The ramifications of the Court of Justice’s landmark decision upholding the European Commission’s determination that Apple received €13 billion of unlawful state aid will reverberate for years to come.
The Court’s September 10 judgment in European Commission v. Ireland (C-465/20 P) upholds the commission’s August 2016 ruling in its entirety, ordering Ireland to claw back €13.1 billion in illegal state aid that Apple received from 2003 to 2014 in violation of article 107 of the Treaty on the Functioning of the European Union.
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.”
The Court confirmed the commission’s interpretation of article 107 and its application in relation to Irish law. The commission correctly calculated the tax payable by the nonresident Irish entities Apple Sales International Ltd. (ASI) and Apple Operations Europe Ltd. (AOE) (together: Apple Ireland), the Court held.
“The General Court erred when it ruled that the Commission’s primary line of reasoning was based on erroneous assessments of normal taxation under the Irish tax law applicable in the case, and when it upheld the complaints raised by Ireland and by ASI and AOE regarding the Commission’s factual assessments of the activities of the Irish branches of ASI and AOE and of activities outside those branches,” the Court said in a release.
The branches' activities “in Ireland had to be compared not to activities of other Apple Group companies, for example a parent company in the United States, but to those of other entities of those companies, particularly their head offices outside Ireland,” the release says.
Many Twists and Turns
In 2014 the EU Competition Commission launched an investigation into Apple Inc.’s Irish operations. In 2016 it concluded that advance pricing agreements granted by Ireland in 1991 and 2007 to ASI and AOE did not reflect the economic reality of the arrangements. Since the companies were incorporated in Ireland and were managed and controlled from the United States, neither country considered them a tax resident. Income from intellectual property transferred to Apple (Ireland) must be taxed at Ireland’s 12.5 percent tax rate, the commission said. The commission’s calculation of Apple’s effective tax rate was much lower than that, based on the interquartile range: In a 2013 hearing before the U.S. Senate, Apple confirmed that its ETR on the Irish income was less than 2 percent.
After the commission’s 2016 ruling, Ireland filed an annulment application with the General Court in November 2016, and a month later it explained the arguments in its appeal. The General Court heard oral arguments in the appeal during a two-day hearing in September 2019. Roughly a year later, it overturned the commission’s ruling (T-778/16; T-892/16), saying that the commission had exceeded its competences and encroached on the member states' competences.
The commission appealed to the Court of Justice in September 2020 to annul the General Court’s decision. The Court held a hearing in May 2023.
In a surprise move, then-Court of Justice Advocate General Giovanni Pitruzzella issued a nonbinding opinion in November 2023 recommending that the Apple state aid case be remanded to the General Court. He argued that the General Court had committed several errors in law when it threw out the commission’s 2016 ruling. Pitruzzella also found that it had "failed to assess correctly the substance and consequences of certain methodological errors that, according to the Commission decision, vitiated the tax rulings,” according to a Court release.
Final Twist: The Court of Justice’s Decision
The Court of Justice did not follow that recommendation, stressing that it is in the position to issue a final decision in the matter.
According to the Court, through the APAs, Ireland provided Apple a selective advantage that distorted competition within the EU in violation of TFEU article 107. To determine the selectivity of the benefit, the “normal tax system” as a reference framework must be determined, the Court said.
“Contrary to Ireland’s contention, the application of section 25 of the [Taxes Consolidation Act] 97, as described by Ireland, corresponded in essence to the functional and factual analysis conducted as part of the first step of the Authorised OECD Approach, the aim of that first step being to identify the assets, functions and risks that must be allocated to a company’s permanent establishment,” the Court of Justice said, agreeing to that extent with the General Court. The commission’s methodology therefore was not flawed, the Court ruled.
That methodology was also properly applied, the Court found. Functions performed by Apple Inc. could not be allocated to the branches of Apple (Ireland) under the separate entity approach applicable for profit attribution between head office and branch and would have had to be priced at arm’s length. After analyzing the functions and risks, the commission concluded that the head offices did not perform significant functions as to the IP licenses. The commission therefore did not adopt an “exclusion approach,” under which it allocated all income to Ireland as the center of the business activity just because the income would otherwise go untaxed, the Court said.
The APAs therefore selectively favored Apple because “in so far as the contested tax rulings reduce the annual amount of tax which ASI and AOE are required to pay in Ireland — as compared, in particular, to non-integrated companies whose taxable profit reflects prices determined on the market and negotiated at arm’s length — those tax rulings involve different treatment that can, in essence, be classified as a derogation and as discriminatory,” the Court held, granting the commission’s appeal.
Worth the Wait?
Margrethe Vestager, executive vice president of the European Commission, appeared emboldened by the judgment. “It is encouraging for us to do more,” she said in a statement. “The Commission will continue its work on harmful tax competition and aggressive tax planning both in terms of legislative proposals and enforcement.”
Ireland’s Department of Finance expressed disappointment that the Court of Justice did not rule in favor of the country's arguments. "We will consider the judgment carefully when it is circulated. The Irish position has always been that Ireland does not give preferential tax treatment to any companies or taxpayers," it said. "Ireland will of course respect the findings of the Court regarding the tax due in this case,” the department added, noting that the funds in escrow will be transferred to Ireland as this is the final determination of the matter.
“The Apple case involved an issue that is now of historical relevance only," the Department of Finance said, noting that the 1991 and 2007 Revenue opinions are no longer in force. "Ireland has already introduced changes to the law regarding corporate residence rules and the attribution of profits to branches of non-resident companies operating in the State,” it said.
Apple said in a statement that "the European Commission is trying to retroactively change the rules and ignore that, as required by international tax law, our income was already subject to taxes in the U.S." Apple is “one of the largest taxpayers in the world,” it added.
An SEC filing of September 10 shows that because of the Court's decision, Apple “expects to record a one-time income tax charge in its fourth fiscal quarter ending September 28, 2024, of up to approximately $10 billion, which will increase the Company’s effective tax rate for the quarter.”
Fiat, Apple, and Beyond
Stephen Daly, reader in tax law at the Dickson Poon School of Law, King’s College London, criticized the Court of Justice for not distinguishing Apple from Fiat v. European Commission (joined cases C-885/19 P and C-898/19 P). In Fiat, the Court annulled the commission’s decision to compel Luxembourg to reclaim €23 million in alleged state aid from Fiat Chrysler’s finance entity.
“We’re a bit lost why Luxembourg won in Fiat and Ireland lost in Apple,” Daly said. “But if I’m supposed to fill in the blanks, I’d have to take a legalistic approach. For one, Ireland conceded that the country had profit allocation rules, which mirrored the [authorized OECD approach]. This is madness to me, because how can this [authorized OECD approach] from 2010 time travel back in time to 1991? Luxembourg had more fleshed-out rules on the arm’s-length principle. Ireland might have won had they more strenuously contested what its laws required in terms of profit allocation.”
Daly also noted that less precise rules backfired.
“In Fiat, the Court said the commission applied the wrong rules and it should have looked at how Luxembourg instantiated the arm’s-length principle,” Daly added. “In Apple, the Court said Irish rules were correctly applied, which is stunning because the rules — being the wording of section 25 [of the Taxes Consolidation Act] 97 — are very vague.”
Ruth Mason of the University of Virginia School of Law told Tax Notes that “the Court of Justice effectively overruled Fiat and reinstated the commission’s ability to use OECD guidance to second-guess member states' rulings, regardless of whether the member state adopted that guidance into domestic law.”
That is a concerning development for the rule of law, Mason said. “Rather than applying the state’s own domestic law, the Court of Justice decided to apply a standard that ‘corresponded in essence,’ in the Court’s terms, to domestic law. The commission can now choose among contemporaneous and retrospective exogenous rules or, if it prefers in a particular case, it can use actual domestic law. Heads the commission wins, tails the state loses.”
Although the Irish government seems to think the matter is closed, the double-Irish structure was not implemented only by the Apple group before Ireland legislated it out in 2015, Daly warned. “In my opinion, under EU law, Ireland is obliged to recoup any state aid benefits relating to the double-Irish structure that were granted before 2015, as can be accommodated by statute of limitation rules,” he said.
Daley said the Court does not defer to the domestic tax authorities, as he and Advocate General Juliane Kokott have argued for. “I think it’s a bad outcome for them. The EU Commission is now the supranational tax authority," he said.