State aid ruling shows Apple is the tip of the iceberg in Ireland

The publication today of the full European Commission ruling on Irish state aid to Apple confirms what was already well known – that Irish Revenue provided a selective advantage to Apple in two sweetheart deals in 1991 and 2007.

But as well as confirming that Apple received special treatment, the findings also outlined a dozen more different secret deals between Irish Revenue and multinationals over a period of two decades that used a similar profit-allocation method between Irish-resident and non-resident company branches.

Sweetheart deals

At least 11 other advanced pricing agreements between Irish Revenue and multinationals struck between 1998 and 2010 – many of which are still in place – are cited in the Commission’s findings. The names of the companies are redacted in the report (see 385-395).

The main finding in the ruling regarding these deals was that “no consistent criteria” have been applied by Irish Revenue in deciding just how much tax these multinationals have to pay.

But further, there appears to be a pattern in the rulings of using a profit-splitting method that allocates only a small amount of profits to the Irish-resident branch or company, meaning the vast majority of the profits, including sales profits, are not taxed in Ireland and are in all likelihood not being taxed anywhere.

The findings state that “an examination of the profit allocation ruling practice of Irish Revenue demonstrates that no consistent criteria are applied to determine the allocation of profits to Irish branches of non-resident companies” (403).

Irish MEP and Panama Papers inquiry member Matt Carthy responded to the findings by calling for a public inquiry in Ireland.

“We can draw no other conclusion from this evidence other than that Ireland’s tax agency has been actively and consciously assisting multinationals engage in massive tax avoidance over a period of decades,” he said.

“How many of these rulings involve companies with subsidiaries in Bermuda or other tax havens? How many billions in tax in addition to Apple’s 13 billion has been avoided as a result of Revenue’s sweetheart deals?

“The government must open a public inquiry into Revenue’s rulings over the past several decades in order to reveal the truth about a scandal of such a scale.”

Last week the Eurodad report, Survival of the Richest, said: “In total, Ireland had eight advance pricing agreements in force at the end of 2015.”

On December 12, the day that the retrial of the Luxleaks whistleblowers began, the report revealed that sweetheart deals for multinationals in Europe had skyrocketed since 2013 and there are now more than 1,400 sweetheart deals for multinationals in place in countries across the EU.

The Eurodad report was closely followed by a report by Oxfam the same day that placed Ireland sixth on a list of the 15 worst corporate tax havens in the world.

Oxfam found that the Irish state’s tax policy was characterised by a low corporate tax rate, including low effective tax rates facilitated by sweetheart deals; the widespread use of unfair and unproductive tax incentives; and evidence of large scale profit-shifting.

Selective advantage

The European Commission’s non-confidential findings released this morning confirmed that through the advanced pricing agreements issued by Revenue in 1991 and 2007 to Irish subsidiaries Apple Operations Europe (AOE) and Apple Sales International (ASI), the agency agreed to Apple’s proposal to establish artificial structures that allowed them to attribute the vast majority of profits to imaginary and untaxable ‘head offices’ that were resident nowhere.

The state aid ruling showed that these ‘head offices’ existed only on paper and could not possibly have generated any meaningful amount of profit. The result of the arrangement was that Apple paid as little tax as 0.005% – or €50 for each million in profits – in 2014.

While the Irish government argues that tax is not payable to Irish Revenue, Apple Inc is a separate legal entity from ASI and AOE, and the deals in question, sealed by Revenue, were between the resident and non-resident branches of ASI and AOE.

The Commission correctly found that the only profit that could truly be attributed to the non-resident entity was that of interest as it had no employees or premises.  If the non-resident branch of ASI is a non-entity then that means those profits must be attributed to the Irish branch.

Carthy commented: “The Irish government’s arguments don’t stand up to scrutiny. The Department of Finance chooses to ignore the economic reality that the structures put in place by Apple and sanctioned by Revenue facilitated industrial-scale tax avoidance.”

Irish government appeal

This morning, pre-empting the release of the Commission’s findings, the Irish government published a summary of its legal arguments for its appeal against the ruling.

The appeal closely echoes the arguments made by the US Treasury in its white paper on state aid in August, including that the Commission is attempting to retrospectively enforce a higher standard of the arms-length principle governing intra-group transactions than exists in Irish law.

The Irish government appears in its appeal to be arguing that the Irish state has been exempt from applying the arms-length principle in transfer pricing by multinational corporations. While the principle wasn’t formally enshrined into Irish law until 2010, it has existed since the time of the League of Nations and the modern guidelines were formalised by the OECD in 1979.

As the Irish government said in a paper accompanying its Finance Bill in 2010, ‘All member countries of the OECD, including Ireland, accept this principle’. It has long been a feature of EU case law, Irish tax treaties, case law and previous Revenue rulings, and it was also found long before 2010 in the Taxes Consolidation Act 1997 (in s1036). The only evidence of any framework being applied by Revenue when it comes to transfer pricing has been the use of the OECD guidelines.

Matt Carthy commented: “The crux of the matter is that there was selective advantage conferred on Apple by Revenue’s sweetheart deals, and nothing in the government’s appeal summary comes close to challenging this finding. The chances of the government winning this appeal are slim to nil, but it will cost taxpayers millions of euro and further damage our international reputation on tax justice.

“Surely the government’s lawyers have advised it of how unlikely an appeal is to succeed – the motivation in opposing the finding is clearly political and is intended to send a comfort message to tax-avoiding multinationals that the Irish government will have their backs.

“Just last week Oxfam labelled the Irish state as the sixth worst corporate tax haven in the world, in part due to sweetheart deals and other selective incentives provided to some multinationals. In siding with one of the wealthiest corporations in the world in appealing this ruling, the Irish government is sending a signal that it thinks massive and unfair tax avoidance by multinationals is legitimate.”