The EU General Court has quashed the European Commission’s decision requiring Ireland to collect €13 billion in allegedly unpaid taxes from Apple because the enforcer failed to prove that Ireland granted the tech company a selective economic advantage.
The court ruled today that the commission’s 2016 state aid decision was insufficient on multiple grounds. The authority should have shown that Apple’s purportedly untaxed profits were actually attributable to activities carried out at the company’s Irish branches, it said.
The commission also failed to prove that the Irish tax authorities committed “methodological errors” or exercised undue discretion when they granted Apple two sweetheart tax rulings in 1991 and 2007, the General Court said.
Although it lamented the “incomplete and occasionally inconsistent nature” of the tax rulings, the court found these defects did not amount to a selective economic advantage – which is necessary for a tax break to be considered unlawful state aid under EU law.
It, therefore, annulled the commission’s decision in its entirety.
EU competition commissioner Margrethe Vestager said in a statement that the enforcer “stands fully behind the objective that all companies should pay their fair share of tax”. The commission will “reflect on its next steps” after studying the court’s judgment, she said.
Tax advantages harm competition and “deprive the public purse and citizens of funds for much-needed investments – the need for which is even more acute during times of crisis,” Vestager added.
She said the commission will continue assessing whether “aggressive tax planning measures” result in illegal state aid. But this enforcement “needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency”, she said.
Ireland’s finance minister, Paschal Donohoe, said today’s decision “proves that Ireland was correct to pursue this case in the European courts”. The country has always been clear that the correct level of tax was charged and Ireland provided no state aid to Apple, he said in a press release.
Apple did not respond to a request for comment.
In 2016, the EU enforcer ruled that the two tax rulings Ireland granted Apple in 1991 and 2007 gave the company a competitive advantage by applying a lower rate of taxation than Irish law mandated.
The rulings only taxed a minor percentage of the profits that Apple’s Irish-incorporated subsidiaries – Apple Sales International and Apple Operations Europe – generated in the country, the enforcer said. It required that Ireland recover the unpaid tax, estimated at €13 billion, dating back 10 years from when its investigation began in 2014.
The commission’s 130-page infringement decision articulated several theories of harm. Its primary line of reasoning found that Ireland should have allocated the profits from all of Apple’s intellectual property-related activities to its Irish branches, while a subsidiary line excluded IP profits to estimate Ireland’s amount of recovery at just under €1 billion.
A third alternative argument claimed that the Irish tax authority lacked any objective criteria when allocating Apple’s profits, giving rise to a presumption of selectivity.
Both Ireland and Apple appealed against the enforcer’s decision to the General Court in 2017. At a hearing last September, Ireland argued that the commission wrongly interpreted Irish tax law and applied the arm’s-length principle to its taxation system when no such principle was incorporated under Irish tax rules or international community law.
The arm’s-length principle requires tax authorities to treat profits earned from intra-group sales as if the companies were unrelated, enabling officials to adjust taxable figures to reflect market prices.
Today, the General Court said that the commission was correct to apply this principle when analysing the tax rulings. Even though the principle had not been formally incorporated into national law, Ireland incorporated it into bilateral treaties in the 1990s and national courts endorsed its use since at least 1984, the court noted.
However, the General Court found the commission’s application of the arm’s-length principle insufficient.
Apple granted its Irish-incorporated subsidiaries royalty-free licences to manufacture and sell its products outside of North and South America. The commission claimed the tax rulings violated the arm’s-length principle because they allowed the Irish branches to allocate those IP licences – and all the profits from the activities stemming from them – to a non-Irish head office, which had no actual employees.
But the General Court said the commission “did not attempt to show” that the Irish branches controlled Apple’s IP licences when it concluded that the Irish tax authorities should have allocated the licences to those branches.
Such an approach is inconsistent with guidelines issued by the Organisation for Economic Cooperation and Development and with the High Court of Ireland’s 1988 Dataproducts judgment, which states that authorities can only allocate assets to an Irish branch if they establish that the assets are actually controlled by that branch, the court noted.
“The fact that the non-resident company has neither employees nor any physical presence outside the Irish branch is not in itself a decisive factor preventing the conclusion that it is that company which controls that property,” it said.
The court also determined that none of the activities that the commission claimed Apple’s Irish branches carried out – such as after-sales service support and quality control – justified allocating the company’s IP licences to those branches. Apple’s strategic decisions were made in California, not Ireland, it said.
The commission’s subsidiary claim that the Irish tax authorities committed “methodological errors” also failed because the enforcer did not link those alleged errors to a selective advantage, the court added.
“The commission would also have needed to demonstrate that such an error had led to a reduction in the chargeable profit of those two companies that they would not have obtained had those rulings not been issued,” it explained.
The General Court also dismissed the commission’s suggestion that Ireland granted Apple the tax rulings to incentivise job creation. The “mere allusion” during exchanges between the Irish tax authorities and the company to the fact that Apple was one of the largest employers in the region cannot support this allegation, it said.
The enforcer’s third line of reasoning claimed the Irish tax authorities granted the rulings on a discretionary basis. But the court rejected this argument because the commission relied on its earlier unproven conclusions that the tax rulings unlawfully endorsed profit allocation methods that reduced the profits attributable to Apple’s Irish branches.
“It is true that, in the present instance, the Irish tax authorities’ application of [Irish tax law] in the contested tax rulings was insufficiently documented,” the court acknowledged. But while that lack of documented analysis “is indeed a regrettable methodological defect”, it does not prove that the tax rulings were the result of a broad discretion exercised by the Irish tax authorities, it said.
“Uncertain and dangerous”
Till Müller-Ibold at Cleary Gottlieb Steen & Hamilton in Brussels said that while the General Court has endorsed the commission’s “basic approach” to assessing tax rulings, today’s decision also confirms that the enforcer “is not well-placed to substitute itself for the tax authorities”.
The judgment also calls into question the commission’s decision to enforce against several tax rulings at the same time, Müller-Ibold added. Doing so will no doubt have “stretched the available human resources quite considerably”, and perhaps may have led to a “less rigorous analysis” of the underlying facts, he said.
Massimo Merola at BonelliErede in Brussels said the commission should not be too disappointed with the court’s decision. “The overall approach to tax rulings under state aid rules has been endorsed once more, as in the September 2019 judgments concerning Fiat and Starbucks,” he noted.
As the result is positive for the commission from a legal and policy perspective, Merola suggested the enforcer should not appeal the decision to the European Court of Justice. “It would be better to readopt the decision after a thorough reexamination of the merits and more solid reasoning,” he said.
José Luis Buendía at Garrigues in Brussels also said today’s decision “follows the same logic” as the General Court’s Starbucks and Fiat rulings. “In view of these judgments, multinational companies and third countries should be reassured that the EU system of judicial review works well,” he said.
But Shearman & Sterling partner James Webber said the General Court’s decision “wrongly” endorses the enforcer’s use of the arm’s length-principle and allows it to conflate the separate elements of selectivity and advantage when analysing tax rulings.
The commission gets to decide with hindsight what “arm’s-length” means in any given case and what the benchmarks should be when comparing intra-group activity with standalone companies, he noted.
“Overall, the EU will become more uncertain and dangerous for corporate taxpayers," Webber warned.
Pinsent Masons partner Totis Kotsonis in Brussels said today’s ruling will be very much welcomed by other multinational companies, “who have been watching this case closely”.
This decision will not stop the commission from pursuing other tax arrangements between member states and certain companies, but it is likely to lead to a “much more robust economic analysis” in the enforcer’s tax-related state aid decisions, he said.
Partner Jason Collins added that the EU’s economic commissioner, Paolo Gentiloni, has already confirmed that the commission is exploring the use of EU treaty provisions to “tackle member states which it believes continue to operate tax regimes which can be used for aggressive tax planning.”
“This isn’t the end of the story,” Collins said.
Counsel to Ireland
Paul Gallagher SC, Maurice Gerard Collins SC, Philip Baker QC, Suzanne Kingston and Aoife Goodman in Dublin
Counsel to Apple Sales International and Apple Operations Europe
Daniel Beard QC, Alan Bates, Ligia Osepciu and James Bourke in London and Dublin
Freshfields Bruckhaus Deringer
Partners Andreas von Bonin in Brussels and Eelco van der Stok in Amsterdam
Counsel to the European Commission
Commission Legal Service
Paul-John Loewenthal and Richard Lyal in Brussels