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CRS INSIGHT
EU State Aid and Apple's Taxes
September 2, 2016 (IN10561)
Related Author
Jane G. Gravelle, Senior Specialist in Economic Policy (jgrave r cr]g, 7-7829)
On August 24, 2016, the Treasury Department issued a mhi tepapr critical of four recent investigations by the
European Union (EU). This white paper followed previous concerns raised by the Treasury Department and by
Congress, especially the Senate Finance Committee.
The EU investigations claimed that certain countries had provided illegal state aid via favorable tax rulings. The most
significant in monetary terms is Ir ands' rulings for Apple. There are also investigations of Starbucks in the herlands
and Amazon in Luxembourg. (The remaining non-U.S. firm is Fiat Chrysler, also in Luxembourg.) A decision has been
reached for Starbucks to pay 20-30 million ($22 to $33 million at exchange rates as of August 31, 2016) and is on
appeal by the Netherlands to the courts; the Amazon decision is pending. On August 30, 2016, the EU announce
decisio requiring Apple to pay Ireland 13 billion in back taxes, or $14.5 billion, plus interest. This action will be
appealed by Ireland. The EU has also opened an investigation into a Luxembourg ruling for McDonalds. The discussion
in this Insight focuses on the Apple case.
The EU claims of state aid are based on advance pricing agreements (or transfer pricing agreements) with the firms'
respective countries, which determine how profits are divided between related parts of the firm. Generally agreed-to
principles are that such transactions should be at arms-length (the prices charged unrelated parties), although as a
practical matter this pricing is difficult to perform in the case of intangible assets where there are no comparable
unrelated transactions.
A typical tax planning arrangement for a U.S. firm with intangible assets (such as technology, know how, or brand
name) to operate in Europe is to set up a foreign subsidiary (or subsidiaries) that largely exists to hold these intangible
assets. This subsidiary is typically set up in a way that it is eligible for deferral from U.S. tax on its earnings and subject
to little or no foreign tax. It may be without a tax home, as in Apple's case, because under former Irish law a tax home
depended solely on the place of management (determined by place of board meetings), or with a tax home in a zero-tax
location such as Bermuda or the Cayman Islands. That subsidiary in turn has a branch or another subsidiary that is
subject to tax and performs the actual operations (for example, purchasing and selling phones).
Profit shifting from the U.S. point of view focuses on the price paid by the holding company to its U.S. parent for the
rights to the intangibles, which affects how much profit is currently subject to tax in the United States. Companies may
pay upfront payments or buy-in payments for existing intangibles to a parent, royalties for existing intangibles, or, as](ViewImageLocal?handle=hein.crs/crsmthmanst0001&div=1&collection=&method=preview&ext=.png&size=3)