Statement by Commissioner Vestager on state aid decision that Ireland's tax benefits for Apple were illegal

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The European Commission has today adopted a decision that Apple's tax benefits in Ireland are illegal.

Two tax rulings granted by Ireland have artificially reduced Apple's tax burden for over two decades, in breach of EU state aid rules. Apple now has to repay the benefits worth up to €13 billion, plus interest.

This decision sends a clear message: Member States cannot give unfair tax benefits to selected companies. No matter if they are European or foreign, large or small, part of a group or not.

This has been long confirmed by the EU courts and the Commission's case practice. EU state aid rules have been in force since 1958 and apply to all companies that choose to operate in the EU Single Market.

State aid rules ensure that companies can compete on equal terms, also as regards taxation in each Member State. And these rules protect European taxpayers.

Today's decision concerns two companies in the Apple group - Apple Sales International and Apple Operations Europe. Both are incorporated in Ireland and have been set up by Apple to record profits there. Their ultimate parent is Apple Inc. in the US.

The first company, Apple Sales International, accounts for almost all of the unpaid taxes Ireland now needs to recover.

So, how does it fit into the Apple group?

Apple Sales International holds the right to use Apple's intellectual property to sell and manufacture Apple products outside North and South America. In exchange of this right, it makes payments to Apple in the US to contribute to the development of this intellectual property - often more than 2 billion US dollars per year.

In practice, Apple Sales International buys Apple products from their manufacturers. It sells these products throughout Europe, as well as in the Middle East, Africa and India. And then records all sales in Ireland.

No matter if you buy your iPhone at the Apple Store in Berlin, Rome or elsewhere in these regions, contractually you buy it from Apple Sales International in Cork in Ireland. This is how Apple decided to set it up. It means that all profits coming from those sales are recorded in Ireland.

That arrangement, however, is not a matter for state aid rules and we did not look into it as part of our investigation.

Our state aid investigation focused on the allocation of the profits recorded in Ireland within Apple Sales International. We looked into two tax rulings issued by Ireland to Apple. The first in 1991, which was replaced in 2007 by a similar second ruling.

Both rulings endorsed an internal split of Apple Sales International's profits for tax purposes - they allocated the profits between its Irish branch and the company's head office. It is a "so-called" head office because it exists only on paper: it has no employees, no premises and no real activities.

The Irish branch was subject to the normal Irish corporation tax. However, the head office was neither subject to tax in Ireland nor anywhere else. This was possible under the Irish tax law, which until 2013 allowed for so called 'Stateless companies'.

As a result of the allocation method endorsed in the tax rulings only a fraction of Apple Sales International's profits were attributed to its Irish branch. The remaining, vast majority of profits was attributed to its "head office".

This means Apple Sales International as a whole paid very little tax on its profits.

Let me illustrate this for one tax year: In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the "head office", where they remained untaxed.

This means that Apple's effective tax rate in 2011 was 0.05%. To put that in perspective, it means that for every million euros in profit, it paid just 500 euros in tax.

This effective tax rate dropped further to as little as 0.005% in 2014, which means less than 50 euros in tax for every million euro in profit.

Our decision concludes that splitting the profits did not have any factual or economic justification. As mentioned, the "head office" had no employees, no premises and no real activities. Only the Irish branch of Apple Sales International had any resources and facilities to sell Apple products.

But under the tax rulings it was the "head office" that was attributed almost all of the company's profits - in fact, due to Apple's set-up, it was attributed almost all of the profits Apple made from selling products throughout Europe, the Middle East, Africa and India.

The second company, Apple Operations Europe, makes certain Apple computers in Ireland. Under the same two tax rulings, the majority of its profits was also artificially allocated to a "head office" that only existed on paper, and whose profits were not taxed.

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules. It gave Apple a significant benefit compared other businesses.

Tax rulings cannot endorse a method to calculate taxable profits of a business that fails to reflect economic reality.

So, what are the consequences of this decision for Ireland and for Apple?

To restore fair competition, Ireland must recover up to €13 billion euros in unpaid taxes from Apple, plus interest. This amount covers the period of 2003 until 2014. It starts ten years before we made our first inquiries to the Irish authorities in 2013. It is for the Irish tax authorities to now determine the exact amount and the modalities of payment. The recovery amount can for example be put in an escrow account, in case of an appeal before the EU courts.

Also, Apple would no longer be allowed to benefit from this tax treatment in Ireland. The two tax rulings under investigation were, in any event, terminated last year by the company. It is up to the Irish authorities to ensure that the company, under its new set up, pays taxes in line with the Irish tax law and EU State aid rules.

Finally, it may be that not all the unpaid taxes are due in Ireland.

Apple Sales International is based in Ireland, where it records all profits on sales of Apple products throughout Europe, in the Middle East, Africa and India. As I have already mentioned, this recording of profits in itself is not a matter for state aid rules. It results from Apple's choice of structure.

But, other countries, in the EU or elsewhere, can look at our investigation. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally. That would reduce the amount to be paid back to Ireland.

The amount to be paid back to Ireland would also be reduced if the two companies were required to pay larger amounts of money to their US parent company to fund the research and development efforts, in addition to the annual payments they have made. As I mentioned, these are conducted by the US parent on behalf of Apple Sales International and Apple Operations Europe.

There are many good and transparent ways for EU countries to support and encourage investment - and many other good reasons to invest in Europe. For one, we have a Single Market with more than 500 million potential customers.

Today's decision shows that we can act when a Member State gives illegal state aid to a company. This is a good thing since illegal state aid harms competition.

Looking ahead, the ultimate goal should of course be that all companies, big or small, pay tax where they generate their profits. Enforcement of EU state aid rules alone cannot achieve this - that's why we need a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.

On the international level, the G20 and the OECD have taken important steps towards this objective. Also in the EU, under the responsibility of my colleagues Valdis Dombrovskis and Pierre Moscovici, significant changes have already been proposed, decided and implemented - with more to come. This is real change for the better.

The Commission still has two in-depth state aid investigations under way - into the tax treatment of Amazon and McDonald's in Luxembourg. And we are continuing our work on reviewing more than a thousand tax rulings from all EU countries that make active use of them.

So, we still have some work ahead of us - to ensure that companies compete on equal terms, and not at the expense of European taxpayers; citizens and other companies.

STATEMENT/16/2926