EU General Court strikes a blow to Commission approach to fiscal State aids in the Apple tax case

The General Court has upheld a challenge to a 2016 Commission decision that had required Ireland to recover €13.2 billion in illegal State aid from Apple, on account of alleged preferential tax treatment for the multinational’s Irish subsidiaries.

The Apple State aid decision

On 30 August 2016, following a formal investigation procedure, the European Commission (“Commission”) adopted a negative State aid decision against Apple, concluding that two of Apple’s Irish subsidiaries, Apple Sales International (“ASI”) and Apple Operations Europe (“AOE”) had benefitted from illegal State aid in the form of reduced corporate taxes to the tune of €13.2 billion (plus interest of €1.2 billion) (the “State aid decision”).¹ 

At issue were two advance ‘tax rulings’ – mechanisms by which the Irish tax authorities adopted advance tax decisions as to liability for taxes. These approved proposals made by Apple on the method for determining the tax base of the Irish branches of ASI and AOE, both non-resident Irish corporations. The Commission’s decision held that these tax rulings resulted in Apple receiving a reduced tax bill for the years to which the tax rulings applied.

The General Court’s ruling

Broadly speaking, the Court upheld several key elements underpinning the Commission’s approach to determining whether the tax rulings conferred a selective advantage, but found fault with the Commission’s application of these elements. Specifically, the Court considered that the Commission had failed to demonstrate to the requisite standard of proof the facts of the case on which it relies for its conclusions.

On the Commission’s primary approach, the Court rejected several of Ireland and Apple’s arguments, holding that, as a matter of principle, the Commission was right to use as a reference framework the ordinary rules of taxation of corporate profit (in particular, the provisions of section 25 of the TCA 97), and to rely on the arm’s length principle as a tool in order to check whether, in the application of section 25 of the TCA 97 by the Irish tax authorities, the level of profit allocated to the branches for their trading activity in Ireland as accepted in the contested tax rulings corresponded to the level of profit that would have been obtained by carrying on that trading activity under market conditions.

Further, the Court held that the Commission could not be criticised for having relied, in essence, on the Authorised OECD Approach when it considered that, for the purposes of applying section 25 of the TCA 97, the allocation of profits to the Irish branch of a non-resident company had to take into account the allocation of assets, functions and risks between the branch and the other parts of that company.

However, the Court held that the Commission made errors in its application of section 25 of the TCA 97, the arm’s length principle, and the Authorised OECD Approach. In light of this, the Court concluded that the Commission’s primary line of reasoning was based on erroneous assessments of normal taxation under the applicable Irish tax law.

The Court then turned to the Commission’s factual assessments concerning the activities within the Apple group. Under Irish tax law, as regards non-resident companies such as AOE and ASI, that carry on their trade in Ireland through a branch, only the profits derived from trade directly or indirectly attributable to that Irish branch, and income from property or rights used by or held by or for the branch, are taxable. However, Irish tax law does not lay down any specific methodology for establishing which profits are directly or indirectly attributable to the Irish branches of non-resident companies. The Court accepted that, according to Irish case law, the relevant determining factor when deciding the relevant profits of a branch is the extent to which the branch has control of property at issue – in this case, Apple’s IP licences.² 

The Court held that the Commission was wrong to assign control of the IP licences to the Irish branches, based on the so-called ‘exclusion’ approach, which involved attributing to the Irish branches of ASI and AOE the quality control, R&D facilities management and business risk management functions solely on the basis that ASI and AOE had no staff outside their Irish branches. This was not sufficient to show that, in the light, first, of the activities and functions actually performed by the Irish branches and, second, of the strategic decisions taken and implemented outside of those branches, the Apple IP licences should have been allocated to those Irish branches when determining the annual chargeable profits of ASI and AOE in Ireland.

Accordingly, the Court held that the Commission had failed to meet “the requisite legal standard to demonstrate that there was a selective advantage” and so annulled the State aid decision in its entirety.³ 

As regards the allocation of the profits from the Apple IP licences to ASI and AOE for the purpose of determining profit allocations within Apple, the Court accepted that a lack of evidence submitted to the Irish tax authorities when obtaining the tax rulings about the functions carried out by those branches could be regarded as a methodological defect under the Irish tax regime.⁴  However, whilst such defects in the Irish tax procedure were acknowledged as “regrettable” by the Court, it was not sufficient for the Commission to merely state that the profit allocation was incorrect under the Irish tax rules. Even if an error in the profit allocation method were established under the Irish tax rules, the Commission should also have demonstrated that the (incorrect) profit allocation led to a mitigation in the tax burden for Apple as compared with the tax burden to which they would have been subject had the tax rulings not been issued.⁵  In other words, the Commission was still required to demonstrate that Apple had still benefited from a selective advantage. The Court held, however, that the Commission had not submitted any evidence that the error had led to an actual reduction in the tax base of ASI and AOE as a result of the contested rulings.⁶ 

In the same vein, the second part of the Commission’s case in its State aid decision related to how ASI and AOE’s profits should have been calculated for the purposes of determining taxable earnings. The tax rulings had used the branches’ operating costs as a basis to calculate the chargeable profits for tax purposes. The State aid decision had concluded that the use of operating costs as a proxy to determine the subsidiaries’ profits was incorrect, and that profits could “generally” be better calculated by reference to the sales of ASI in particular.⁷  The Court held that the Commission had not demonstrated that applying a percentage margin (15%) to operating costs was inappropriate as a profit level indicator for ASI’s Irish branch, beyond pointing to certain defects that may be inherent in the use of the operating costs (rather than sales) as the basis for determining profits. Once again, the Court held that the Commission had failed to demonstrate that any such potential defects had resulted in a selective advantage in practice.⁸ 

Next steps

The Commission will be considering whether to appeal the ruling. It may only appeal on points of law.Further, given that the Court rejected a number of Apple’s and Ireland’s arguments, an appeal by the Commission would open up the risk of a cross-appeal on those points where the Court held in its favour. These include challenges to the Commission’s competence to review Apple’s tax treatment, as well as the basic principles as to the review, including the reference framework, the arm’s length principle and the use of OECD guidelines as tools for State aid purposes. In the meantime, the recovered funds of €13.2 billion (plus circa €1.2 billion in interest) continue to languish in escrow.

Following the judgment, European Commissioner for Competition, Margrethe Vestager, stated that ‘the Commission will continue to look at aggressive tax planning measures under EU State aid rules to assess whether they result in illegal State aid. At the same time, State aid enforcement needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.’

The 2016 Apple decision is among the first in a string of cases that has seen the Commission utilise State aid rules to take aim at what it considers ‘sweetheart’ tax deals for multinational companies having an establishment in low-tax Member States. The underlying driver in all these cases is the need to ensure a level playing field in the Internal Market. This aim is also reflected in the Commission’s recent White Paper on foreign subsides,⁹  as well as its recommendation to Member States of 14 July 2020¹⁰  not to grant financial support to companies with links to countries that are on the EU's list of non-cooperative tax jurisdictions.¹¹ 

_{1 SA.38373 – State aid implemented by Ireland to Apple [2017] OJ L187/1.
2 Joined cases T 778/16 and T 892/16, Ireland v European Commission, ECLI:EU:T:2020:338, para. 182.
3 Ibid., para. 507.
4 Ibid., para. 347.
5 Ibid., para. 349.
6 Ibid., para. 350.
7 State aid decision, paragraphs 334-345.
8 Paragraph 416.
9 https://www.whitecase.com/publications/alert/eu-flexes-its-muscles-foreign-subsidised-acquisitions-and-market-distortions
10 https://ec.europa.eu/commission/presscorner/detail/en/mex_20_1349 
11 For the list, see https://ec.europa.eu/taxation_customs/news/council-revises-its-eu-list-non-cooperative-jurisdictions-4_en} 
 

Aron Senoner (White & Case, Legal Trainee, Brussels) contributed to the development of this publication.

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