Apple Tax Decision Based in Economic Reality: EU Official

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Penny Sukhraj

Sept. 27 — The European Commission's state aid enforcement director, facing criticism that the EC is “living in a time warp” in telling Ireland to retroactively collect $14.5 billion from Apple Inc., challenged tax lawyers and advisers to read the decision, which will be redacted and published in a few weeks.

EU State Aid Scrutiny and Enforcement Director Karl Soukup, addressing a Sept. 27 session sponsored by Bloomberg BNA in conjunction with the International Fiscal Association congress in Madrid, encouraged the audience to “read it twice” as it would show the basis of the Apple decision “is not detached from economic reality but is in fact deeply based in the economic reality created by the structure.”

The response followed an earlier IFA session discussing the European Union and direction of policy around tax avoidance, with specific reference to concerns that the European Union’s Anti-Tax Avoidance Directive was going beyond the OECD’s project to combat tax base erosion and profit shifting measures.

As state aid decisions came under scrutiny, Philip Baker QC—a senior barrister who acts for the Irish government’s legal team—also suggested the audience read the redacted decision when it is published, as he said it would indicate the European Commission is “living in a time warp.”

Soukup referred to Apple’s stateless structure, and said it wasn't up to the EC to judge the correct channels for business for the tech giant. “But of course the amounts are a little bit big out of Ireland, if you say how could these few thousand people in Cork generate all those profits,” he said.

“I think what is important is the trading income. And you know how trading income can be generated. And what you need to manage and control such activities. It’s more than a phone conference. You cannot actively manage and control operations in that way,” he said.

The European Commission released a four-page summary of its decision in the Apple case Aug. 31, saying that two Irish tax rulings allowed the world's richest company an effective corporate tax rate of 0.005 percent on its European profits in 2014, thereby distorting competition within the EU (25 Transfer Pricing Report 512, 9/15/16)

Not for the EC To Tax

A more dramatic attack on the EC decision came from another direction as U.S. Deputy Assistant Treasury Secretary for International Tax Policy Robert Stack didn't waste the opportunity to criticize the EU’s approach that Ireland should have extracted more tax from Apple.

“That is income that is deferred for U.S. taxation—what some people might call stateless, even if one doesn’t like the concept of stateless income—it doesn’t mean that the EU gets to tax that income.”

Stack said he was gratified that European professionals and companies “are starting to take into account enormity of the implications of the EU Commission taking over vast elements” of tax “by declaring that when they find an advantage, whatever they find, they have the power to declare state aid.”

“So I’m beginning to wonder whether, when the halo fades from European politicians that brought these cases, this may be looked back on as a colossal blunder, by the Commission,” said Stack.

Irish Residency Rules

Joe Duffy, partner at tax law firm Matheson in Dublin, provided background to the debacle too. He cited a 1998 Irish Department of Finance report that stated following proposals to change the rules—so that Irish companies could be a non-Irish resident and have a connection to Ireland or controlled by a tax treaty partner—that the European Commission confirmed this wouldn't be a problem as far as state aid rules are concerned.

“Later when the international tax requirements changed, and Ireland changed its core tax residency rules—firstly by ensuring that an Irish incorporated company had to be resident, this threatened so-called stateless companies,” he said. “And now Ireland is being judged on international standards that have only been expressed in the last few years,” said Duffy.

Not a U.S. Issue?

Stack said initially he didn’t believe the U.S. should be involved in the EU state aid cases. But when the companies under investigation were predominantly American, he said, he changed his view.

“When I saw three of the four first cases come out as U.S. companies, I’ve got to be honest, I got very concerned that before I paid more attention, there could be 14 cases and at a cost to U.S. taxpayers.”

He said the first point of contention between the U.S. government and the commission was the insistence that “this was always the law in the EU.”

“From the U.S. view, we had never seen a case in which the Commission looked at particular application of a particular ruling in a tax affair, declared that it has disagreed with it and said that was state aid,” he said.

The EC produced 65 state aid cases in all. “We duly went through them all, and we think we have the better part of the argument—that this is a retroactive application of a new standard to individual tax determination by member states, and that’s concerning,” said Stack.

Arm's-Length Principle

Another problem with the commission's state aid approach concerns what is fast becoming a view that its decisions are detracting from the OECD’s arm's-length principle.

Addressing this, Soukup said that the Commission “accepts the OECD transfer pricing guidelines and international consensus.”

“If these rules are complied with in spirit and letter, it’s very unlikely that state aid arises. We are focusing our work on outliers because we know that with all these methods, you don’t arrive necessarily at one price but a range of outcomes.

“And if you have major outcomes, as long as you are in this reasonable range of outcomes, there is no problem,” Soukup said.

Stack countered that in light of the Apple decision, the commission’s view represents an “extraordinary rejection” of the arm's-length standard “that the European-dominated OECD has spent 20 to 30 years establishing.

“It’s a remarkable departure from an entity of the EU that is a member of the G20 and voted to endorse the BEPS project,” Stack said.

European GAAR

More fundamentally, though, Europe’s expected general anti-avoidance rule (GAAR), Stack said, will “give to Brussels the ability to come to countries and say, ‘We’re not sure you’re applying your GAAR correctly. You didn’t audit this. It doesn’t seem to us to be the right way to apply your member tax law.’

“One has to step back and ask, ‘What is Europe telling the rest of the world about investing in Europe?' It sounds like they’re saying, ‘Don’t invest here because we make up the laws as we go along.’

“And I’m not sure that that is a place that Europe wants to be,” Stack said.

Defending the U.S. Position

Stack defended the U.S.’s decision to fight the Apple matter.

“The old notion is that the rules should apply to those we vilify and those we don’t. That’s what the rule of law is about,” he said. “As a responsible policy maker, it would have been cowardice on our part not to show up and ask hard questions when the principles at stake for the stability and growth of our countries and the global economy were so strong.

“So yes, it may look like we’re defending an unpopular group of taxpayers but it’s the right thing to do. We’re glad that we did it,” Stack said.

To contact the reporter on this story: Penny Sukhraj in London at

To contact the editor responsible for this story: Rita McWilliams at

Pending European Commission State Aid Tax Cases Case Issue Status Inc. by Luxembourg ( SA.38944). A 2003 unilateral APA granted by Luxembourg to Amazon EU Sarl, based in Luxembourg, that records most of Amazon's European profits. Amazon EU Sarl pays a tax-deductible royalty to a Luxembourg limited liability partnership that isn't subject to corporate tax. A preliminary decision Oct. 7, 2014, found the APA constituted state aid (23 Transfer Pricing Report 787, 10/16/14) . Apple Inc. by Ireland in the amount of 13 billion euros ( SA.38373). On June 11, 2014, the commission initiated an investigation of two unilateral APAs granted by Ireland in 1991 and 2007 to Apple Sales International (ASI). That company is incorporated in Ireland and carries on a trade through its branch in Ireland but is not tax resident in Ireland. The commission Aug. 30 announced its final decision concluding that Apple Inc. benefited from unlawful state aid granted by Ireland, and ordered recovery of up to 13 billion euros plus compound interest. The decision found most profits of ASI's European sales of Apple branded finished goods, including the iPhone, were allocated to ASI’s stateless “head office” and thus remained untaxed (25 Transfer Pricing Report 554, 9/15/16) . Ireland and Apple have both said they will appeal the decision (25 Transfer Pricing Report 560, 9/15/16) . Belgium's excess profit tax ruling system to 36 companies totaling some 700 million euros ( SA.37667). Belgium's excess profit scheme, applicable since 2005, allowed multinational companies to reduce their corporate tax base by 50 percent to 90 percent to discount for “excess profits” that allegedly result from being part of a multinational group. The group's profit is compared with the hypothetical average profit a stand-alone company in a comparable situation would have made. The commission's final decision Jan. 11, 2016, said Belgium’s entire “excess profits tax ruling system” constituted state aid (24 Transfer Pricing Report 1161, 1/21/16) . Belgium appealed the commission's decision to the General Court of the European Union on March 22, 2016 (24 Transfer Pricing Report 1587, 4/14/16) . French company Engie S.A.—formerly the GDF Suez group—from Luxembourg ( SA.44888). Rulings from Luxembourg's tax authority appear to treat the same financial transaction between companies of GDF Suez inconsistently—as both debt and equity. The commission in a Sept. 19 press release said it considers the treatment in the tax rulings gave tax benefits to GDF Suez that weren't available to other companies in Luxembourg. Margrethe Vestager, commissioner in charge of competition policy, said that while transactions can be taxed differently, “a single company cannot have the best of two worlds for one and the same transaction” (see related story) . Fiat Chrysler Automobiles N.V. by Luxembourg in the amount of 20 million to 30 million euros ( SA.38375). A 2012 APA granted by Luxembourg to Fiat Finance & Trade Ltd. (FFT). FFT provides financing to Fiat group companies and manages several group cash pools. The APA used the transactional net margin method to calculate the interest rates charged by FFT. A final decision Oct. 21, 2015, found the arrangements constitute state aid (24 Transfer Pricing Report 825, 10/29/15) .Luxembourg on Dec. 4, 2015 appealed the decision to the EU General Court (24 Transfer Pricing Report 1009, 12/10/15) McDonald's Corp. by Luxembourg ( SA.38945). A 2009 Luxembourg tax ruling granted to McD Europe Franchising Sarl (Luxembourg). McD Sarl owned group franchising rights and derived royalty income from its U.S. branch. McDonald's argued that the branch was a permanent establishment of McD Sarl in the U.S. under the Luxembourg-U.S. tax treaty, which doesn't require the profits to be taxed in the other state. The commission's Dec. 3, 2015, preliminary decision is that the rulings constitute state aid (24 Transfer Pricing Report 1015, 12/10/15) . Starbucks Corp. by the Netherlands in the amount of 20 million to 30 million euros ( SA.38374). On June 11, 2014, the commission initiated an investigation of a 2008 Dutch unilateral APA relating to the markup of royalty payments paid by Starbucks Manufacturing EMEA BV to its U.K. affiliate, Alki LP. In the U.K. the payments were tax-deductible royalties. The commission said instead of using the transactional net margin method, the APA should have used the comparable uncontrolled price method. The commission's Oct. 21, 2015, final decision said the arrangements constitute state aid (25 Transfer Pricing Report 281, 6/30/16) .The Netherlands appealed the decision to the EU General Court of the European Union Feb. 16, 2016.

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