Caplin & Drysdale's J. Clark Armitage spoke with Worldwide Tax Daily concerning the European Commission's September 30th letters sent to the Irish and Luxembourg governments detailing its reasons for investigating whether EU state aid rules were violated by tax rulings Ireland gave to Apple Operations Europe and Apple Sales International, and Luxembourg gave to Fiat Finance and Trade Ltd. SA. For the complete article, please visit Worldwide Tax Daily's website (subscription required).
Excerpt taken from the article "European Commission Outlines State Aid Cases Against Apple and Fiat" by Stephanie Soong Johnston and Kristen A. Parillo for Worldwide Tax Daily.
J. Clark Armitage of Caplin & Drysdale said Apple has apparently been able to achieve relatively low rates on taxable income in Ireland, not through transfer pricing, but through the application of Irish tax rules that allow a nonresident Irish company to avoid Irish tax on its nonresident income.
"Apple has created Irish nonresident companies, and their intangible income, which seems to be most of their income, apparently is earned offshore at the companies' place of management," Armitage said. "The report notes that the two relevant Irish entities are nonresident, but there is no discussion of the consequences of that status."
The commission may have chosen not to address those rules because they're generally applied to all companies and therefore can't form the basis for an assertion of state aid, Armitage said.
"The report notes that for there to be state aid under the EU treaty, a country must give a selective advantage to one company," Armitage added. "So one significant omission from the analysis is any discussion of whether Ireland gave similar deals to other companies."
Armitage said the letter does not address several other significant issues: whether Ireland applied its transfer pricing rules to Apple differently than for other companies; whether Ireland granted other companies rulings with open-ended durations; how Ireland allocated nonresident companies' income between their Irish branches and their foreign home offices; and whether the Apple ruling applied those rules unfairly in Apple's favor. "Instead, the commission found a presumption that Apple had been favored because Ireland did not properly apply transfer pricing principles," he said.
The letter shows that the 1991 APA negotiations between Ireland and Apple were similar to other APA negotiations Armitage has seen. "They talked about what is the right profit level indicator, how to address different kinds of activities of the local party, whether using data from other industries is appropriate or not," Armitage said. "These are all very typical discussion points for an APA negotiation. The one place where the commission has a point is that a typical APA discussion almost always involves, as a starting point, a set of comparables, which seems not to have been present here."