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It has no employees, no premises and no activities but it allows Apple to pay less than €500 per €1 million tax on its EU profits.
Commission's ruling hits the core of the international offshore industry.
Silicon Valley firms have also called on the Dutch Government to reduce its 25 percent corporate tax rate and bring it "more into line" with competitors such as Ireland, Switzerland and the United Kingdom.
Margrethe Vestager opening statement. EP plenary session, Strasbourg (France). Report on the Apple state-aid decision. Source: © EC Audiovisual Service 2016
The European Commission has concluded that Ireland granted undue tax benefits to Apple of up to €13.0 billion and that this is illegal under EU state aid rules because it allowed Apple to pay substantially less tax than other businesses. In 2011, Apple paid €500 (five hundred euro) in tax in Ireland per million in profit whereas by 2014 it paid €50 (fifty euro) per million. Ireland must now recover the illegal state aid, the Commission added.
Commissioner Margrethe Vestager, in charge of competition policy, said: "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 1percent on its European profits in 2003 down to 0.005 percent in 2014. If I was paying a tax rate of 1 percent, then falling to 0.005, I would like to check if things were in order."
Following an in-depth state aid investigation launched in June 2014, the European Commission has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991. The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a "head office". The Commission's assessment showed that these "head offices" existed only on paper and could not have generated such profits. These profits allocated to the "head offices" were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. As a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1 percent in 2003 to 0.005 percent in 2014 on the profits of Apple Sales International.
This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, as the Commission points out because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules. The Commission can order recovery of illegal state aid for a ten-year period preceding its first request for information in 2013.
Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 billion, plus interest.
Commissioner Margrethe Vestager. © European Union , 2016 / Source: EC - Audiovisual Service / Photo: Georges Boulougouris
Apple's reaction
Tim Cook, third Chief Executive Officer of Apple Inc., has sent a message to what he calls the "Apple's community in Europe" rejecting the Commission's ruling.
You may read it here: http://bit.ly/2c5oC72
Silicon Valley
Silicon Valley
A coalition of Silicon Valley tech companies has urged the Dutch Government against making changes to the most "attractive" features of its corporate tax regime warning that it risks damaging its traditionally strong tax competitiveness by doing so.
The Silicon Valley Tax Directors Group (SVTDG,) which includes more than 80 Silicon Valley-based firms, made the recommendation in a letter sent to Prime Minister Mark Rutte in May 2016.
The letter was written following a visit by Rutte to Silicon Valley earlier in 2016 during which he asked the SVTDG how the Netherlands could maintain and improve its competitiveness.
In their reply, the tax directors advised the Dutch Government to "maintain the attractive features of the Netherlands tax regime." These include easy access to the Netherlands tax authorities, the ability of companies to obtain advanced tax rulings, the favourable participation exemption regime, the extensive double tax treaty network, the absence of withholding tax on interest and royalties and incentives for research and development, including the R&D tax credit and the innovation box.
According to The Group, which seems to assume some kind of US representation, the United States has been a major source of investment for the Netherlands for many years, supporting a total of 450,000 jobs and 5 percent of the country's gross domestic product. The Group therefore urges the Dutch Government to carefully consider the pros and cons of any change to the current business tax regime.
These warnings were sounded as the Netherlands seems to be considering changes to its corporate tax regime to fall into line with new standards promoted by the OECD under its Base Erosion and Profit Shifting project (BEPS) and by the own European Union.
Read the letter here: http://bit.ly/2bRFoEY
Ireland's position
Ireland's position
The Irish Minister for Finance, Michael Noonan, disagrees profoundly with the Commission’s decision:
"Our tax system is founded on the strict application of the law, as enacted by the Oireachtas (Irish Parliament), without exception.
The decision leaves me with no choice but to seek Cabinet approval to appeal the decision before the European Courts. This is necessary to defend the integrity of our tax system, to provide tax certainty to business and to challenge the encroachment of EU state aid rules into the sovereign Member State competence of taxation.
It is important that we send a strong message that Ireland remains an attractive and stable location of choice for long-term substantive investment. Apple has been in Ireland since the 1980s and employs thousands of people in Cork. The company has continued to expand its operations in Ireland in recent times.”
TTIP & The International Offshore Industry
TTIP & The International Offshore Industry
In 2015, on December 9th, MEP Catherine Bearder (ALDE) asked the Commission about ensuring large corporations pay their fair share of corporation tax in the frame of the Transatlantic Trade and Investment Partnership (TTIP) negotiations. Bearder said that TTIP is expected to significantly increase trade links between firms in the EU and the USA and therefore, with these increased levels of trade and investment, it is crucial to ensure that large multinational corporations pay governments their fair share of corporation tax.
"The Commission has already launched investigations into companies that have avoided paying corporation tax, including Starbucks, which was ordered to repay €30 million in tax after an EU ruling. Is the Commission considering additional measures as part of the TTIP agreement to ensure that multinationals do not avoid paying corporation tax? Will it use the TTIP negotiations to push for global measures to tackle tax avoidance?," she asked.
The answer was given by Pierre Moscovici, Commissioner for Economic and Financial affairs, on behalf of the Commission:
"The EU's Free Trade Agreements include provisions to ensure that these agreements don't prevent the EU or its partner(s) from taking measures to tackle tax avoidance or evasion.
In the ‘Trade for All’ Communication, adopted on 14 October 2015, the Commission recognises the need for joined-up strategies across different areas of economic policy to address aggressive tax planning and tax avoidance strategies. The communication confirms that trade agreements can support efforts to promote international standards of transparency and good governance.
In addition, in its communication on an External Strategy for Effective Taxation, presented in January 2016, the Commission has called on Member States to support a new strategy for negotiating tax good governance clauses in agreements with third countries. Recent developments in international tax standards should be taken into account, along with the need for a more tailored negotiation process on these clauses.
In this context, a structured dialogue with the USA, to discuss key tax questions, could be extremely useful. For example, the issue of reciprocity on the automatic exchange of information for financial accounts (USA's FATCA) and the reciprocal implementation of BEPS country-by-country reporting provisions still needs to be resolved.
The Commission will explore with Member States the possibility of such a structured dialogue," Moscovici stated.
The use of "Head Offices on papers" is a common practice in the international offshore industry. Mainly large companies, but also small and medium ones, establish administrative fictitious offices in offshore financial centres to benefit from lower tax conditions: an address and some external services of accountancy and management is all they need to get it. This phenomenon of company de-localization belongs to the fields of aggressive tax planning and tax avoidance strategies.