The Missing Word in the Apple Case

A quick addendum to last week’s blog post on the Apple case.

If you read the EU Commission’s press release (and that is all we have at the moment), you’ll find the word “non-resident” conspicuous by its absence. This is important because that word forms the bedrock of Ireland’s argument that the Commission’s decision is hopelessly flawed.

The Commission’s press release conveys the impression that the case is all about accounting jiggery-pokery. The 1991 and 2007 Irish tax rulings, it says, “endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group . . . which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a ‘head office’ . . . that . . . existed only on paper and could not have generated such profits”. In other words, profits that could and should have been taxed in Ireland escaped Irish taxation because they had been artificially allocated to offshore “head offices”.

But it is Ireland’s case, as set out in an explanatory memorandum to the Irish Parliament, that those profits were never, at any time, within reach of the country’s corporate tax jurisdiction. Under the Irish law applicable when the impugned rulings were made, a company could, in certain circumstances, be regarded as non-resident even if it were incorporated in Ireland.

In international terms, this was an unusual rule, and it has now been repealed in relation to companies incorporated in Ireland after December 31, 2014. But, at the time of the rulings, it applied to Apple’s Irish-incorporated companies which were treated as non-residents by the Irish revenue authority. This in turn meant that they were taxable in Ireland only on the profits attributable to their Irish branches. “On the basis of a branch-focused analysis of the operations undertaken in Ireland,” says the Irish government’s memorandum, “it would have been clear that the main profit-generating functions and assets were not located in Ireland. All significant risks and all intellectual property would have been borne and economically owned elsewhere . . . and the profit attribution to the Irish branch would have represented full remuneration of its role in that process.”

There is not even a hint of this in the Commission’s press release. It does describe the Irish companies as “branches”, but makes no reference at all to their residence status. It simply refers to them as “Irish-incorporated” companies. In short, it seems to treat their residence status as an irrelevance.

To be fair to the Commission, no one would expect a press release to go into all the nuances of a technically complex area of law. It may be that the full decision, which so far has been seen only by Apple and the Irish government, does address the issue of tax residency, and this will become clear when the non-confidential version of the decision is released. But a reasonable person is entitled to expect that a press release of this nature should at least rehearse the counter legal arguments. Otherwise, it risks being seen as an exercise in spin, disingenuously portraying the Commission’s decision as merely impugning a “sweetheart” tax deal when it actually goes to the heart of Ireland’s tax jurisdiction over non-residents.

By Dr Craig Rose, Technical Editor, Global Tax Guide

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