shell companies.

The European Commission competence on state aid also covers the area of direct business taxation and this has been the case for decades:

While the member states enjoy fiscal autonomy in the design of their direct taxation systems, any fiscal measure a Member State adopts must comply with the EU State aid rules, which bind the member states and enjoy primacy over their domestic legislation.  As a rule, fiscal measures of a general nature that apply to all undertakings without distinction fall within the remit of the member states’ fiscal autonomy and cannot constitute State aid, since they do not selectively advantage certain undertakings over others. By contrast, fiscal measures that discriminate between taxpayers in a similar factual and legal situation constitute, in principle, State aid.

The use of Irish shell companies, which have cash balances of over $200bn (the cash is in the US not Ireland) that have no real world existence and since 1980 had no tax residencies anywhere, will be of interest to the European judges. If they are minded to look beyond sham structures that resulted in massive tax avoidance, then commonsense will win.

Apple's case

Apple will appeal the Commission's ruling this week and again European judges are unlikely to be impressed by Apple's secret decision, possibly with the knowledge of the Irish authorities, to declare it's nonresident Irish companies to be stateless.

Bruce Sewell, general counsel, and Luca Maestri, chief financial officer, told Reuters in an interview at the company's global headquarters in Cupertino of the appeal plan.

Sewell played the victim card that Apple has been singled out because of its success!

What Sewell conveniently ignores is that Apple was able to get away with the fraud that its Irish nonresident companies had no tax residency anywhere on the planet.  

"Apple is not an outlier in any sense that matters to the law. Apple is a convenient target because it generates lots of headlines. It allows the commissioner to become Dane of the year for 2016," he said, referring to the title accorded by Danish newspaper Berlingske last month.

This is a comment worthy of the president-elect!

Reuters reports that Apple also intends to challenge the Commission's basis for its case, arguing that the "crazy notion of nonresidency" was chosen on purpose to produce a punitive amount.

Why is it crazy when it has been so beneficial for Apple?

Reuters says other arguments the EU could have used could have been based on transfer pricing — the pricing strategy between a company's units — or the "arm's-length" principle adopted by companies to sell and buy from affiliates as if they were unrelated firms.

"Both of those other two theories at least could be fleshed out, but they produced much lower numbers," Sewell said.

He added it was not possible for Apple to comply with the EU decision because it would mean Ireland violating its own past tax laws setting different rules for residents and nonresident companies.

Maestri said the Commission over-estimated the importance of the company's European headquarters in Cork but irrespective of its size it facilitated Apple to use its nonresident companies with addresses there to engage in massive tax avoidance until US senators broke the story.

Apple’s Irish tax rate not backed by data

The European Commission's 130-page non-confidential transcript of its August ruling that Ireland provided Apple with illegal state aid, shows that Ireland agreed to give Apple a very low tax rate without requiring the firm to support its claim with any supporting data.

The ruling says that the fact that the 1991 and 2007 tax concessions made by Ireland were issued without profit allocation reports for Apple Sales International (ASI) and Apple Operations Europe (AOE) “tends to indicate that the methods endorsed by those rulings" did not produce an outcome based on economic reality.

It said the taxable profits Apple allocated to both subsidiaries with the agreement of Ireland departed “from a reliable approximation of a market-based outcome” because of the “unsubstantiated assumption” that revenue from intellectual property due to the two groups accrued outside Ireland.

The Commission added that “the open-ended duration of those rulings calls into question the appropriateness of the profit allocation, given the possible changes to the economic and regulatory environment in the years covered by the rulings.”

The Commission rejected Apple’s claim that the two nonresident Irish subsidiaries of Apple were involved in intellectual property management, saying board minutes support that claim.

“In a submission to the Commission describing the discussions in those board meetings, Apple itself did not identify any IP-related discussions in those minutes when summarising the activities of the boards,” it said.

The Commission also said that it examined tax rulings in relation to 9 other companies as part of its investigation to show that Apple was given a “selective” advantage. Like Apple, the ruling says these involved the allocation of profits between non-resident companies and their Irish branches. The Commission states that it was “unable to identify any consistent set of rules that generally apply on the basis of objective criteria to all nonresident companies operating through a branch in Ireland,” based on its examination of the tax rulings submitted by Ireland to the Commission. As there were no objective rules operating in Ireland, the Revenue thus had discretion in what to do, the Commission argued. It thus finds it conferred a selective benefit to Apple and states that Ireland “has not put forward any justification at all for the selective treatment” of the US tech giant.

The Commission report also discloses that Apple Distribution International (ADI), which was incorporated in Ireland in 2009 and was tax resident, made a tax settlement with the Irish Revenue in 2014 as the company had failed to pay tax on profits made in 2009-2011 including between €100m and €200m in 2011.

In a statement released Monday, Apple accused the Commission of having a "pre-determined outcome" in mind before the investigation into its tax regime. It said it was the largest taxpayer in the world, in the US and in Ireland.

"The Commission took unilateral action and retroactively changed the rules, disregarding decades of Irish tax law, US tax law, as well as global consensus on tax policy, that everyone has relied on. 

"If their opinion is allowed to stand, Apple would pay 40% of all the corporate income tax collected in Ireland, which is unprecedented and, far from leveling the playing field, selectively targets Apple. This has no basis in fact or law and we're confident the ruling will be overturned," Apple said.

Apple said it paid a 26% tax rate on its worldwide earnings, but said it was correct that it paid most of that in the USits foreign tax rate rose from 2% in 2002 to 6% in 2015 and the 26% overall tax rate is misleading as it's boosted by a about 10% through using a rare system of reserve accounting.

"Because our products and services are created, designed and engineered in the US, that's where we pay most of our tax... this case has never been about how much tax Apple pays, it's about where that tax is paid."

The Irish Independent reports that Commissioner Vestager said that the size of Apple's giant tax bill may be reduced through payments from its Irish subsidiaries back to its US parent.

She added that the full €13bn that is due to be collected from Apple may not be payable to Ireland.

"The amount to be paid back to Ireland would also be reduced if the two companies were required to pay larger amounts of money to their US parent company to fund the research and development efforts, in addition to the annual payments they have made," she said.

Apple Sales International, which accounts for most of the unpaid taxes, holds the intellectual property rights to sell and manufacture Apple's products outside of America.

The company buys products like iPhones, Macs, and iPads, from its California-headquartered parent and then sells them throughout Europe, the Middle East, Africa, and India. All sales throughout the regions, Ms Vestager said, are recorded in Ireland.

"Other countries, in the EU or elsewhere, can look at our investigation. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally. That would reduce the amount to be paid back to Ireland," she said.