Case Law Details
Ireland And Others V European Commission (General Court of the European Union, Luxembourg)
EU General Court annuls decision of European Commission and rules in favour of Apple by holding no Irish State Aid
The General Court, Luxembourg (GC), the second highest judicial body in EU finally rendered its long-awaited judgment in the cases of Ireland v. Commissioner (T-778/16) and Apple Sales International & Apple Operations Europe v. Commission (T-892/16) on 15th July 2020 and has ruled in favour of Apple and Ireland, thereby annulling the European Commission (EC) decision of 2016. The case related to illegal fiscal state aid investigations initiated by EC against Apple and the Irish Government that effectively demanded retrospective recovery of a tax bill amounting to €13 billion (approx. ₹1.14 lakh crore) alongwith applicable interest.
Apple’s Tax Structure
Apple Sales International (ASI) and Apple Operations Europe (AOE) are subsidiary companies of the Apple Group (based in California, USA) incorporated in Ireland. ASI and AOE are neither tax residents of Ireland nor of USA. ASI and AOE further set-up Irish branches that were responsible for manufacture, assembly, procurement, sales, distribution and marketing of Apple products for the Europe, Middle-East, India and Africa (EMEIA region). The profits attributable to such branches could be taxed in Ireland. In the current case, ASI and AOE were the alleged beneficiaries of fiscal aid by the Irish Government.
Ireland’s Tax Rulings
Ireland forms the base country for Apple’s operations in the EMEIA region. Although the country offers a general low corporate tax rate @ 12.5%. However, according to two tax rulings of 1991 and 2007 received from the Irish tax authorities, ASI and AOE agreed to adopt an intra-group transfer pricing method (similar to transactional net margin method or TNMM) whereby significant profits arising from all European sales were allocated to a “head office” of the two entities that was not located in any country and had no employees or location, while a minority of profits were allocated to the Irish branches of ASI and AOE. As calculated by the EC, effective tax rate in 2011 was 0.05% and in 2014, it decreased to a shocking 0.005%.
Allegations of EC
The EC formally opened state-aid investigation in 2014 against the tax rulings issued by Irish tax authorities. It was alleged that the tech-based company had been receiving tax benefits through two Irish tax rulings of 1991 and 2007 that constituted illegal state aid under A. 107(1) of the Treaty on the Functioning of the European Union (TFEU) by significantly reducing the company’s tax burden. These tax rulings were not modified or changed for over two decades considering the international tax changes and increase in remuneration levels. Simply put, tax rulings are agreements between national tax authorities and a particular enterprise.
By its decision of August 2016, the EC noted the existence of illegal fiscal state aid by individually satisfying the following four cumulative conditions as provided under A. 107(1) of the TFEU –
1. Existence of advantage in any form
2. From state-originated resources
3. Distortion of competition in EU internal market and adverse effect on EU trade
4. Selective aid to certain undertaking or enterprise
In the Apple Case, the EC held that the method used for internal allocation of profits has no economic and factual justification and was not in line with market conditions, ultimately leading to substantial reduction in the tax base. While examining state-aid, the EC has been presuming proper and satisfactory compliance of the arm’s length principle within the state-aid clause. This is also seen from other state aid investigations of Starbucks in Netherlands and Fiat in Luxembourg. The position of EC has been frequently been criticized for ignoring national tax sovereignty of Member States as reference systems and autonomously interpreting the arm’s length principle. The manner of enforcement and retroactive recovery of taxes was said to be improper use of EU law by many experts. Moreover, a colour of anti-Americanism was also given since it would inadvertently affect the tax revenue of USA as the Irish tax could be credited in the USA.
The EC generally places paramount importance on healthy and distortion-free competition between business enterprises operating in 27 Member States. The Apple case is all the more intriguing since the investigation was initiated by the Commissioner for Competition of the EC – Margrethe Vestager showcasing a close nexus between tax and competition policies of a Member State.
Judgment of the GC
The landmark judgment has been delivered ten months after the hearing of the case took place on 17th and 18th September, 2019.
The EC lost the case upon failing to meet sufficient level of burden of proof. As per the judgment, the EC wrongly considered that all EMEIA profits relating to Apple Groups’ IP licenses should necessarily have been allocated to the Irish branches of ASI and AOE. This reasoning of the EC was not justified because management and strategic decision-making functions were performed in California. The GC ultimately held that “In the present instance, as the Commission did not succeed in showing to the requisite legal standard that there was a selective advantage for the purposes of Article 107(1) TFEU, the contested decision must be annulled in its entirety without it being necessary to examine the other pleas in law raised by Ireland and ASI and AOE. “
On the bright side for the EC, it has been clearly held that the benchmark of the arm’s length principle and relevant OECD guidance is a tool to test illegal state aid. Also, GC has endorsed the view that the EC is well within its powers conferred on it under A. 107(1) of the TFEU.
This, along with the Starbucks decision of the GC concerning state aid provided by Netherlands mays serve as a blow to international tax reputation of the EC. Both judgments provide that EC failed to satisfy the burden of proof, especially on the issue of Apple receiving a selective economic advantage from Irish tax authorities to constitute illegal state aid.
As for the Irish tax authorities, the GC did acknowledge “the incomplete and occasionally inconsistent nature of contested tax rulings”. For Ireland, there seems to be conflicting interests. In the event of illegal state aid, it would generate heaps of revenue in the form of back taxes alongwith interest. However, it certainly would hurt the long-term reputation of the country due to lack of legal certainty and corporates could choose to invest in other countries. According to the statement of the Department of Finance, Ireland, “Ireland has always been clear that there was no special treatment provided to the two Apple companies – ASI and AOE. The correct amount of Irish tax was charged in line with normal Irish taxation rules.”
Takeaway
In the midst of rampant international efforts to minimize international tax avoidance arrangements by OECD and G-20 nations, this ruling comes in the form of a breather for MNEs that have similar rulings in place that guarantee tax certainty. It not only encourages foreign investment in low tax nations to a certain extent but also upholds the legitimacy of beneficial tax rulings with individual governments.
As a side note, new advantageous tax deals with national authorities may not be as viable owing to a plethora of judicial changes at the OECD level after the successful BEPS Project, new anti-avoidance measures introduced at the EU level and the recent pro-active role being played by the EC in scrutinizing incompatible state aid. This case makes one ponder on whether the key reasoning behind the Apple investigation was the low quantum of tax paid by the MNE or that of stateless income.
The EC has been policing such sweetheart tax deals offered by EU member nations to MNEs. Apple is another case out of the lot dealing with individual tax rulings that allegedly deviate from OECD Transfer Pricing Guidelines. While decisions of the GC in the cases of Ikea (Netherlands) and Nike (Netherlands) are awaited, the EC won the Fiat (Luxembourg) case and lost the Starbucks (Starbucks) case last year.
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