The Irish Government has failed to put forward any justification for why Apple received “selective treatment” when it came to paying tax in Ireland, the European Commission has said.

Publishing its full decision on the controversial finding that Ireland offered computer giant Apple up to €13 billion in illegal state aid rulings, the commission states that two tax rulings issued by Ireland to the company substantially and artificially lowered the tax paid by Apple in Ireland since 1991.

It found that two Apple subsidiaries – Apple Sales International and Apple Operations International – were used in a way that “did not correspond to economic reality”.

This amounted to the “selective tax treatment” of Apple in Ireland, the commission found, because it gave Apple a significant advantage over other businesses subject to the same national taxation rules.

The commission examined in detail tax judgements issued by the Revenue Commissioners to Apple in 1991 and 2007. They found that Revenue was mistaken in the way it handled the allocation of profits between different parts of the Apple operation and did not require Apple to provide it with detailed data to back these up. This allowed it to move money to two companies that were “stateless”, thus sharply lowering its tax bill in Ireland, the commission found.

The Government strongly disputes this, arguing that the profits the commission said should have been taxed here were not in any way attributable to Ireland.

Sweeping theory

On Monday afternoon, a US treasury department spokesman also rejected the commission’s reasoning.

The department had reviewed the commission’s decision against Apple and “we continue to believe the commission is retroactively applying a sweeping new state aid theory that is contrary to well-established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.

The Apple tax ruling The EC issued a ruling on August 30th in relation to the tax arrangements of Apple in Ireland, where it has its European HQ. The EC said Apple had been granted selective treatment by Ireland through two tax rulings in 1991 and 2007. The EC has ordered Ireland to recover up to €13 billion from the tech giant. Minister for Finance Michael Noonan indicated Ireland would appeal the decision "to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation”. Q&A: Cliff Taylor answers the key questions I found this helpful Yes No

Moreover, he added, “it threatens to erode America’s corporate tax base”.

As part of its effort to prove that Apple was given a “selective” advantage, the commission examined tax rulings in relation to 14 other companies . Like Apple, these involved the allocation of profits between nonresident companies and their Irish branches.

On this crucial issue, the commission states that it was “unable to identify any consistent set of rules that generally apply on the basis of objective criteria to all nonresident companies operating through a branch in Ireland”, based on its examination of the tax rulings submitted by Ireland to the commission.

Though names of specific companies are omitted from the full version of the document published on Monday due to confidentially concerns, the commission sets out in detail the tax arrangements of a number of multinationals operating in Ireland.

A total of 19 dozen tax rulings offered by Ireland to multinationals other than Apple from 1998 are outlined.

Because there were no objective rules operating in Ireland, Revenue thus had discretion in what to do, the commission argued. It found that it conferred a selective benefit to Apple and states that Ireland “has not put forward any justification at all for the selective treatment” of the US multinational.

Arm’s length

The commission responded to claims by Ireland that it relies on nonbinding OECD recommendations on arm’s length principle that date from 2010. It considers the OECD framework “to provide useful guidance to tax administrations and multinational enterprises on how to ensure that transfer pricing and profit allocation arrangements produce outcomes in line with market conditions”.

It continues: “Therefore, to the extent a profit allocation method departs from the guidance provided by that framework, this provides an additional indication that that method does not result in a reliable approximation of a market-based outcome in line with the arm’s length principle.”

The initial ruling against Ireland was published on August 30th, after more than three years of inquiries.

On the issue of selective advantage granted to Apple, the ruling notes that Apple has argued that transactions between related companies are not comparable to transactions between unrelated companies. The commission disputes this reading.

The commission also takes issue with Ireland’s claim that resident and nonresident companies must be taxed on the same basis as regards what sources of income fall to be taxed.

Responding to the European Commission’s ruling, Apple accused it of having a “pre-determined outcome” since the beginning of its investigation.

Business group Ibec and Oxfam are among a number of interested parties who made submissions to the commission. In particular, Ibec noted the impact of the decision on the business environment, the full decision states.