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  • 45 key takeaways of European Commission's

    Apple State aid ruling

    News item offered by Taxsutra, week 51, 23 December 2016

    P a

    g e 1

    The European Commission’s (EC’s) decision in the Apple State aid case has concluded that tax

    rulings of 1991 and 2007 issued by Irish Revenue in favour of two Apple sales and

    marketing/manufacturing subsidiaries in Ireland conferred a “selective advantage”. The EC held

    that the profit allocation methods endorsed by Irish Revenue resulted in lowering corporate tax

    liability in Ireland for the two subsidiaries, as all the profits, except for a limited mark-up on a

    reduced cost base, were allocated outside Ireland. Apple and Ireland claimed that the two

    subsidiaries were non-resident in Ireland, despite being incorporated there, and that intellectual

    property (IP) rights were allocable to subsidiaries’ head offices in the United States, as related

    management functions were not carried out in Irish branches. Questioning Irish Revenue’s

    acceptance of Apple’s unsubstantiated assumption that intellectual property (IP) licences held by

    the two subsidiaries should be allocated to head offices outside of Ireland, the EC held that it

    was incumbent on Irish Revenue to first properly examine the assets used, the functions

    performed and the risks assumed by those companies through their Irish branches and through

    the other parts of those companies, including IP held by the company as a whole. Noting that, at

    the relevant time, the head offices were only present on paper, as there was no physical

    presence of employees outside Ireland, the EC perused the minutes of meetings of board of

    directors to concludes that “[n]ot only did those head offices not perform active or critical

    functions with regard to the management of the Apple IP licenses, they also did not have the

    capacity to perform such functions during the period that the contested tax rulings were in

    force”. The EC also disagreed with the methodology used to arrive at taxable profits in Ireland in

    the contested rulings, considering the choice of the Irish branches as the “tested party”,

    premised on the unsubstantiated assumption of their performing a “less complex function” as

    compared to their head offices, the choice of “operating expenses” as the PLI, despite significant

    activities and risks assumed by the Irish branches, and the lack of contemporaneous

    documentation justifying IP returns in the two rulings.

    This decision concerns two tax rulings issued by Irish Revenue, on 29 January 1991 and on 23 May

    2007, in favour of two Apple group companies – Apple Sales International (ASI) and Apple Operations

    Europe (AOE).

    Summary of conclusions

    • The Commission held that the tax rulings issued by Ireland on 29 January 1991 and 23 May 2007

    in favour of ASI and AOE, which enable the latter to determine its tax liability in Ireland on a yearly basis,

    constitute aid within the meaning of Article 107(1) of the Treaty. That aid was unlawfully put into effect by

    Ireland in breach of Article 108(3) of the Treaty and is incompatible with the internal market.

    • The Commission directed Ireland to recover the aid from ASI and AOE, along with interest, from

    the date on which they were put at the disposal of the beneficiaries until their actual recovery. It was

    directed that recovery shall be immediate and effective.

    • The Commission also directed Ireland to ensure that the decision is implemented within four

    months following the date of its notification.

  • 45 key takeaways of European Commission's

    Apple State aid ruling

    News item offered by Taxsutra, week 51, 23 December 2016

    P a

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    • The Commission ruled that, within two months following notification of the decision, Ireland shall

    submit information to the Commission regarding the method used to calculate the exact amount of aid.

    1. Tax status of the two Irish subsidiaries

    These two companies are incorporated in Ireland but not resident of Ireland in terms of Section 23A of

    the Taxes Consolidation Act 1997 (TCA 97), which provides certain exceptions to the rule that

    companies incorporated in Ireland are, in principle, liable to tax in Ireland, even if they are managed and

    controlled outside of Ireland. Both ASI and AOE are considered not resident under Section 23A of TCA

    97, as they were both ultimately controlled by a company that is resident in a tax treaty country, namely

    Apple Inc., which is a tax resident of the United States, and since ASI and AOE had a trading activity in

    Ireland through their respective branches and were managed and controlled outside Ireland. Thus, the

    companies were considered to be non-resident companies in Ireland under the “trading exception” of

    Section 23A of TCA 97.

    Apple’s corporate structure in Ireland (as provided in the EC ruling order) is as under:

    2. Profile of ASI and AOE

    ASI and AOE are incorporated in Ireland but were not tax resident in Ireland during the time that the

    contested tax rulings were in force. However, these companies were not tax resident in any other tax

    jurisdiction during that period, since their activities in other jurisdictions, and in particular the activities of

    their head offices, which lacked any physical presence or employees, did not give rise to a taxable

    presence in the United States or any other jurisdiction under the applicable taxation rules.

    ASI’s Irish branch was mainly responsible for the execution of procurement, sales and distribution

    activities associated with the sale of Apple products to related parties and third-party customers across

    the EMEIA and APAC regions. ASI’s Irish branch also fulfilled the purchase orders placed by the APAC

  • 45 key takeaways of European Commission's

    Apple State aid ruling

    News item offered by Taxsutra, week 51, 23 December 2016

    P a

    g e 3

    www.taxsutra.com │www.tp.taxsutra.com │www.idt.taxsutra.com │www.lawstreetindia.com │www.orange.taxsutra.com │www.greentick.taxsutra.com

    local country distribution entities. AOE’s Irish branch was responsible for the manufacturing and

    assembly of a specialized range of computer products at its facilities in Ireland, including iMac desktops,

    MacBook laptops and other computer accessories, all of which are manufactured for the EMEIA region.

    In addition to its core manufacturing activities, AOE’s Irish branch also provided shared services to other

    Apple group companies in the EMEIA region with regard to finance (accounting, payroll and accounts

    payable services), information systems and technology and human resources. ASI sold goods in the

    EMEIA region. ASI did not declare a permanent establishment in the EMEIA tax jurisdictions where

    those goods were sold. For illustration purposes, [80-85]% of ASI’s and ADI’s total third-party sales

    revenues in 2014, as determined for Apple’s internal reporting, were derived from sales within the Union,

    whereas sales in the overall region of Europe represented [90-95]% of the total third-party sales

    revenue, and sales in the Middle East accounted for [5-10]% of total third-party sales revenue.

    3. Contested tax rulings

    Under the contested tax ruling of 1991, the net profit to be allocated to ASI’s Irish branch would be

    calculated as 12.5% of all branch operating costs, excluding material for resale. In 2007, the method was

    modified, per which net profit to be allocated to ASI’s Irish branch would be calculated as equal to [10-

    15]% on branch operating costs, excluding costs such as charges from Apple affiliates and material

    costs. In respect of AOE, the contested tax rulings of 1991 provided that the net profit attributable to

    AOE’s Irish branch would be calculated as 65% of that branch’s operating expenses, up to an annual

    amount of USD [60-70] million, and 20% of its operating expenses in excess of USD [60-70] million. In

    2007, a revised formula was agreed upon, per which the tax base of the Irish branch was equal to (i) [10-

    15]% of the branch’s operating costs, excluding costs such as charges from Apple affiliates and material

    costs; (ii) an IP return of [1-5]% of branch turnover in respect of the accumulated manufacturing process

    technology of the Irish branch; and (iii) a deduction for the capital allowances for plant and buildings,

    computed and allowed in the normal manner.

    4. Preliminary conclusions of the Commission

    On 11 June 2014, the Commission opened a formal investigation procedure, because it came to the

    preliminary conclusion that the contested tax rulings constituted the granting of State Aid within the

    meaning of Article 107(1) of the Treaty on the Functioning of the European Union (the Treaty) by Ireland

    to Apple, ASI and AOE, and that that aid is incompatible with the internal market pursuant to Article

    107(2) and (3) of the Treaty. The Commission expressed doubts that the profit allocation methods

    endorsed by those rulings to determine ASI’s and AOE’s taxable profit in Ireland reflected a

    remuneration for ASI