The Apple Group is composed of Apple Inc. and all companies controlled by Apple Inc. (hereinafter collectively referred to as: ‘Apple’). Apple is headquartered in the United States of America (hereinafter: the ‘US’).

Apple designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. It sells a variety of related software, services, peripherals, networking solutions and third-party digital content and applications. Apple sells its products worldwide through its retail stores, online stores and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added resellers. In addition, Apple sells a variety of third-party products compatible with Apple products, including application software and various accessories and peripherals, through its online and retail stores.

Apple's global business is structured around key functional areas centrally managed and directed from the US by executives based in Cupertino, US. The key functional areas in the Apple group are: Research and Development (hereinafter ‘R&D’), Marketing, Operations, Sales, and General and Administration.

The Apple Group includes companies incorporated in Ireland. Amongst the companies of the Apple Group incorporated in Ireland, a distinction can be made between companies incorporated in Ireland that are also tax resident in Ireland, such as ADI, Apple Operations and Apple Sales Ireland, and companies that are incorporated in Ireland but are not tax resident in Ireland, such as AOI, ASI and AOE.

Of the Apple Group companies incorporated and tax resident in Ireland with employees in Ireland, ADI has been contracted by ASI to ensure the distribution of Apple products outside of the Americas, Apple Operations acquires tooling equipment for use by manufacturers and procures components parts from suppliers for sale to manufacturers and Apple Sales Ireland supports Apple's Sales programs locally in Ireland.

A company that is incorporated under Irish law or centrally managed and controlled in Ireland, or both, is normally considered tax resident in Ireland and therefore liable to corporation tax on its worldwide profits. This means that companies incorporated in Ireland are, in principle, liable to tax in Ireland, even if they are managed and controlled outside of Ireland.

In sum, ASI and AOE are incorporated in Ireland, but were not tax resident in Ireland during the time that the contested tax rulings were in force. Nor were those companies tax resident in any other tax jurisdiction during that period, since their activities in other jurisdictions and in particular the activities of their head offices, which lacked any physical presence and employees, did not give rise to a taxable presence in the US or any other jurisdiction under the applicable taxation rules. During the time that the contested tax rulings were in force, ASI and AOE could therefore be best described as ‘stateless’ for tax residency purposes.

ASI's Irish branch also fulfils the purchase orders placed by the APAC local country distribution entities. Many activities associated with the distribution into this region are performed by related parties (for example, logistics support) under service contracts with ASI's Irish branch. In addition, ASI's Irish branch is responsible for monitoring day-to-day management of distribution risks, in particular, inventory, warranty and credit limit risks. Since 1 January 2012, ASI's Irish branch has also been responsible for product localisation functions, which were previously performed by AOE's Irish branch.

In 2007, a modified method for determining the net profit of ASI's Irish branch was endorsed by Irish Revenue in a new ruling. According to that ruling, the net profit to be allocated to ASI's Irish branch would be calculated as equal to [10-15] % on branch operating costs, excluding costs such as charges from Apple affiliates and material costs.

In 2007, a revised method for determining the net profit of AOE's Irish branch was endorsed by Irish Revenue in a new ruling. According to the method endorsed by that ruling, the tax base of the Irish branch was equal to (i) [10-15] % of branch's operating costs, excluding costs such as charges from Apple affiliates and material costs, (ii) an IP return of [1-5] % of branch turnover in respect of the accumulated manufacturing process technology of the Irish branch and (iii) a deduction for the capital allowances for plant and buildings ‘computed and allowed in the normal manner’.

The documents provided by Ireland as constituting all essential elements supporting the 1991 ruling include three letters (dated 12 October 1990, 5 December 1990 and 16 January 1991) and two faxes (dated 2 January 1991 and 24 January 1991) from [Apple's tax advisor], as tax advisor of Apple (hereinafter: ‘Apple's tax advisor’); one note of an interview dated 30 November 1990 and one note of a meeting dated 3 January 1991 prepared by Irish Revenue; and a letter from Irish Revenue dated 29 January 1991 which confirms that the letters from Apple's tax advisor correctly reflect the method for determining the profits to be allocated to the Irish branches of ASI and AOE as agreed at the meeting on 3 January 1991. That method is described in recitals 59 and 61.

The letter from Apple's tax advisor dated 16 January 1991 contains an illustrative account filling format for the Irish branch of Apple Computer Ltd and a capital allowances schedule for Apple Computer Ltd for the years 1985 to 1990. The fax dated 24 January 1991 from Apple's tax advisor confirms the agreement by Apple to the following wording on the capital allowance which substitutes the wording on the capital allowance previously provided by Apple's tax advisor in the letter dated 16 January 1991: ‘The capital allowance claimed will not exceed by USD [1-10]m of the depreciation charged in the accounts.’

The documents provided by Ireland as constituting all essential elements supporting the 2007 ruling consist of a letter dated 16 May 2007 from Apple's tax advisor and a letter dated 23 May 2007 from Irish Revenue confirming its endorsement of the method for determining the profits to be allocated to the Irish branches of ASI and AOE as explained in the letter from Apple's tax advisor. That method is described in recitals 60 and 62. Neither of the two documents provided offer any explanation for the figures ‘[10-15] % [of Irish located operating costs]/[1-5] % [of the annual turnover of AOE which is derived from products manufactured in Ireland]/[10-15] % [of operating costs of ASI]’, endorsed by that ruling, nor is there any indication as to how those figures were arrived at. The letter of Apple's tax advisor contains a number of specifications as to how the agreed method will be applied. In particular, it specifies, for the avoidance of doubt, that ASI's operating costs and AOE's ‘Irish located operating costs’ exclude all charges from Apple affiliates worldwide, ‘above the line’ costs such as material costs, customs, freight costs, etc., one-off restructuring costs, and capital costs.

None of the documents provided in support of the contested tax rulings contain either a contemporaneous profit allocation study or a transfer pricing report.

As explained in recital 15 of the Opening Decision, multinationals can allocate profit within a corporate group by using transfer pricing between separate companies of the same corporate group. Transfer pricing refers to the prices charged for commercial transactions between various companies of the same corporate group. However, transfer pricing can also take place within one company, if the company operates a permanent establishment in a separate jurisdiction. This requires an allocation of that company's profit between its permanent establishment and the other parts of the company.

The OECD Model Tax Convention, which forms the basis of many bilateral tax treaties involving OECD member countries and an increasing number of non-member countries, contains provisions both on transfer pricing between associated group companies and profit allocation within a company.

Article 9(1) of the OECD Model Tax Convention on ‘associated enterprises’ provides: ‘[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly’. That provision is considered to lay down the authoritative statement for international tax purposes of the OECD's ‘arm's length principle’ in transfer pricing between associated group companies.

The Authorised OECD Approach thus consists of a two-step analysis according to which income is allocated to a permanent establishment.

Section D-2(iii)(c) of the 2010 OECD Profit Attribution Report concerns the allocation of intangibles to permanent establishments. As regards internally developed trade intangibles, point 86 of the Report sets out that, depending on the business organisation model of the enterprises, ‘the active decision-making and management may often be devolved throughout the enterprise. An issue arises as to whether this is likely to be the same with regard to the development of intangible property or whether it is more likely that the significant people functions relevant to the determination of economic ownership of intangible assets are performed at a high strategic level by senior management or by a combination of centralised and devolved decision-making functions’. Point 87 explains that ‘there is no hard evidence that the decision-making process for the development of intangible property is generally so centralised, especially as the focus for determining the significant people functions relevant to the determination of economic ownership is on the active-decision making and management rather than on simply saying yes or no to a proposal. This suggests that, just as for financial assets, economic ownership may often be determined by functions performed below the strategic level of senior management. This is the level at which the active management of a programme toward the development of an intangible would occur, where the ability to actively manage the risks inherent in such a programme lies.’

The contested tax rulings endorse a profit allocation for ASI and AOE based on one-sided profit allocation methods which, in their application, resemble the TNMM as described in the OECD TP Guidelines. The TNMM is one of the ‘indirect methods’ to approximate an arm's length pricing of transactions and profit allocation between companies of the same corporate group. The TNMM can be contrasted with the CUP method, which is a ‘direct method’ that compares the price charged for the transfer of property or services in a controlled transaction (that is to say, a transaction between two enterprises that are associated enterprises with respect to each other) to the price charged for the transfer of property or services in a comparable uncontrolled transaction (that is to say, a transaction between enterprises that are independent enterprises with respect to each other), conducted under comparable circumstances. The TNMM approximates what would be an arm's length profit for an entire activity, rather than for identified transactions. It does not seek to establish the price of goods sold, but estimates the profit independent companies could be expected to make on an activity, such as the activity of selling goods. It does this by taking a base (‘a profit level indicator’), such as costs, turnover or fixed investment, and applying a profit ratio reflecting that observed in comparable uncontrolled transactions to that base.

Ireland indicated that funds identified as being above the working capital needs of ASI and AOE are transferred to ASI and AOE bank accounts and investment funds outside of Ireland which are operated, managed and controlled in the US.

In its response to the Opening Decision, Ireland indicated that up until 31 December 2011 all employees of Apple in Ireland were formally employed by AOE, with AOE's Irish branch operating a single payroll in Ireland. According to Ireland, such arrangements are not uncommon in Ireland for groups. There was a recharge mechanism in place whereby the costs of AOE employees working on activities of ASI's Irish branch were allocated to that branch on a monthly basis. From 1 January 2012, employment arrangements were reorganised, so that employees were directly employed by the entity whose Irish branch activities they worked on.

Ireland submitted that Apple informed it that there were no FTEs employed by ASI or AOE beyond those employed in their respective Irish branches and in AOE's Singapore branch. According to Apple, ASI and AOE were functionally managed and controlled from the US and all significant business decisions (including in relation to matters such as IP, product development, what products and component would be manufactured and sales and marketing strategy) were made in the US and not in the Irish branches of ASI and AOE.

Under the CSA, Apple Inc., on the one hand, and ASI and AOE, on the other, agreed to combine their R & D efforts and to share the costs and rights relating to the ‘Development Programme’. The Development Programme refers to: (i) the development of new intangible property, (ii) the creation of improvements, updates, adaptations, translations, localizations or other modifications to existing intangible property, (iii) the development and improvement of manufacturing processes for any product, and (iv) the development, acquisition and protection of marketing intangibles.

The Commission requested Ireland to clarify what activities the specific functions and risks presented in Figure 8 and Figure 9 refer to and to provide concrete examples of activities performed by ASI and AOE under those functions. The Commission also asked Ireland to identify, in the minutes of the meetings of ASI's and AOE's board of directors, any indication of activities related to the activities listed in Figure 8 and Figure 9 which Ireland or Apple considered to be performed by the boards of ASI and AOE.

Apple further indicated that the R & D activities listed in the table reproduced in Figure 8 — the cost shared intangibles, quality control of the cost shared intangibles, R & D facilities management, contracting with related parties or third parties in relation to the intangibles development activities and selecting, hiring and supervision of employees and contractors and subcontractors to perform any of the intangible development activities — were performed almost entirely by Apple Inc. employees in the US. Irish Branch employees participated in those activities only to the extent they relate to routine localisation and product testing.

Ireland and Apple further stated that ASI and AOE do not have any role in the management of Apple's IP and that they have only a limited role, within the strict parameters set by Apple Inc. executives in the US, in commercial contract negotiations. They also stated that no employee of either ASI or AOE is involved in the creation, acquisition, management and/or protection of the Apple IP. All the functions that drive Apple's profits are directed by Apple Inc. executives in the US and performed largely in the US. Additionally, no IP created or acquired by Apple is legally owned by, or registered to, ASI or AOE. ASI and AOE have only entered into the following commercial contracts in their own capacity: (i) procurement contracts with component suppliers, (ii) contract manufacturing agreements with original equipment manufacturers governing the purchase of finished goods, and (iii) forward sales contracts.

ADI was incorporated in Ireland in 2009. Since 2012, ADI has assumed certain responsibilities for Apple's distribution activities in the EMEIA region. Since 2014, ADI has been responsible for sales, distribution and Apple Online Store activities across the EMEIA region and China. ADI receives orders from customers, engages in demand and sales forecasting and provides contract management for channel customers. ADI manages logistics activities associated with delivering products to customers.

ADI is responsible for providing in-warranty and out-of-warranty after-sales support. Those services are provided through ADI's AppleCare support group. ADI also provides after-sales support through third party call centres and networks of Apple approved service providers.

In 2010, a distribution agreement was concluded between ASI and ADI. Under that agreement, ASI appointed ADI as a non-exclusive global distributor for the sale of Apple products and ADI was granted a non-exclusive licence to certain proprietary rights to promote sales of Apple products. The distribution agreement gave ADI the right to purchase Apple products from ASI or directly from third party manufacturers. ASI and ADI agreed that the aggregate of all charges for products and services supplied under the distribution agreement would be of an amount such that ADI would achieve a net pre-tax profit equal to approximately [1-5] % of […].

Under that new corporate structure, […].

In the minutes of the meetings of […] board of directors, provided to the Commission on 24 May 2016, information is presented regarding the […].

In particular, in the minutes of […] board meeting, held in […] on […] August 2015, it is stated that […].

In the minutes of […] board meeting held in Cupertino, US, on […] April 2016, it is recorded that […].

Attachment 1 to the minutes of the meeting of […] April 2016 contains the minutes of the board meeting on […] August 2015, where changes were introduced and emphasis added, such as striking out […].

In response to Ireland's request of 25 February 2015 that the Commission set out its assessment resulting from its investigation into the contested tax rulings in more detail, which according to Ireland appeared to be based on a misapprehension by the Commission as to the applicable national law, the Commission services sent the letter of 17 April 2015 to Ireland, asking Ireland to transmit a copy to Apple.

Finally, the Commission responded to the specific claim made by Ireland in its observations on the Opening Decision that the Commission endorsed the fact that no rights in relation to the IP had been attributed to the Irish branches of ASI and AOE. The Commission explained that the Opening Decision only describes the arrangements under the CSAs as regards the allocation of IP as presented by the Irish authorities, but that this had not been endorsed by the Commission in its assessment. The Commission also clarified that, contrary to Ireland's claim, it had not applied the OECD arm's length principle in the Opening Decision as a source of law.

In a letter dated 4 May 2015, Ireland claimed that, by the letter of 17 April 2015, the Commission had significantly changed its assessment of the alleged aid, in particular with respect to the reference framework. According to Ireland, that change of assessment constitutes a breach of Ireland's right to a fair hearing. Ireland submitted that the Commission seemed to have abandoned the arm's length principle and that it should therefore issue a new or supplemental Opening Decision setting out the new analysis.

As regards the reference framework, Ireland claims that it was not clear which reference framework was being proposed by the Commission. ASI and AOE are not tax-resident in Ireland and are taxable under the general rules of corporate taxation. Whereas persons resident in Ireland are taxable on all their income wherever arising, non-residents are, pursuant to Section 25 TCA 97, only taxable on their source income.

Ireland further explained that all of the income of ASI's and AOE's Irish branches, apart from interest income, is trading income. The branches have no income that results from ‘the use/exploitation of IP right’ that is separable from the trading income of the branches. In fact, the Irish branches of ASI and AOE have no separate IP income stream, nor would it be correct to treat any part of the branches' income as IP income. Furthermore, Ireland reiterated that Apple's highly valuable technology, design and marketing IP is created, developed and managed in the US and is not in any way attributable to ASI's and AOE's Irish branches. There are also no activities in the branches associated with the management of the licences granted under the CSA. Therefore, the profits of ASI and AOE arising as a result of the CSA are not attributable to the Irish branches.

Ireland stated that the trading income is net trading income after deductions rather than gross trading receipts. That net income must be ‘arising […] through or from the branch’, which means that ‘the branch is the causal source of the income, to which the income is properly attributed’. Section 25 TCA 97 cannot be constructed as providing that a flow of gross receipts through a branch determines the attribution of a company's entire income to the branch. Ireland reiterates that such an interpretation would lead to absurd results bearing no relation with economic reality. According to Ireland, the reason why much of the income of ASI and AOE has not been subject to taxation is a result of mismatches between national tax regimes, which cannot be rectified with State aid rules.

Finally, Ireland maintained that the arm's length principle is not part of the Irish tax regime and that the Commission's ‘clarification’ in the letter that it applies the OECD rules in the Opening Decision as a ‘non-binding’ recommendation is far from reflecting the position of the Commission in the Opening Decision. According to Ireland, the Opening Decision relies squarely on the OECD definition of the arm's length principle. If the Commission suggests that there is a second type of ‘non-OECD’ arm's length principle, it should have heard Ireland's arguments on this point.

In a letter dated 4 May 2015, Apple indicated that they take issue with the Commission approach that seems to require that Irish tax resident companies and the Irish branches of ASI and AOE should be treated in the same way and taxed on their worldwide income. According to Apple, the profit-generating activities of a non-resident company occurring outside of Ireland are not relevant to the amount of tax due in Ireland.

Moreover, Apple claims that the Commission incorrectly attributes all profits to the Irish branches based on the irrelevant and false assumption that ASI and AOE do not have any economic activity outside their Irish branches. Apple claims that critical activities conducted by or for ASI and AOE occur outside of Ireland, and lists as an example that the boards of ASI and AOE decided to enter into the CSA with Apple Inc., while the negotiations with respect to sales, procurement and manufacturing contracts are managed by Apple Inc. executives on behalf of ASI and AOE. Finally, Apple claims that the remainder of the profits, which are not subject to tax in Ireland, are subject to eventual taxation in the US.

Apple disputes that any IP licences of ASI and AOE have been exclusively used by and exclusively held for the Irish branches. This is because the Commission incorrectly asserts that ASI and AOE have no economic activity outside the Irish branches. Instead, in their roles as a procurement and distribution centre and a routine product assembler, respectively, the Irish branches had only limited access to the licensed IP for assembling and shipping products. Apple claims that even under the Authorised OECD Approach, the Irish branches of ASI and AOE would not be entitled to be allocated profits based on their limited access to the licensed IP, just as an independent enterprise would not be paid a return on similar licensed IP. Apple concludes that the IP rights that drive mark-ups — such as the rights relating to hardware and software design and engineering — are not the rights on which the Irish branches rely to conduct procurement, distribution or assembly activities, which can therefore not be attributed to the Irish branches.

Apple also does not agree that by mentioning the fact that ‘no rights in relation to the IP concerned are attributed to the Irish branch of AOE/ASI’ in the descriptive part of the Opening Decision, the Commission was not endorsing that fact. According to Apple, the Commission did not dispute that fact in the assessment part of the Opening Decision. As an undisputed fact, it remains relevant and parties can rely on such factual and legal statements set forth in an Opening Decision. Apple also disputes that the Commission used the OECD TP Guidelines merely as a reference document, given that the Commission relied heavily on the guidelines in the Opening Decision.

At the request of Ireland, a meeting was held between the Commission's services and Ireland on 7 May 2015. During that meeting the following topics were discussed: (i) the interpretation of Section 25 TCA97 and the question of territoriality; (ii) the tax treatment of resident and non-resident companies; (iii) the identification of the reference framework; (iv) the private market operator test; (v) the role of the arm's length principle in Irish and Union law; (vi) and the significance of activities in other companies of the Apple group besides ASI and AOE on the profit allocation within ASI and AOE.

By email of 9 July 2015, the Commission sent the draft minutes of the meeting on 7 May 2015 to Ireland and invited Ireland to agree or propose changes to those minutes.

In its letter of 17 July 2015, Ireland expressed its opinion on several of the topics discussed during the meeting on 7 May 2015.

In Ireland's opinion, the Commission allegedly acknowledged during that meeting that, in line with the applicable rules on residency, ASI and AOE were at all material times non-resident companies and that their tax liability fell to be assessed by reference to Section 25 TCA 97. This means that Irish Revenue, in line with the principle of territoriality which was not disputed by the Commission, cannot tax the worldwide profits of ASI and AOE, but that the Irish branches are liable to tax only in respect of Irish-source profits. Related to this, Ireland does not agree, as was suggested during the meeting on 7 May 2015, that the reference framework consists of the ordinary corporate tax system. The TCA 97 does not have a single overarching objective. Instead, while the objective of the TCA 97 is to tax the worldwide profits of Irish resident companies, its objective in respect of non-resident companies is to tax Irish-source profits. The reference framework can therefore only be Section 25 TCA 97 and Ireland taxed all of the profits arising to AOE and ASI that were within Ireland's jurisdiction to tax, that is to say, all of the profits of the companies that were attributable to the activities of the Irish branches. Given that the functions performed by ASI's and AOE's Irish branches were essentially routine operational and logistical activities, while the key strategic and commercial decisions were taken by senior management executives in the US, given that the development and exploitation of Apple's IP as main driver of the company's profitability was undertaken outside of Ireland, and given that the decision to participate in the CSA as well as the management and control of the risks under the CSA were located outside of Ireland, the income resulting from the CSA and the economic rights created as a result of the CSA cannot, in any way, be attributed to the Irish branches of ASI and AOE.

In this context, Ireland considers that the Commission has not given any authority for or explanation of its view that the classification of income as active income is significant in this case and that active income must be actively managed somewhere. All of the income of ASI's and AOE's Irish branches, apart from interest income, is trading income and the branches do not receive any income from the use or exploitation of Apple IP rights that is separable from the trading income of the branches. Accordingly, the only income of the branches that comes within the scope of ‘income from property or rights used by, or held by or for, the branch or agency’ pursuant to Section 25 TCA 97 is interest income. The Commission cannot argue that the income from the Apple IP should have been taxed in Ireland under Section 25 TCA 97. Ireland could and should only consider the functions of the branches themselves and therefore could only establish that the R & D that generated the IP and the active management of the IP was not in Ireland. Furthermore, it is not relevant where profits are recorded. The profits of ASI and AOE are recorded in the accounts of those companies, but they have not been taxed — other than those of the Irish branches and the investment income arising in the US — because the companies are not resident in the US. This non-taxation of profits is due to a mismatch in the sovereign taxation system and is not relevant for State aid purposes.

Given that ASI and AOE have their central management and control in the US, the Cooke opinion argues that Irish Revenue correctly treated the subsidiaries as non-resident taxpayers. Under Section 25 TCA 97, it is only the profits that are shown to arise in a trade through or from the branch or agency that come within the tax charge and the Commission conflates companies with branches when it requires that Irish Revenue should charge the trading profits of the company and not of the branch. Furthermore, Irish Revenue had no discretion to have recourse to the arm's length principle by analogy, because that principle did not form part of the Irish tax code at the relevant time. The Cooke opinion concludes that there is no basis in Irish law to tax all of the profits of AOE and ASI in Ireland. The only competence of Irish Revenue in the relevant years was to charge to tax that portion of the profits of ASI and AOE that was commensurate with the activities of its branches in Ireland.

Finally, according to the Cooke opinion, it would be untenable in commercial reality to insist that the entire revenue of the trades in question was attributable to the functions carried on by the two branches. This is illustrated by the fact that customers do not queue overnight outside Apple stores around the world for the latest iPhone or iPad because they are sold from Cork, but because of the value generated for such products by the extensive investment, engineering and technological innovation, design reputation and all that goes into the Apple product range, most of which is attributable to what is accomplished in the US or elsewhere.

In a letter of 7 September 2015, Apple commented on the minutes that had been sent by the Commission to Ireland in follow-up to the meeting on 7 May 2015. Apple noted that the Commission failed to show that Apple was advantaged by the contested tax rulings and that ASI and AOE were treated selectively by the Irish Revenue relative to companies in a similar situation.

As regards the correct application of Section 25 TCA 97, the incorrect identification of the reference framework and the non-applicability of the arm's length principle, Apple raises the same arguments as Ireland in its letter of 17 July 2015. With respect to the objective of the Irish corporate income tax system and residency, Apple also makes essentially the same arguments as Ireland. As ASI and AOE are non-resident in Ireland for tax purposes, they are not in a comparable factual and legal situation with Irish resident companies based on the plain language of Ireland's tax law.

In support of its position, Apple submitted the [Apple's advisor] opinion. That opinion concludes that Ireland properly considered that ASI and AOE were non-resident companies and that Ireland's treatment of ASI and AOE as non-resident companies different from Irish resident companies is consistent with the international tax principle of territoriality. ASI and AOE are therefore not in a legal and factual situation that is comparable with that of Irish resident companies. Moreover, according to that opinion, no Apple IP or profit derived from an Apple IP is attributable to the Irish branches because the ‘significant people functions’ with respect to IP are all performed outside of Ireland. According to that opinion, to attribute the income to the branches a comparison needs to be made with a hypothetical resident company that is engaged only in local activities, without legally or economically owning or exploiting any IP rights. The allocation of income should thereby follow the functions, risks and assets of the Irish branches and not, pursuant to the ‘force of attraction’ principle — that has been explicitly rejected by the OECD — lead to attributing non-Irish-source income. The allocation of profits to the Irish branches based solely on the activities taking place in the branches, that is to say, without regard to the activities outside the branches, whether within ASI/AOE or within other Apple group companies was therefore fully in line with the profit allocation to branches as follows from public international law and international tax principles, including the 2010 OECD Profit Attribution Report and Union case law.

Furthermore, according to the [Apple's advisor] opinion, the Irish branches do not own any IP and have nothing to do with any aspect of the management of IP. All IP management, including all the activities necessary to fund, create, assert and protect IP, occurs outside of Ireland. The ‘significant people functions’ are all outside of Ireland and thus all the value creation takes place outside of Ireland. The Commission's argument that the boards of ASI and AOE do not actively manage the IP is incorrect. According to the [Apple's advisor] opinion, the ASI and AOE board minutes and further submissions by Apple to the Commission show decision making regarding issues of key strategic importance for ASI/AOE, including dealing with (i) financial matters such as investment decisions, bank account authority and capital maintenance issues; (ii) the consideration and approval of the financial statements; and (iii) delegation of authority within certain parameters in respect of the business activities, all having taken place in the US and not in Ireland.

According to the [Apple's advisor] opinion, for the purposes of determining the amount of profits to be allocated to the permanent establishment of a non-resident company under the OECD Model Tax Convention (along with the domestic tax rules of many countries), after establishing through a functional analysis what is actually happening within the permanent establishment, a comparison with a (fictitious) resident company has to be made. This comparison (‘as if’) is made because in the absence of a legally separate entity, no legal yardstick is available for isolating within the non-resident company the amount of profits that is understood to have been earned locally by the non-resident company. When making the comparison, the following point is highly important: the (fictitious) resident company with which the comparison is made is a very particular one; it is a resident company that derives income only from activities or assets in the State in which it is tax resident. While a resident company is, in its State of residence, generally subject to tax on its worldwide income, the resident company in the comparison only earns income from activities or assets in its State of residence. In other words, the comparison has to be made only with a resident company with activities and assets restricted to the country where the non-resident company is active through its permanent establishment. In the case of Apple, ASI's and AOE's Irish branches cannot be treated as if they were the economic owner of such rights. Therefore, the comparison is to be made with a company that does not legally or economically own such IP rights either (but which has access to the IP, to the limited extent needed to carry on its (product assembly/procurement, sales and distribution) activities.

According to the [Apple's advisor] opinion, for the determination of whether the IP (and the profits derived therefrom) can be attributed to the Irish Branches, it is irrelevant whether staff or board members of ASI and AOE participated (with or without staff and/or board members of Apple Inc.) in performing these highly relevant ‘significant people functions’. Since neither ASI nor AOE are tax-resident in Ireland, the only relevant fact that needs to be established is whether staff or board members performed their significant people functions within the permanent establishment through which ASI and AOE carried on business in Ireland. From the functional analysis of the Irish branches, it is apparent that the functions carried out through and in the permanent establishments in Ireland are restricted to procurement, sales and distribution activities (ASI) and to product assembly (AOE). To the extent those branches use the Apple IP in their activities in Ireland, the rights to which are granted to ASI and AOE under the CSA, they do not do so as a licensor that manages and exploits IP rights.

Finally, the [Apple's advisor] opinion explains that under the so-called ‘force of attraction’ principle, all non-branch income arising in a source State is deemed to be attributable to the branch in such source State. The application of this principle, however, has been explicitly rejected by the OECD and its Member States. Comparing resident companies that use their IP in their local business activities, with local branches of non-resident companies that are not the economic owner of such IP, such as ASI's and AOE's Irish branches, would amount to a flagrant breach of OECD principles.

The function of a tax ruling is to establish in advance the application of the ordinary tax system to a particular case in view of its specific facts and circumstances. However, like any other fiscal measure, the granting of a tax ruling must respect the State aid rules. Where a tax ruling endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, without justification, that ruling may confer a selective advantage upon the addressee, in so far as that selective treatment results in a lowering of that taxpayer's tax liability in the Member State as compared to companies in a similar factual and legal situation.

The contested tax rulings endorse methods for allocating the profit of ASI and of AOE to their respective Irish branches, which allow those companies to determine their taxable profit and thus their corporation tax liability in Ireland on a yearly basis for the period during which those rulings were in force. Having determined that the ordinary rules of taxation of corporate profit in Ireland, including but not limited to Section 25 TCA 97, constitute the reference system against which the contested tax rulings should be assessed, it is necessary to establish whether those rulings constitute a derogation from that reference system, leading to unequal treatment between companies that are factually and legally in a similar situation. As explained in recital 224, the Commission's assessment whether the contested tax rulings derogate from that reference system will coincide with its identification of the economic advantage conferred on ASI and AOE as a result of those rulings.

The Commission does not consider those arguments to justify the selective treatment of ASI and AOE in this case.

In conclusion, the selective treatment offered to ASI and AOE under the contested tax rulings is not justified by the nature and general scheme of the tax system.