Why did EU court order Apple to pay 13 billion euros as taxes in Ireland?

European Commission vs Apple

The European Commission in 2016 ordered Ireland to collect 13 billion euros in unpaid taxes from Apple. This came after a two-year investigation where the Commission found that the country had unfairly subsidised Apple, through two tax rulings that “substantially and artificially lowered” the amount of tax the company paid, reducing Apple’s effective tax rate in Ireland from 1 per cent in 2003 to 0.05 per cent in 2014.

Simply put, Apple paid only 50 euros in taxes for every million dollars of profit in 2014.

At the time, Apple and the Irish government had appealed against the Commission’s order with Apple CEO Tim Cook saying that it had “no basis in fact or law.” The company called the effective tax rate “a completely made-up number.”

Ireland’s finance ministry said taxes were a “fundamental matter of sovereignty,” and that the order would create business uncertainty while undermining a continuing global tax overhaul.

In 2020, the European General Court, a lower court in the ECJ system, ruled that the 2016 order had not sufficiently established that Apple’s subsidiaries were given preferential treatment in Ireland. This verdict was overturned by the ECJ on Tuesday following an appeal by the Commission.

Apple in Ireland

Apple came to Ireland in the early 1980s, attracted to the tax regime the country offered to multinational companies (MNCs) focused on the export market. Apple set up an arrangement where its Irish operations would share in the costs of funding Apple’s R&D, while enjoying the rights to Apple’s intellectual property for goods sold outside the US.

From 1956 to 1980, the country offered a zero tax rate on all MNCs. Companies like Apple which arrived later were given tax holidays till 1990, according to a 2013 report from the Irish Times. After Ireland joined the European Economic Committee in 1973, it had to reverse this policy, charging entrants a low 10 per cent tax rate, if they qualified for manufacturing status.

As the tax holiday ended, Apple made plans in 1992 to shift some of its operations to Singapore, which then offered lucrative tax breaks. This led to Ireland and Apple negotiating a new agreement, in which Apple was given tax relaxations in exchange for providing jobs.

Tuesday’s verdict said that tax rulings of the Irish government in 1991 and 2007 had approved of the methods used by Apple’s Irish subsidiaries to “determine their chargeable profits in Ireland in relation to the trading activity of their respective Irish branches.”

How Apple dodges taxes

From the get-go, Apple was intentional about tax-based corporate structuring. This earned the ire of US Congressional investigators in 2013, with The New York Times reporting that the company had resorted to setting up offices in regions within and outside the US, including Ireland, to successfully dodge paying tax. Overall, Apple’s international operations constituted 61 per cent of its income in 2011, while its share of international taxes was only 3.2 per cent of foreign profits according to The NYT.

In Ireland, Apple used two subsidiaries, Apple Sales International (ASI) and Apple Operations Europe (AOE), to leverage a loophole in Irish law: While both companies were incorporated in Ireland, neither was tax resident in the country, meaning neither company was managed or controlled in Ireland.

For comparison, the US calculates tax residency on the basis of where companies are incorporated. In Ireland, Apple paid taxes only on activities conducted by the Irish branches within the aforementioned units, and channelled most of its sales in Europe through these two offices.

Ireland has since closed the legal loophole that allowed Apple to virtually pay no taxes, but remains arguably the most sought after destination in Europe for major MNCs due to its corporate-friendly laws.