Possible state aid repayment as a result of tax rulings could be "material" says Apple

The investigation relates to two advance pricing arrangements (APAs) issued by Ireland in favour of Apple in 1991 and 2007. An APA is an agreement between a taxpayer and a taxing authority that amounts to be charged for goods or services supplied intra group, and usually cross-border, will not fall foul of transfer pricing legislation.

In June 2014 in-depth investigations into whether tax arrangements adopted by Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg amounted to "unjustifiable" state aid were announced by the European Commission. In October 2014 a similar investigation was announced into Amazon in Luxembourg.

In September 2014 the European Commission published a letter setting out its preliminary findings in relation to its investigations into the rulings given to Apple. It said that the APAs agreed between the Irish tax authorities and Apple may have given the company unfair advantages incompatible with EU state aid laws. It said that tax margins appeared to have been "reverse engineered" without economic basis and tied to concerns about local jobs. It also criticised the length of the 1991 agreement which lasted 16 years, compared to arrangements in other European countries that the Commission said typically lasted for no more than five years.

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies. If the Commission rules that member states have given unlawful state aid, any company found to have benefited has to pay back any illegal reliefs granted over a period usually covering up to 10 years.

“If the European Commission were to conclude against Ireland, it could require Ireland to recover from the company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.” Apple said in its filing. A material event is usually defined for the purposes of US Securities rules as 5 per cent of a company’s average pre-tax earnings for the past three years.

If the Commission finds that a member state has given unlawful state aid, it must order the state state in question to recover the aid in full from those who have benefited. In a tax case, a taxpayer which has benefited from state aid will have to pay the difference between the tax it was charged and the tax it would have paid had it not been given the unlawful state aid. Calculating this can be complex. Compound interest is also payable, currently in the UK at 1.02 per cent above base rate.

Caroline Ramsay, a state aid expert at Pinsent Masons, the law firm behind Out-law.com said  "despite stringent penalties for state states which fail to recover state aid, the track record for some state states in recovering aid is not good. However, the Commission is taking an increasingly strict line on the recovery of aid, as evidenced by its recent action in relation to Italy".

The European Commission announced this week that it was referring Italy to the EU Court of Justice for a second time because it did not fully recover state aid illegally granted to the hotel industry in Sardinia. The Commission is asking the Court to impose on Italy a lump sum penalty of about € 20 million, in addition to a daily penalty payment of about € 160,000 until Italy has fully recovered the aid.

The European Commission’s probes into state aid for multinational companies including Apple is “approaching the end,” with rulings planned for this summer, Gert Jan Koopman a senior Commission official said yesterday.

"From the way that the European Commission has been talking critically about tax rulings and from the preliminary findings that were published, it seems likely that all the decisions will go against the state states concerned" said Caroline Ramsay,

Heather Self, a tax expert at Pinsent Masons, said that if the initial decisions find that there was state aid then the Commission may "widen their probe". She said that formal state aid findings against some companies would mean that companies with similar rulings would be obliged to consider their position for audit purposes". 

"Companies with rulings which may be challenged should be able to reduce their risk of a huge repayment liability by recognising that they have not paid enough tax in the past and potentially reorganising. Taking action now may mean that when the Commission widens its investigation, you are not at the front of the queue." Heather Self said.

In March the European Commission announced, as part of its Tax Transparency package, a proposal for the automatic exchange of tax rulings between EU state states. If adopted this would require that every three months every member state would be obliged to report to all the other member states on the tax rulings they have issued in that period. If the proposal is agreed by the end of 2015, it could come into force on 1 January 2016.  

Earlier this month the European Commission decided that the UK's exemption from aggregates levy for shale and spoil for shale extraction was unlawful state aid. The other exemptions which the Commission investigated were found to be compatible with EU law. The government said it would "seek to work with the Commission and businesses to reduce the impact" of the need to recover tax that should have been paid on shale extraction between 2002 and 2014, in line with its legal obligations to recover unlawful state aid.