More on the European Commission's Apple-Ireland ruling

Here are a couple of interesting quotes from the public statement about the Apple-Ireland ruling by EC Commissioner Margrethe Vestager:

 [1) Explaining the grounds for the ruling]:
Apple Sales International [an Irish company] holds the right to use Apple's intellectual property to sell and manufacture Apple products outside North and South America. In exchange for this right, it makes payments to Apple in the U.S. to contribute to the development of this intellectual property - often more than 2 billion US dollars per year ....

[Ireland] endorsed an internal split of Apple Sales International's profits for tax purposes – they allocated the profits between its Irish branch and the company's head office. It is a "so-called" head office because it exists only on paper: it has no employees, no premises and no real activities.

The Irish branch was subject to the normal Irish corporation tax. However, the head office was neither subject to tax in Ireland nor anywhere else. This was possible under the Irish tax law, which until 2013 allowed for so called 'Stateless companies'.

As a result of the allocation method endorsed in the tax rulings only a fraction of Apple Sales International's profits were attributed to its Irish branch. The remaining, vast majority of profits was attributed to its "head office".

This means Apple Sales International as a whole paid very little tax on its profits.

Let me illustrate this for one tax year: In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the "head office", where they remained untaxed.

This means that Apple's effective tax rate in 2011 was 0.05%. To put that in perspective, it means that for every million euros in profit, it paid just 500 euros in tax.

This effective tax rate dropped further to as little as 0.005% in 2014, which means less than 50 euros in tax for every million euro in profit.

Our decision concludes that splitting the profits did not have any factual or economic justification. As mentioned, the "head office" had no employees, no premises and no real activities. Only the Irish branch of Apple Sales International had any resources and facilities to sell Apple products.

But under the tax rulings it was the "head office" that was attributed almost all of the company's profits – in fact, due to Apple's set-up, it was attributed almost all of the profits Apple made from selling products throughout Europe, the Middle East, Africa and India.

[2) What happens to the $14.5 billion that Apple must pay?]

[O]ther countries, in the EU or elsewhere, can look at our investigation. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally. That would reduce the amount to be paid back to Ireland.

The amount to be paid back to Ireland would also be reduced if the two companies were required to pay larger amounts of money to their US parent company to fund the research and development efforts, in addition to the annual payments they have made. As I mentioned, these are conducted by the US parent on behalf of Apple Sales International and Apple Operations Europe.

Back to me (as opposed to Margrethe Vestager).  A few quick comments:

(1) Does the bolded (in the original) conclusion with regard to Apple Sales International sound factually unreasonable, or even seriously contestable?  Certainly not to me.

(2) Note that Apple Sales International, if 2011 was typical, appears to have been paying the US parent about 1/8 of its profits.  Surely the IP was predominantly created in the US, and indeed by people working for the US parent.  I wonder if Apple has ever given away 7/8 of the upside from its IP to unrelated parties.

(3) Vestager appears to be encouraging, not only other EU countries but also the US, to claim pieces of the $14.5 billion.  She expressly notes the possibility that larger R&D payments to the US parent might be required.  This may not be feasible under US law, in particular if (as I presume) the low royalty payments from Apple Sales International back to the US parent (whether under cost-sharing regulations or otherwise) pass muster under our rules or indeed have already done so expressly through agreement between Apple and the IRS.  But that certainly wouldn't be the EC's fault.