Taking the First Bite: Who Should Tax Apple's $187 Billion in Ireland

Authors

Reuven S. Avi-Yonah, University of Michigan Law SchoolFollow
University of Michigan Law School

Document Type

Article

Publication Date

2017

Abstract

On December 19, 2016, the European Commission (hereinafter “Commission”) published its final decision in the Apple State aid case. The Commission concluded that two tax rulings granted in 1991 and 2007 on the allocation of profits to the Irish branches of Apple Sales International (“ASI”) and Apple Operations Europe (“AOE”) amounted to illegal state aid, and ordered Ireland to immediately recover this aid from Apple. The key issue in the Apple decision is where Apple’s foreign income ($187 billion, as of 2016) should be regarded as being generated. In the authors’ opinion, there is almost no basis for any argument that two-thirds of the profits of Apple were generated by functions performed, assets used and risks assumed in Ireland, where only 4 percent of its global workforce and approximately 1 percent of its customers are located. Indeed, under traditional principles, profits originate and taxes are due where value is created – that is, where the research and development is conducted. Accordingly, since almost all of Apple’s research activity takes place in the United States, Apple should remit most of its taxes there. Such view was recently supported by Jacob Lew, Neelie Kroes and Pascal Saint-Amans, but does not take into account the fact that 60 percent of Apple’s total net sales occur overseas and the significance of the customer market in value creation. In addition, it is also inconsistent with the position taken by the Internal Revenue Service in the Glaxo case, i.e., that intangibles derive their value primarily in the country where marketing activities are carried out and not where research and development activity is performed. This paper discusses how the arguments presented by the IRS in Glaxo can be used by high-tax EU countries to justify locating extra profits to sales and marketing support operations performed by Apple Europe’s retail subsidiaries. While ordering Ireland to recover €13 billion in illegal tax benefits, the Commission left the door open for other tax authorities to claim for Apple’s commercial risks, sales and other activities that might have taken place in their countries.

Comments

Reproduced with permission. Copyright 2017, State Bar of Michigan

Recommended Citation

Avi-Yonah, Reuven S. and Gianluca Mazzoni. "Taking the First Bite: Who Should Tax Apple's $187 Billion in Ireland?" Michigan Tax Lawyer 42, no. 2 (2017): 9-13.