€13 billion Apple tax recovery decision quashed
On 15 July 2020, the EU General Court ("GC") handed down its much awaited judgment in the Apple case. It overturned the European Commission’s ("Commission") decision ordering Ireland to recover EUR 13 billion (plus interests) in illegal State aid from Apple in its entirety.
Background
In August 2016, the Commission found that Apple had been granted illegal State aid of up to EUR 13 billion as a consequence of tax rulings issued by the Ireland in 1991 and 2007 (the "Decision"). These involved two Apple Group companies which were incorporated in Ireland, but not tax resident there. As a result of the tax rulings, most of the sales profits of Apple Sales International ("ASI") and Apple Operations Europe ("AOE") were allocated to their respective head offices. However, according to the Commission:
- these head offices, which had no physical presence or employees, were unable to control or manage the Apple Group’s IP licences; and
- only the Irish branches of these companies had the capacity to perform functions related to those licenses.
On this basis, the Commission concluded that the sales profits of ASI and AOE should have been recorded with the Irish branches and taxed in Ireland. It considered that the Irish tax rulings had endorsed an artificial internal allocation of profits within ASI and AOE respectively, and therefore conferred a selective advantage upon them. Consequently, the Commission ordered Ireland to recoup up to EUR 13 billion, plus interest, from Apple.
This Decision was the third in a string of decisions concerning tax rulings allegedly granting illegal State aid to multinationals. The Decision and associated record recovery amount attracted criticism notably from the US treasury, for "retroactively applying a sweeping new State aid theory that is contrary to well-established legal principles [and] calls into question the tax rules of individual countries".
Both Ireland and Apple appealed the Decision before the GC. The judgment in the Apple case is the third one delivered concerning this new Commission’s policy after the Fiat and Starbucks judgments back in September 2019 (see our September 2019 newsletter article). [1]
Confirmation of the Commission’s competence and clarification of its limits
In line with the Fiat and Starbucks judgments, the GC takes the view that the Commission is competent to verify, under EU State aid rules, whether an individual tax ruling granted an advantage to the concerned tax payer as compared to the ’normal’ taxation system.
The GC confirmed that:
- the Commission may use an ’arm’s-length principle’ as a ’tool’ to screen whether the tax rulings at issue were in line with market conditions; and
- the Commission can apply the Authorised OECD Approach which, in the GC’s words, reflect the ’international consensus’ and thus have ’real practical significance’ when interpreting questions regarding profit allocation to permanent establishment. [2]
The GC took these views despite the fact that neither the ’arm’s-length principle’ nor the Authorised OECD Approach were ’formally incorporated into Irish law’ at the time of the rulings.
However, and arguably in contradiction with the above, the GC draws some limits to the Commission’s action by clarifying that:
- there is no ’freestanding obligation’ to apply an ’arm’s length principle’ arising from Article 107 TFEU and obliging Member States to apply it horizontally and in all areas of their national tax law;
- the Commission cannot ’disregard the national rules of taxation’ and determine ’independently’ what constitutes the ’normal’ taxation of an integrated company.
As a result, and in contrast with its Fiat and Starbucks judgements, the GC carried a detailed analysis of the national legal framework, including the relevant legislation and case law.
Failure by the Commission to discharge its burden of proof
The GC concluded that the Commission had failed to show to the ’requisite standard of proof that there was a selective advantage’ and annulled the Decision in its entirely. The GC held that the Commission’s primary line of reasoning was based on erroneous assessments of:
- the ’normal’ taxation under the applicable Irish tax law. The Commission was wrong to allocate ’by default’ the profits derived from the use of the IP licences to the Irish branches, solely on the basis that ASI and AOE had no staff nor physical presence outside their Irish branches (so-called ’exclusion’ approach). The GC accepted that, according to Irish case law, the relevant determining factor when deciding the relevant profits of a branch is the extent to which the branch has ’actual’ control of property at issue; and
- the activities within the Apple Group. The Commission failed to show that the IP licences should have been allocated to the Irish branches of ASI and AOE in view of: (a) the activities and functions ’actually’ performed by the Irish branches of ASI and AOE; and (b) the strategic decisions taken and implemented outside of those branches (which were centralised in the US).
In addition, the GC considered that the Commission did not demonstrate, in its subsidiary line of reasoning, methodological errors in the contested tax rulings (concerning the choice of the tested party, the choice of the profit level indicator and the levels of return accepted) which led to a reduction in ASI and AOE’s chargeable profits in Ireland.
While the General Court explicitly ’regrets the incomplete and occasionally inconsistent nature of the contested tax rulings’, [3] it made clear that these ’defects’ were not, in themselves, sufficient to prove the existence of an advantage.
Conclusion and next steps
The Apple judgment, shows that the Commission is required to conduct a thorough analysis to meet the requisite standard of proof. In particular, the Commission cannot presume the existence of a selective advantage or a consequence of mere ’methodological defects’ in the adoption of the rulings.
Following the judgment, Commissioner Vestager stated that ‘the Commission will continue to look at aggressive tax planning measures under EU State aid rules to assess whether they result in illegal State aid. At the same time, State aid enforcement needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.’
The Apple judgment may still be appealed before the Court of Justice.
On the same day as the Apple judgment, the Commission unveiled its new tax package. In this context, the Commission will explore how to make full use of Article 116 TFEU, which allows proposals on taxation to be adopted if the qualified majority is reached. Ashurst represented Luxembourg, who intervened in support of Ireland in Case T-778/16.