On 11 June 2014 the European Competition Commission announced it was opening a State Aid investigation in relation to an advance transfer pricing opinion given by Ireland to Apple.
In recent months, Ireland’s tax opinion regime has been under review by the Commission in tandem with its review of the tax ruling systems in Luxembourg and the Netherlands. The Commission announced on 11 June that it is opening similar investigations against the Netherlands in the case of Starbucks and Luxembourg in the case of Fiat Fiance and Trade. Infringement action is also being taken against Luxembourg in respect of its failure to provide requested information on taxpayer rulings. Ireland and the Netherlands have cooperated fully.
These three countries are part of ongoing review work which will extend to other countries in due course. In Ireland’s case, it is understood that this review has encompassed all significant advance opinions given to taxpayers over many years. We believe that the review demonstrates that Ireland’s advance opinion practice does not form a significant part of Ireland’s tax regime which has been rated highly for its transparency and reputation in reviews of ‘harmful tax practices’ conducted by the OECD.
The EU investigation is being made into one specific transfer pricing opinion only. It is understood that Ireland’s rate of tax is not in question. Rather, the investigation will focus on whether the advance transfer pricing opinion dealt in an acceptable manner with the approach to be used for Irish transfer pricing purposes in allocating part of the company’s profits to an Irish ‘branch’ or ‘permanent establishment’.
EU State Aid rules on taxation seek to prevent EU Member States from acting in a manner which distorts competition by ‘favouring certain undertakings’. The practice of a tax authority in providing a ruling to a taxpayer can be considered to be a matter of State Aid where the ruling conveys a benefit on a taxpayer over its competitors in an equivalent position. Under the State Aid process, Ireland will be given an opportunity to provide evidence to defend its position. The investigation phase may take a number of months to complete.
Ireland has stated its intention to vigorously defend the action. If the investigation ultimately concludes that Ireland has provided State Aid, it is probable that Ireland will appeal to the Court of Justice of the European Union - which process could take a number of years to bring to conclusion.
If an action on State Aid is successfully upheld, the benefit gained by the taxpayer is potentially recoverable from that taxpayer for up to a 10 year period. Where the benefit to be quantified centres on the amount of taxable profits attributable to a local branch, there is likely to be a range of transfer pricing outcomes possible under accepted methods of allocation. This might mean that it could prove difficult to estimate the quantum of any alleged State Aid benefit.
The current focus on tax opinion practices in various jurisdictions forms part of a wider review of the tax regime affecting multinational corporations which is underway in the EU and through the OECD’s project which is focused on Base Erosion and Profit Shifting (BEPS). The question in relation to Ireland’s advance opinion practice may have been sparked by debate in May 2013 arising from hearings conducted by the US Senate Permanent Subcommittee on Investigations on offshore profit shifting and the US tax code.
In these hearings, the Subcommittee explored the application of US tax provisions to the offshore profits of US multinationals. Apple was amongst the US taxpayers called to testify. The Subcommittee’s report released before the public hearings included in its findings a statement that “Apple told the Subcommittee that it had obtained this special rate through negotiations with the Irish government.” The Subcommittee cited an interview dated 15 May 2013 of Phillip Bullock, Apple Inc. Tax Operations Head.
This statement was later clarified on 29 May 2013 by Apple CEO Tim Cook when he stated at a conference “We have no special deal with the Irish Government that gives us a 2% flat tax rate”. On that date, Ireland’s Ambassador to the US, Michael Collins, stated in a letter to the Senate Subcommittee “Ireland’s tax system is set out in statute – so there is no possibility of individual special tax rates being negotiated for companies.”
Whilst taxpayers need to remain mindful of State Aid issues it is clear, in our view, that this investigation relates to one specific technical issue and there is no systemic issue with Ireland’s corporation tax regime which remains robust and transparent.