As a result of winning the case, Ireland will no longerbe required to recover the €13 billion in unpaid tax and over €1 billion in interest payments (currently held in an escrow account). Margrethe Vestager has yet to reveal whether the European Commission will appeal the decision to the European Court of Justice.
On 15 July 2020, the General Court of the European Union ruled in favour of Ireland and Apple in their appeal to annul the European Commission's Decision finding unlawful State aid in 2016. The ruling has significant implications for how the European Commission assesses selectivity and advantage in State aid and tax cases and shall also give comfort to many of the international companies which have been attracted to Ireland by its beneficial tax regime and EU market access. What was on trial however was not Ireland's famously low rates of corporation tax generally, but rather an alleged selectively beneficial application of those rates to Apple.
European Commission Decision in 2016
In 2016, the European Commission ordered Ireland to recover €13.1bn in unpaid taxes from Apple accrued over an 11-year period between 2003 and 2014, as well as €1.2bn in interest. This was, and remains, the highest value unlawful State aid finding reached by the European Commission.
At the heart of the case was the claim that two companies set up by Apple (Apple Sales International and Apple Operations Europe) benefited from tax treatment provided by the irish tax authorities which other companies did not receive. The rate of tax in some instances was said to be as low as 0.005%. The decision of the Commission to investigate was politically controversial, with Margrethe Vestager stating that "we are doing this because people are angry".
The decision to tackle international tax avoidance through State aid law was also controversial with many believing that such a crusade would be better achieved through a new and specially designed law, albeit that would have been difficult (but arguably not impossible) to navigate through the legislative process, particularly with the freedom to set one's own tax policies being considered by many EU Member States as a fundamental issue of sovereignty.
The Irish government and Apple contended that the majority of the profits of these companies should be taxed in the US, as the location for the creation, design and engineering of its products and services. However, the Commission asserted that all of the profits of the two subsidiaries were taxable in Ireland, as there was no physical presence or employees outside of Ireland during the period under investigation. Further, the Commission concluded that the Irish tax authorities did not properly apply the arm’s-length principle of transfer pricing when working out what taxable profits could be allocated.
Shortly after the ruling, Apple launched an appeal to the General Court of the EU. The decision for that appeal was announced on 15 July 2020.
General Court's decision: "no advantage"
In its judgment, the General Court of the European Union decided that the Commission did not successfully show to the requisite legal standard that there was an "advantage" for the purposes of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).
The General Court declared:
"The General Court endorses the Commission’s assessments relating to normal taxation under the Irish tax law applicable in the present instance, in particular having regard to the tools developed within the OECD, such as the arm’s length principle, in order to check whether the level of chargeable profits endorsed by the Irish tax authorities corresponds to that which would have been obtained under market conditions.
However, the General Court considers that the Commission incorrectly concluded, in its primary line of reasoning, that the Irish tax authorities had granted [the two Apple subsidiaries] an advantage as a result of not having allocated the Apple Group intellectual property licences."
The Court also dismissed two secondary arguments made by the Commission, also concluding that the European Commission had not done enough to prove a selective advantage had arisen.
Reactions and context of the decision
The Irish government has expressed its support of the decision, noting that it has "always been clear that there was no special treatment" given to Apple. However, critics note that the €14bn euros (including interest), which would have been recovered, could have been put towards the country's deficit, which is expected to amount to as much as 10% of GDP this year, exacerbated by the challenges arising from the COVID-19 pandemic.
This case is particularly noteworthy as it is central to the Commission's crackdown on multinational taxation over the recent years. The General Court's decision could impact how the Commission deals with taxation matters involving other multinational companies. In a statement by EU Competition Commissioner Margrethe Vestager, she said the Commission would "study the judgment and reflect on possible next steps".
The ruling follows another high profile State aid ruling overturned by the General Court last year in favour of Starbucks, which was previously ordered by the Commission to pay up to 30 million euros in Dutch back taxes. In the Starbucks case, the Commission largely lost on points of law, as it did not meet the requisite burden of proof. This reflects the General Court's reasoning for granting the appeal to Apple and Ireland, concluding that the Commission did not prove to the requisite standard an "advantage" within the meaning of the TFEU.
In the near future, the General Court is due to rule on further cases on the taxation arrangements involving Ikea and Nike and the Dutch government, which are likely to be impacted by this new decision.
Conclusion
Whilst the European Commission decide whether to appeal, the decision will be welcomed by Apple and the Irish government. If the decision is appealed to the European Court of Justice, it may be a matter of years before a final outcome to the saga of how Apple is taxed in Ireland is reached.
If the decision is not appealed, then there are questions marks about how State aid law is to be applied to tax measures in future, noting that the Court determined that all three of the approaches taken by the Commission were insufficient to show unlawful aid had been granted.
Either way, this decision sends a clear message to the effect that State aid is an ineffective tool to regulate multinational tax arrangements (in the name of protection of a level playing field for competition and the single market). Uneven tax arrangements across the EU continue to be controversial hence this decision is likely to increase pressure upon the EU to look at other legislative and policy proposals to deal with tax advantages by other means.
DWF Law LLP has the largest State aid law team in UK private practice and is able to draw upon market leading experts in our UK, Brussels and other international offices as well as experts in other disciplines such as taxation. Our experience in this area includes working within the European Commission, Central Government, Local Government and with private sector bodies receiving funds. Therefore, we are on hand if it would be useful to discuss the issues raised in this Article or any other element of State aid law.
