European Formally Opens Investigation into Apple's Tax Affairs
Published on: 11th Jun 2014
As expected, the European Commission has opened a formal investigation into Apple's tax affairs in Ireland.
It's part of a wider investigation though that takes in also Starbucks in the Netherlands and Fiat in Luxembourg with regard to the corporate income tax to ensure that they comply with the EU rules on state aid.
It could be that the use of low taxes by governments to lure companies could fall foul of European limits on the use of state-aid to help companies.
The Commission said that it has been investigating under EU state aid rules certain tax practices in several Member States following media reports alleging that some companies have received significant tax reductions by way of "tax rulings" issued by national tax authorities. Tax rulings as such are not problematic: they are comfort letters by tax authorities giving a specific company clarity on how its corporate tax will be calculated or on the use of special tax provisions.
However, tax rulings may involve state aid within the meaning of EU rules if they are used to provide selective advantages to a specific company or group of companies.
Commission Vice President in charge of competition policy Joaquín Almunia said: "Under the EU's state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way."
In the case of Apple, the Commission said that the Irish tax authorities have been fully cooperative in providing comprehensive replies in response to Commission's requests. The Commission notes that although the transfer pricing rules have been tightened over the years, the tax administration had a significant degree of discretion in the past. The Commission said that it has concerns that such discretion has been used in the case of Apple to grant a selective advantage to that company, reducing its tax burden below the level it should pay based on a correct application of the tax rules. The Commission notes however that the number of tax rulings issued in Ireland relating to transfer pricing arrangements is limited.
Tax rulings are used in particular to confirm transfer pricing arrangements. Transfer pricing refers to the prices charged for commercial transactions between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries.
If tax authorities, when accepting the calculation of the taxable basis proposed by a company, insist on a remuneration of a subsidiary or a branch on market terms, reflecting normal conditions of competition, this would exclude the presence of state aid. However, if the calculation is not based on remuneration on market terms, it could imply a more favourable treatment of the company compared to the treatment other taxpayers would normally receive under the Member States' tax rules. This may constitute state aid.
The Commission said that it will examine if the three transfer pricing arrangements validated in the following tax rulings involve state aid to the benefit of the beneficiary companies.
The Commission has reviewed the calculations used to set the taxable basis in those rulings and, based on a preliminary analysis, has concerns that they could underestimate the taxable profit and thereby grant an advantage to the companies by allowing them to pay less tax. The Commission notes that the rulings concern only arrangements about the taxable basis; they do not relate to the applicable tax rate itself.