Your Taxes: Apple Sauce

The European Commission announced on August 30, 2016 that that Ireland granted undue tax benefits of up to €13 billion to Apple (  The Commission said this is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid from Apple.

Commissioner Margrethe Vestager, in charge of competition policy, said: “Member States cannot give tax benefits to selected companies… this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.”

What happened?

According to the European Commission, Apple set up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland rather than from the shops that physically sold the products to customers in Europe (as well as in the Middle East, Africa and India). In this way, Apple apparently recorded all sales, and the profits stemming from these sales, directly in Ireland.

Two tax rulings issued by Ireland concerned the internal allocation of these profits. Under the agreed method, most profits were internally allocated away from Ireland to a “head office” within Apple.

This “head office” was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings. Only a fraction of the profits of the relevant Apple sales entities  were allocated to its Irish branch and subject to tax in Ireland.  The remaining vast majority of profits were allocated to the “head office”, where they remained untaxed. This “head office” had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter.

According to the European Commission, profits must be allocated between companies in line with arrangements that take place under commercial conditions between independent businesses (so-called “arm’s length principle“).

Only the Irish branch had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

The amount of unpaid taxes to be recovered by the Irish authorities would be reduced if other countries were to require Apple to pay more taxes on the profits recorded by Apple.

Apple’s Reaction:

Tim Cook, the Apple CEO issued a strongly worded message to the Apple Community in Europe on August 30 ( He wrote:

“We never asked for, nor did we receive, any special deals.

A company’s profits should be taxed in the country where the value is created.

In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States.

Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.”

What possible defense is there?

Aside from the above, two similar cases come to mind.

In the case of Wood v Holden in the UK Court of Appeal [2006 STC 443, CA] the directors on the board of a Dutch company had little to do, but they did it according to the Court.  This mainly involved approving a property transaction after taking advice.

In the Cadbury Schweppes case, the European Court of Justice court ruled on a UK group which set up a group treasury operation in Ireland. The Court said the fact that a company has been established in a Member State for the purpose of benefiting from more favorable legislation does not in itself suffice to constitute abuse (C-196/04 – Cadbury Schweppes plc, (Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, judgment of 12.9.2006)

The Israeli Situation

In Israel, artificial or fictitious transactions may be disregarded by the Israeli Tax Authority (ITA) (Section 86 of the Income Tax Ordinance).

In addition, the ITA published Tax Circular 4/2016 which seeks to tax overseas traders with a “significant digital presence” in Israel. However, the OECD has rejected this approach.

On the other hand, Israel offers tech companies with Israeli plants low corporate tax rates of 9% -16% and is proposing to further reduce those rates to 6%-12%.

To sum up:

The OECD and the EU are leading the way to curtail abusive tax planning. But careful planning is still possible. .

As always, consult experienced tax advisors in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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