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Tax alert: Apple ruling spells uncertainty for European cross-border tax planning

September 28, 2016 Article 2 min read
Kellie Becker Joel Mitchell
Looking to invest in European jurisdictions? Pay close attention to this ruling, which penalized Apple even though its subsidiary complied with local tax law and treaties.

In a tax ruling handed down by the European Union, Ireland must recover unpaid taxes from Apple equivalent to 14.6 billion U.S. dollars.

The European Commission’s ruling finds fault with the company’s perceived diversion of profits to two Irish home office “shell” companies, which paid little or no taxes under the specific provisions granted by Irish tax structure at the time. The Commission asserts that profits of the companies weren’t an economic reality, and the deal with Apple unfairly favored the company, allowing it to pay little-to-no tax compared to other companies in Ireland enjoying the same benefits of the European Union’s state aid programs.

While Irish tax law at the time allowed for the structure used by Apple and agreed with the taxes paid by the company, it’s the disproportionate benefit of the state aid received that the Commission has deemed illegal. The Commission has essentially overridden the local state tax laws of Ireland to recuperate the lost tax revenue.

The implication of this ruling is widespread, as it creates uncertainty for businesses looking to invest in European jurisdictions. The commission is turning the states’ bargaining ability on its head by ignoring the local tax law, as well as the application of tax treaties agreed to by the two countries.

From a U.S. point of view, the ruling could serve to reduce U.S. tax revenue as the taxes paid to Ireland could be claimed as an offsetting foreign tax credit for Apple.

More importantly, jobs and investments in countries that are a part of the European Union could suffer. U.S. businesses making strategic planning decisions about business structure could be put off by the notion that they can follow the local state’s tax rules and still be challenged by an overreaching body.

The implication of this ruling is widespread, as it creates uncertainty for businesses looking to invest in European jurisdictions.

The Apple case is just one of a few high profile decisions reached on similar structures. Other companies have also seen their structure and strategies challenged in the Netherlands and Luxembourg. The European Union intends to continue targeting these types of U.S. business structures used by Google and others.

Both parties will be actively fighting against the ruling, and the ultimate conclusion to this matter is uncertain. What is certain, in the meantime, is the question of whether or not multinationals can rely on the tax laws of EU member states as currently enacted.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.

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