The Apple ruling and its relevance to the Maltese tax regime

In a recent State aid ruling delivered by the European Commission’s competition department, Apple Inc., a multinational consumer electronics company, was ordered to pay €13 billion (plus interest) to the Irish Government in the form of retroactive tax payments.

Commenting on the Commission’s ruling, Competition Commissioner Margrethe Vestager argued that:

“Two tax rulings granted by Ireland have artificially reduced Apple’s tax burden for over two decades in breach of EU State aid rules. Apple now has to repay the benefits worth up to €13 billion plus interest. This decision sends a clear message. Member states cannot give unfair tax benefits to selected companies no matter if they are EU or foreign, large or small, part of a group or not. This has been long confirmed by the EU Courts and the Commission’s case practice. EU State aid rules have been in force since 1958 and apply to all companies that decide to operate in the EU Single Market.”

The tax rulings under investigation concerned Apple's Sales International (ASI) and Apple Operations Europe (AOE). The former company, in particular, holds the right to use Apple’s intellectual property, to manufacture and to sell Apple products around the world, with the exception of North America and South America. It is no scoorprise, therefore, that ASI accounts for the vast majority of unpaid taxes that the Irish government now needs to collect.

The tax rulings granted to Apple in 1991 and 2007 essentially allowed ASI and AOE to allocate their profits between, on the one hand, an Irish branch paying Irish corporate tax at 12.5% and, on the other hand, a head office which had no state of incorporation, no employees and no real activities and where profits remained untaxed.

This practice was possible under Irish law which until 2013 allowed for such stateless companies. As a result of the allocation method in the tax rulings, only a fraction of ASI and AOE profits were attributed to the Irish branches. The vast majority of profits were attributed to stateless head offices.

In 2011, for instance, the profit generated by ASI amounted to €16 billion, out of which, less than €50 million were allocated to the Irish branch. The remaining profit was allocated to the “stateless” head office, where they remained untaxed. This arrangement rendered the effective tax liability of ASI to just 0.05%.

Drawing inferences from the rationale employed in the Commission’s ruling, there appears to be little relevance, if any at all, to Malta and its tax regime. One of the principal reasons is that the Maltese Inland Revenue Department does not engage in what is commonly referred to as sweetheart deals with individual companies, thereby eliminating the condition of selectivity - a constituent factor in the concept of State aid.

The Maltese fiscal regime is based on the full imputation system where the tax paid by the company is imputed to the shareholder upon the distribution of a dividend. In other words, once the tax is paid on profits, no further tax is paid on the same profits as they are distributed.

Another distinguishing characteristic of the Maltese tax regime is the tax refund mechanism through which non-resident shareholders can claim 5/7ths or 6/7ths of the corporate tax paid, depending on whether the underlying commercial activity is considered to be passive or active. The result is that the effective tax is reduced to 10% or 5% when the profits are received by the shareholder. One of the conditions for applying for the refund, however, is that non-resident shareholder are obliged to declare the refund in their personal tax returns in the country where they are resident. This allows tax revenue to be returned to the countries where the foreign direct investment has originated.

Additionally, Malta’s full imputation system, which has been in place for well over 20 years, was vetted by the European Commission prior to Malta’s accession to the European Union and was specifically found to be in conformity with both State aid rules and the Code of Conduct for Business Taxation.

On a final note, while every tax system can be abused of through the identification of loopholes and other gaps in the legislation, the Maltese tax system is transparent and, for the most part, it is aligned with the principles behind the OECD’s Base Erosion and Profit Shifting (BEPS) project and the 15-point plan. The Maltese tax legislation also employs a General Anti-Avoidance Rule (GAAR) to ensure that tax benefits are denied where there is no commercial substance or purpose other than to generate the tax benefit obtained.