Both Ireland and Apple may face claims for damages from firm’s competitors
31 August 2016
So the first half is over. Following a protracted investigation, the European Commission has ordered Ireland to recover up to €13bn in back taxes from Apple.
The Commission decided, broadly, that two rulings from the Irish Revenue allowed Apple to pay significantly less tax in Ireland than other companies - and that this facilitation breached the EU state aid rules. The Commission found that the rulings endorsed an approach to the allocation of Apple's sales profits which, in the Commission's view, did not correspond to economic reality; almost all sales profits recorded by two of Apple's Irish subsidiaries were internally attributed to 'head offices' which "existed only on paper".
This, the Commission found, had the effect of artificially and significantly lowering the tax paid by Apple in Ireland since 1991.
The decision is by some distance the largest ever State aid recovery order ever made by the Commission. It has ordered Ireland to recover all of the taxes unpaid by Apple over the period 2003-2014.
While it is for Ireland to calculate the actual amount repayable based on a methodology specified by the Commission, the Commission has estimated this amount to be anywhere up to €13bn. Compound interest will be applied from the time aid was granted until the date of its recovery.
Some implications: aside from the obvious implications of Apple potentially having to pay a large amount of money and the reputational damage to Ireland Inc, both Ireland and Apple may also be subject to claims for damages (eg loss of profit) caused by the unlawful State aid to Apple's competitors and to other third parties.
In its media release, the Commission also made a number of observations which have little to do with the state aid rules and more to do with the issue of tax management policies of multinationals.
Those observations also, rather unhelpfully, increase the uncertainty around this already contentious area of law. For example, the Commission emphasised the possibility for other countries to require Apple to pay taxes on those profits which they believe should have been recorded in their respective jurisdictions. While such action would result in a reduction in the state aid to be recovered by Ireland, this could, conceivably, result in a much larger overall cost to Apple than the €13bn estimate. This is because that €13bn estimate is calculated by reference to Ireland's corporate tax rate (which is generally lower than applicable rates in other member states).
The Commission also noted that the amounts to be repaid to Ireland could be reduced if additional amounts were paid to Apple's US parent company under their R&D cost-sharing agreement for the period in issue. Finance Minister Michael Noonan has indicated Ireland is likely to appeal, subject to Cabinet approval. Apple is also likely to appeal. Appellants have two months and 10 days from today's decision to lodge an appeal with the EU General Court in Luxembourg. Proceedings before that court typically take between 30 and 35 months. A further appeal to the Court of Justice of the EU is also likely. Given the penalty, any appeal is very likely to run the full course. Whilst an appeal does not suspend the recovery obligation, an appellant may, separately, apply to the General Court for such a suspension. Such suspensions are difficult to obtain.
The Commission has also noted that Ireland may place the recovered amount in an escrow account pending the outcome of any appeal.
In the meantime, Ireland must give effect to the Commission's decision without delay and ensure that its tax laws are in line with this decision.
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