Ireland and Apple Inc. are opposing an appeal by the European Commission against a judgment of the General Court that the commission incorrectly applied the arm’s-length principle under Irish law.
In a May 23 hearing before the Court of Justice of the European Union in Ireland and Apple Sales International, Apple Operations Europe v. European Commission (C-465-20 P), the commission appealed the lower court's decision (T-778/16 and T-892/16) overturning its 2016 state aid ruling against Ireland. Referring to article 107 of the Treaty on the Functioning of the European Union, the commission had held that Ireland granted Apple €13 billion of illegal state aid.
Article 107 of the TFEU says that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”
Ireland had entered into unilateral advance pricing agreements with Apple's Irish branches, Apple Sales International and Apple Operations Europe, capping the branches' income at a percentage of their operating expenses.
“Ireland misapplied its tax law when granting the tax rulings,” said P.-J. Loewenthal, who is representing the commission in its appeal. "As the Commission’s decision demonstrates, that misapplication resulted in Ireland granting ASI substantial tax breaks as compared to other Irish taxpayers," and violating state aid law "within the meaning of article 107(1) of the treaty.”
Loewenthal said a correct application of the arm’s-length principle as recognized under Irish law should have led to the conclusion that income from intellectual property transferred to Apple (Ireland) by Apple Inc. had to be taxed in Ireland at the standard corporate tax rate of 12.5 percent. The effective tax rate of less than 2 percent showed that Ireland provided a selective advantage that amounted to illegal state aid, as Apple itself admitted during a U.S. congressional hearing in 2012 when asked about its low tax rate in Europe, Loewenthal noted.
“Apple answered, and I quote: ‘Since the early 1990s, the government of Ireland has calculated Apple's taxable income in such a way to produce an effective tax rate in the low single digits,’” Loewenthal said. “Here comes the crux. Apple said: ‘These results are similar to incentives made available by many U.S. states and other countries to entice investment in their jurisdiction.'”
P. Gallagher, who is representing Ireland, responded that the ETR “is a calculation taking [into account] all the profits of this company, which Ireland cannot tax" because it was not resident in Ireland. “Ireland is limited to taxing the profits attributable to the branch,” he said.
The commission incorrectly asserted that the arm’s-length principle was part of Ireland’s law at the time, Gallagher said. Section 25 of the Irish Taxes Consolidation Act, 1997 recognized the market value principle, which is not equivalent to the arm’s-length principle, he said.
That statement appears to contradict the General Court’s assertion that the Irish High Court in Belville Holdings v. Cronin, [1985] I. R. 465, endorsed “adjustments equivalent to those proposed on the basis of the arm’s-length principle, in particular in the OECD Transfer Pricing Guidelines.”
Gallagher further argued that — in accordance with the General Court’s ruling — the commission incorrectly attributed functions to Ireland in an “exclusion approach” by saying that if those functions could not be attributed to Apple Inc., they must have been exercised by the Irish permanent establishments. Even if the authorized OECD approach on the attribution of profits to a PE — which was not part of Ireland’s law at the time — is considered for allocating profits to Apple’s Irish PEs, independent reports by two of the Big Four accounting firms confirmed that Ireland applied the OECD guidelines correctly, he said.
D. Beard, who is representing Apple, said that regardless of the legal principles, the facts did not support the commission’s ruling. Because the PEs in Ireland performed only routine functions and support activities, no more income could be allocated to them, as was agreed in the Irish APAs. “The essence of this case is simple,” Beard said. “The Commission just got the facts wrong about what activities went on in Ireland, which was what it was required to look at under the reference framework — Irish law. Throughout this appeal process, the commission has tried to confuse things, and it has done so today, repeatedly and wrongly, and it's tried to argue that the General Court made errors of law. But the key here is the facts.”
M. Sánchez Rydelski, who is representing the intervening European Free Trade Association Surveillance Authority, said the General Court’s decision sends two unfortunate messages. “The first message is that . . . the more opaque a national tax system is, the greater the chance for that tax system to escape the application of the state aid rules,” Rydelski said. “The second message is that the omission of a member state or third party concerned to submit relevant information to the commission during the formal investigation enhances the chance that the commission will be unable to prove state aid is involved because the standard of proof for the commission becomes insurmountable.” Because the EFTA Surveillance Authority is facing similar issues, this is of particular concern, Rydelski added.
Presiding Judge Koen Lenaerts said policy arguments could not be made in the appeal proceeding and must be made at the proper venue.
Several judges asked the parties to clarify some of their statements. Judge Niilo Jääskinen inquired whether the Irish tax authorities explicitly analyzed whether the state aid rules were violated and considered the notification procedure under article 108 of the TFEU.
Gallagher said that because no selectivity was present and no advantage was granted, there was no need to entertain those deliberations. “The Revenue have no discretion” and applied the rules as they were, he said.
“But what’s the interest for the taxpayer to seek for a fiscal ruling if you say that there is no discretion?” Jääskinen asked. It is for certainty, Gallagher responded.
Advocate General Giovanni Pitruzella will deliver his opinion November 9.