On July 15th the General Court of the EU handed down their decision in cases T‑778/16 and T‑892/16, which have become known as the Apple Cases. In a decision comprising over 500 paragraphs the General Court reversed the 2016 decision by the European Commission that Ireland had granted illegal state aid to Apple. The decision of the Court may be appealed to the Court of Justice. Given the length of the decision of the General Court, what follows below is a very brief analysis.
The decision of the General Court is interesting for a number of legal and non-legal reasons :
· In general, member states of the EU retain the right to create their own tax policies. There are no EU laws relating to corporate income tax or personal income tax for example. However, any such domestic tax law must not breach EU law as supremacy of EU law is a well-established principle of supremacy of EU law. In this case, the Commission argued that the tax decisions the Irish tax authority took in relation to Apple’s subsidiaries registered in Ireland constituted a breach of the EU rules relating to state aid.
· In order to establish state aid the following five elements must be proved : There must be (1) an advantage (2) granted by a member state (3) to an undertaking. The advantage must be granted (4) selectively, and it must (5) distort trade or competition in the internal market.
· Poland, Luxembourg, EFTA (European Free Trade Association – an intergovernmental organisation of Iceland, Liechtenstein, Norway and Switzerland) and also the USA asked permission to intervene in the case and address the Court on their views on the commission’s decision. The Court allowed Poland, Luxembourg and EFTA to intervene and so be allowed to address the issues before the court. However, the Court rejected the application from the USA.
· Had Apple lost the case the total amount payable in tax would have been up to EUR13 billion.
· The Court accepted the Commission’s approach of using OECD guidance when assessing certain tax issues
· The Commission decision would have forced the Irish government to demand more tax from Apple. Ireland was opposed to this action and said that Apple had paid tax correctly and in accordance with Irish law. A number of tech companies such as Apple and Google have established headquarters in Ireland and have been attracted by Ireland’s low rate of tax for such companies and so if Ireland were forced to alter this low tax policy then those companies might be drawn elsewhere.
· the European Commission made their assessment using agreements between Ireland and Apple going back 10 years.
· Apple were required to place $14bn into escrow. That money remains tied up in escrow whilst the Commission decides whether to appeal.
Apple’s Company Structure
The Apple Group is based in Cupertino in California and comprises Apple Inc and all companies controlled by Apple Inc. Apple had two subsidiaries in Ireland, called ASI and AOE. Apple Inc had granted a licence to ASI and AOE to use Apple’s intellectual property.
Due to differing rules on residency and taxation in the USA and Ireland at the time neither company was regarded as resident in either the USA or Ireland. The only tax payable in Ireland were the profits that were attributable to the branches of these companies in Ireland. This was done through an attribution formula which took into account various matters such as the expenses incurred by those branch offices in Ireland. The European Commission argued that Ireland had not followed their own tax rules when making the attribution assessment.
The Commission’s Arguments
The Commission pursued a number of arguments but their two primary arguments were :
1. The profits made by ASI and AOE from exploiting the IP licence granted by Apple Inc should be taxable in Ireland.
2. The branches of ASI and AOE were insufficiently taxed given the value these companies generated for the Apple Group.
The Court rejected both arguments advanced by the Commission for the following reasons :
1. Under Irish law profits are only attributable to the branch if it can be shown that the branch controls the IP. The Court found that :
186….the Commission did not attempt to show that the Irish branches of ASI and AOE had in fact controlled the Apple Group’s IP licences when it concluded that the Irish tax authorities should have allocated the Apple Group’s IP licences to those branches
Due to the lack of such evidence the Court had no choice other than to reject this argument.
2. Although the court was critical of the quality of the decision making by the Irish tax authority, the court also found that the Commission had failed to show a causal link between the errors made by the Irish tax authority and any possible advantage gained by the companies .
480…..Indeed, the Commission did not succeed in demonstrating that the methodological errors to which it had referred with regard to the profit allocation methods endorsed by the contested tax rulings …..had led to a reduction in ASI and AOE’s chargeable profits in Ireland. Accordingly, it did not succeed in demonstrating that those rulings had granted those companies an advantage.
The main arguments advanced by the Commission were rejected due to a lack of evidence. Given that an appeal to the Court of Justice of the European Union (CJEU) can only be made where it can be shown that the General Court erred in law it is possible that the Commission will not proceed with an appeal and may instead either simply accept the decision of the General Court or decide to consider the matter again.
The Intersection of Law and Politics
The Apple cases are a classic example of a collision between law and politics and caused considerable friction between the EU and US. In 2016 the Senate Finance Committee sent a letter to the US Treasury Secretary stating :
It alarms us, however, that the EU Commission is using a non-tax forum to target U.S. firms essentially to force its Member States to impose taxes, looking back as far as ten years, in a manner inconsistent with internationally accepted standards in place at the time. By all accounts, these cases have taken the Member states, companies, and their advisors by surprise. These cases have created significant uncertainty and instability. We agree with Mr. Stack’s hearing testimony that “[t]he retroactive application of a novel interpretation of EU law calls into question the basic fairness of the proceedings.”
Later that year the US Treasury wrote a 25 page paper detailing why the Commission decision was wrong, essentially arguing that the Commission had misunderstood and misapplied EU law. The US Treasury Secretary at the time wrote to the President of the European Union complaining about the Commission investigations into Apple and other US companies. Also, as mentioned above, the US sought permission to intervene in the hearing before the General Court but their application was refused.
Following the decision of the General Court the Commission issued a statement which included the following :
"If Member States give multinational companies tax advantages... It also deprives the public purse and citizens of funds for much needed investments – the need for which is even more acute during times of crisis."
The Commission statement seemingly focusses on political issues such as the social benefits of collecting more tax rather than on the legal principles involved with assessing a complex concept like state aid. This political need to raise revenue could be a sign of things to come, both within the EU and also in the wider world.
Since the financial crisis of 2008, when governments found themselves slipping further into debt and structural deficits, there has been a trend towards more aggressive tax enforcement. The OECD launched multiple global tax initiatives to strengthen global tax collection, particularly against large multinational companies, which are still ongoing, and countries around the world have also developed new approached to tax collection and prosecutions. Given that governments around the world are once more slipping into deep financial trouble as the result of huge amounts of public spending to counter the effects of COVID-19, we can expect to see more and more aggressive tax decisions fuelled by a political need to generate tax revenue.
In light of this changing landscape companies should reassess their current overseas tax structures and should be aware of the 17 OECD tax initiatives currently being developed, and in some cases already implemented, around the world as well as proposed changes at the domestic level. Taxation of multinational companies are likely to be a high priority as can be seen by the fact that the Commission has recently made state aid decisions targeting Apple, Starbucks and Fiat. In addition, multinational companies with a presence in the digital economy, like Apple, Google, Facebook, are also highly likely to face changes as taxation of the digital economy is a high priority for many countries as well as the OECD.
Please note that due to the complexity of the decision of the General Court we have focussed on the wider issues and have not dissected all the complex legal tax issues that were raised.
 Technically, the application to intervene was made by the EFTA Surveillance Authority
 In reality, if the Commission had succeeded it would have been very unlikely that the Court would have agreed that EUR13bn was payable as this would have involved attributing all of Apple’s profits to their Irish subsidiaries
 Google established itself in Ireland in 2003 with 100 employees. Prior to the COVID outbreak it employed around 7000. (https://www.irishtimes.com/business/eu-scrutinises-google-s-tax-arrangements-in-ireland-1.3859945)
 Over the years in question the names of these subsidiaries had changed. Only the names ASI and AOE will be used in this article for the sake of complicity.
 Similar to principles used in China to tax Representative Offices of overseas companies
 See for example OECD BEPS Initiative 1 and Pillar 1.