In 2016, the European Commission determined that two rulings of the Irish tax authority (the “Rulings”) in favour of Apple group companies, Apple Sales International (“ASI”) and Apple Operations Europe (“AOE”), were illegal State aid and therefore in breach of EU law. The Commission found that the Rulings had endorsed a method used by Apple to split the profits of the Irish branches of ASI and AOE so that the majority of profits were artificially allocated to “head offices” based outside of Ireland, resulting in an effective corporation tax rate of less than 1%. The Commission considered that the Rulings granted Apple an unfair advantage and Ireland was ordered to recover €14.3 billion in taxes and interest from Apple. On 15 July 2020, the General Court issued a judgment annulling this decision.
The judgment of the General Court
The General Court considered that whilst the Commission had the right to scrutinise domestic tax rulings, it had not performed a sufficiently concrete assessment of whether the profits in question should have been allocated to Apple’s Irish branches.
The Commission had assessed the Rulings with reference to tools developed by the OECD, including the “arm’s length principle”. This principle means that intra-group transactions should be treated for tax purposes as if they were arrangements between non-associated entities. The Commission, applying this principle, had found that the Irish tax authorities had not allocated income from Apple’s intellectual property licences to their Irish branches. Whilst the General Court accepted the application of the arm’s length principle, it found that the Commission had not actually shown that the income earned represented the value of activities carried out in the Irish branches.
Furthermore, the Commission had argued that the Rulings were the result of the Irish tax authority having exercised too broad a discretion and, that there were methodological errors in the Rulings, but these arguments were also found to be unproven by the General Court. Therefore, the General Court found that the Commission had not demonstrated that Apple had been granted any selective advantage and, as such, the decision of the Commission was annulled.
The Commission now has the opportunity to appeal the judgment within two months and ten days of 15 July 2020. Any appeal, which would be before the Court of Justice of the European Union, must be limited to points of law and would be the final say on this matter. In the meantime, the €14.3 billion paid by Apple will remain in an escrow account until all proceedings have concluded.
The judgment follows other landmark cases in relation to the taxation of multinational corporations, such as those of Fiat and Starbucks, showing that State aid in tax rulings has been very much on the Commission’s radar in recent years. Indeed, Amazon also awaits a judgment from the General Court in another similar case relating to tax rulings in Luxembourg, and it will be interesting to see what impact the decision here has upon any judgment in that case.
What seems clear, however, is that this will not be the last word by the Commission on the issue of State aid in tax cases. Executive Vice-President Margrethe Vestager issued a statement following the judgment where she expressed that “[t]he Commission will continue to look at aggressive tax planning measures under EU State aid rules to assess whether they result in illegal State aid.” The Commission clearly intends to continue its investigations into potential tax-related State aid, although with the high evidentiary standard that has now been set by the General Court, whether the Commission’s crackdown on alleged preferential tax treatment will be successful remains to be seen.