On September 7th, the European Commission (“EC”) issued its largest transfer pricing related state aid ruling against a U.S. multinational yet ordering Apple to pay €13 billion in taxes to Ireland. With interest the amount owed by the company could be as high as €14.5 billion. The EC’s decision focused on two advanced pricing agreements (“APAs”) between Apple and Ireland forged in 1991 and 2007. In these APAs, the Irish government had agreed to an acceptable net profit margin to be earned by Apple’s Irish branches. As part of its investigation, the EC determined that the agreements reached between the Irish government and Apple did not achieve a “market based outcome”.
The EC’s decision comes on the heels of several other high profile investigations into US multinationals doing business in the EU. On May 23rd of this year, four U.S. senators from the Senate Finance Committee wrote a letter to the U.S. Secretary of the Treasury to raise concerns over the EC's transfer pricing related state aid investigations of U.S. multinational companies (a summary of this letter is available in the May edition of the Transfer Pricing Times). Other U.S. multinationals that have been targeted by the EC in the past over transfer pricing rulings with member states include Starbucks in the Netherlands and McDonald’s in Luxembourg.
The main concern raised by U.S. stakeholders is that these investigations into the transfer pricing agreements reached between multinationals and their host countries violate international legal norms. In essence, the EC is asserting itself as a supra-national tax authority with the ability to override taxation practices within each member state. Furthermore, U.S. stakeholders, including the US Treasury, are concerned that the EC is unfairly targeting U.S. multinationals in order to shift tax penalty payments to the EU at the expense of non-EU jurisdictions. For example, in the case of Apple if the penalty paid to Ireland is deemed a tax payment then the company can claim that penalty as a foreign tax credit in the U.S., effectively lowering its U.S. tax bill while increasing taxes paid in Ireland. Interestingly, Ireland has voiced its agreement with the U.S. Treasury and has decided to appeal the EC’s decision.
- The European Commission’s press release on the Apple decision can be found here.
- Treasury Secretary Lew’s letter from February concerning these investigations is available here.
- Treasury Secretary Lew’s op-ed in the Wall Street Journal on the Apple case can be found here.
Source: Transfer Pricing Times: Volume XIII, Issue 7