The Commission decided that the Irish tax authorities had granted unlawful aid to the Apple Group, namely Apple Sales International (ASI) and Appel Operations Europe (AOE) through their Irish branches. The prohibited aid would be transfer prices wrongly approved. As a result, there would be tax back payments of EUR 13 billion. We explain how this decision came about and how the procedure has proceeded.

1. The legal battle: Apple & Ireland against the European Commission

A recent example of an action for tax annulment by a privileged claimant is the action brought by Ireland on 09.11.2016 against the Commission decision of 30 August 2016 in the Apple case. In this Decision, the Commission considered the tax treatment of the Apple group by Ireland as unlawful aid within the meaning of Article 107 et seq. TFEU classified. As a result, the Commission had obliged Ireland to invoke a corresponding tax claim of up to EUR 13 billion against Apple. Ireland brought an action for annulment. In the absence of any other comments, the Commission concludes that the measures in question constitute State aid within the meaning of Article 107(1) of the Treaty.

Meanwhile, on 04.10.2017, the Commission referred the matter to the ECJ for non-implementation of the State aid decision by Ireland. As a result, Ireland has announced that it intends to collect the tax claim. The money should remain in an escrow account until the judicial clarification of the facts.

The right-wing cry thus revolves around the Commission’s decision of 30. August 2016 (Decision (EU) 2017/1283). In that letter, the Commission accepted unlawful aid from the Irish tax authorities. The Commission notes that ASI and AOE are taxed at arm's length by way of a tax ruling. The Irish branches of ASI and AOE are taxed by the Irish branches of ASI and AOE. The subject of the dispute is the question of how to allocate taxable profits to establishments.

The Commission found that the contested tax rulings reduce the costs that ASI and AOE would normally have had to bear in the course of their business. The Commission notes that ASI and AOE are not taxed at arm's length. The profit of the branches in Ireland was under-calculated and should therefore be increased ex post. As a result, the tax burden also increases. They must demand Ireland.

2. The Apple Group

2.1 Business of Apple

The Apple Group was founded in 1976 and is based in Cupertino, California (United States). Apple Inc. and all companies controlled by Apple Inc. form the Apple Group. Apple develops, manufactures and markets, among other things, mobile communication devices and media devices, computers and portable digital music players. The company also offers software applications, other services, network solutions, and third-party digital content and applications.

2.2 Corporate structure of Apple

The Apple Group’s global operations are divided into key functions. These main areas manage and control Cupertino-based executives.

Within the Apple Group, Apple Operations International is a 100% subsidiary. Appel Operations International is a wholly owned subsidiary of Appel Operations Europe (AOE). For its part, AOE owns 100% of the subsidiary Apple Sales International (ASI). ASI and AOE are companies registered under Irish law. However, they are not tax residents in Ireland and have not been taxed without restrictions. In Ireland, companies incorporated in Ireland at the time with a commercial activity in Ireland could be considered not to have unlimited taxation in Ireland if they were centrally managed and controlled outside Ireland. It was not necessarily assumed that the companies were located in another state. Under current law, it would no longer be possible. Rather, there would be unlimited tax liability.

A majority of the board members of AOE and ASI were employed by Apple Inc. and based in Cupertino. Management Board resolutions regularly concerned in particular the payment of dividends, the acceptance of management board reports and the appointment and resignation of management board members. Occasionally, these decisions also concerned the establishment of subsidiaries and the granting of powers to certain managers for various activities. These include, for example, the management of bank accounts, relations with governments and authorities, audits, the conclusion of insurance, leases, the purchase and sale of assets, the receipt of goods deliveries and commercial contracts.

2.3 Cost sharing agreement between Apple Inc. and ASI respectively AOE

Apple Inc. had agreements with both ASI and AOE on the allocation of costs. The agreement was originally signed in 1980. The parties were initially only Apple Inc. and AOE. In 1999, ASI joined the agreement.

Under this agreement, the parties shared the costs and risks associated with the research and development of certain intangibles resulting from the development of products and services of the Apple Group. In addition, Apple Inc. should retain the official legal ownership of the cost-sharing intangibles of the Apple Group, including intellectual property. Apple Inc. granted ASI and AOE a royalty-free license. It was used, inter alia, for the production and sale of the products concerned in the territory allocated to them. The area refers to the whole world except the American continent.

2.4. Marketing Service Agreement

Apple Inc. and ASI entered into a marketing services agreement in 2008. Apple Inc. undertook to provide sales services to ASI. These included the development, development and implementation of marketing strategies as well as advertising programmes and advertising campaigns. ASI agreed to reimburse Apple Inc. for these services by paying a fee of a certain percentage. This percentage corresponded to the costs incurred plus a mark-up.

2.5. The Irish branches concerned by the dispute

ASI and AOE established branches in Ireland.

In particular, the Irish branch of ASI is responsible for carrying out the procurement, sales and distribution activities related to the sale of Apple branded products to affiliates and third-party customers in Europe, Middle East, India and Africa, as well as Asia Pacific. For example, the establishment should procure finished products of the Apple brand from third-party manufacturers and affiliates. They should also sell products and provide logistics and after-sales services. The European Commission has found that many activities related to distribution are carried out by affiliated companies under service contracts.

The Irish branch of AOE, on the other hand, is responsible for manufacturing and assembling a number of specialised products in Ireland, which it supplies to affiliates. The main functions of this branch are production planning and production management.

third subject of dispute

Tax ruling of 29 January 1991

3.1.1. Tax base of Appel Operations Europe

The Irish tax administration issued so-called tax rulings to taxpayers at their request. By letter dated 29 January 1991, the Irish tax administration approved the proposals for taxation of the profits of ASI and AOE in Ireland. The Commission considers that the measure is selective in nature. A revenue-related element was added as a supplement. Overall, the rulings were in force until 2014.

In a letter dated 12 October 1990 to the Irish Tax Administration, the tax advisors of the Apple Group described the activities of AOE and the functions of its Irish branch in Cork, Ireland. They also explained that the branch owned the assets used for the production activity. However, the ownership of the materials used, the unfinished products and the finished products remains with the AOE.

According to Ireland, AOE's taxable profit in Ireland is based on the profits of its Irish branch. The taxable profit in Ireland is therefore as follows: