Final judgement in the tax dispute between Apple and the EU

In Europe, Ireland has emerged as a host country with particularly favourable conditions for business taxation for foreign companies. This has been a success, in the sense that several major foreign players have actually established their European distribution systems here. For Ireland, this means not only increased tax revenues, but also long-term development of technological expertise and infrastructure, jobs, stronger offerings in IT education and other associated benefits that are felt over time.

A development in which individual countries seek to appear particularly favourable in terms of tax conditions could quickly end in a race to the bottom that is neither optimal nor fair from a wider, and in this case, European perspective. From a tax perspective, it would make more sense for countries within the relevant geographical and economic areas to coordinate their tax rules and conditions. Ideally, the tax burden should not be such a prominent factor when businesses choose where to locate.

In a previous article in Lov & Data (L&D no. 143 p. 10 et seq.), I discussed a case in which the European Commission had taken an interest in a tax decision regarding Apple in Ireland dating back to 1991. The European Commission was of the opinion that this decision and a later decision from 2007 in reality meant that Ireland had deviated from the principle of arm's length, and that Apple's tax conditions were not in line with standard market conditions. Arm's length in this context refers to the relationship between Apple's company that received the income in the US and the branch in Ireland. Somewhat simplified, the arm's length requirement means that the two parties are required to act as separate and independent of each other, and that rational business decisions are made on this basis.

Furthermore, the Commission was of the opinion that Apple was granted an unfair advantage in the form of state aid from Ireland through the tax decisions, meaning that Apple were granted a particularly favourable tax regime. In practice, this was primarily done by allocating profit under licence agreements in the Group to the US instead of the local branch in Ireland, where the actual activity was carried out. In 2016, the Commission issued its decision requiring Apple to transfer EUR 13 billion to Ireland.

Apple appealed the Commission's decision to the EU's General Court (here I refer to the Court as the General Court and the Court of Justice as the European Court of Justice or ECJ). The decision of the seventh chamber of the General Court was handed down on 15 July 2021, and Apple and Ireland were successful in their appeal. This decision is discussed in the article in Lov & Data referred to above. The General Court particularly emphasised that the Commission had not demonstrated that the tax decisions from Ireland constituted unlawful state aid. In this regard, it was pointed out that it was not a given that the underlying revenue streams would be allocated to Ireland instead of the US branch as the Commission had argued. Nor did the General Court find sufficient grounds to conclude that an insufficient share of income had been attributed as basis of taxation for Apple's activities in Ireland. Furthermore, the decisions relating to the tax rulings did not, in the General Court's view, appear to be discretionary.

The decision from the General Court can largely be read as the court disagreeing with the Commission's methodological starting point and the conclusions that were derived from this. For example, the General Court held that the Commission had applied a presumption that Apple's branch in the US had no real activity aimed at Ireland, so that the revenues should instead have been allocated to the local branch in Ireland. Similarly, there was a presumption that the Irish tax rules allowed for an exercise of discretion that would entail an unlawful tax advantage. With this, the General Court seemed to place stronger demands on the analysis of actual causal relationships between the tax decisions and the alleged unlawful state aid, suggesting that the Commission had not done a good enough job here. 

The Commission appealed the decision from the General Court to the European Court of Justice on 25 September 2020.

The outcome of the appeal case is surprising, as the lower court was so clear that there were no grounds for reversing the underlying decisions from Ireland. The Grand Chamber of the European Court of Justice has now made a final decision in this case, which has been ongoing since the Commission first approached Ireland in 2013. The decision reverses the outcome of the General Court, and held that the tax rulings were found to constitute unlawful state aid from Ireland to Apple. As a result, Apple must pay more than EUR 13 billion back to Ireland.

The ECJ assumed that the Commission had sufficient grounds to conclude that there was unlawful state aid and that there was arbitrary discrimination. It was also found that the tax rulings from Ireland allowed Apple to allocate profit from licence agreements for intellectual property rights to the US, without there being an actual basis for this.

In paragraph 125 of the decision, the ECJ explains how the principle of arm's length should be applied in this type of case. Reference is made here to the assessment under the Irish tax rules, but the principle applies generally in tax matters:

"…[t]he profits to be allocated to the branch of a non-resident company pursuant to that section are ‘the profits that that branch would have earned at arm’s length, in particular in its dealings with the other parts of the company, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the assets used, the functions performed and the risks assumed by the company through its branch and through the other parts of the company…"

The ECJ then moves from the general to the specific, pointing out that the Irish tax authorities should have assessed the arm's length requirement in relation to Apple's transactions related to the licence revenues:

"In order to do so, they should have compared the functions performed, the assets used and the risks assumed by ASI and AOE through their head offices and their Irish branches…"

In paragraph 126, with the starting point in place, and a review of what should have been considered, the ECJ then assesses the Commission's decision on this point. Here, the Commission's application of the arm's length principle is reproduced, which concludes that the two branches in the US and Ireland, respectively, would not have agreed to such an allocation of profits:

"In particular, it concluded that an allocation outside Ireland of profits generated by the IP licences held by ASI and AOE would not have been agreed to by the Irish branches of those companies if they had been separate and standalone companies acting under normal market conditions and, moreover, that, given the lack of functions performed by the head offices and/or given the activities carried out by those branches, those IP licences should have been allocated to the Irish branches for tax purposes (recital 305 of the decision at issue)."

The ECJ examines several matters in the Commission's decision, and points out that presumptions relating to physical presence and employees have not alone been decisive for the issue of arm's length. In paragraph 129, the ECJ emphasises that the Commission drew its conclusion after a broader assessment:

"The Commission drew that conclusion after linking two separate findings, that is to say, first, the absence of active or critical functions performed and risks assumed by the head offices and, secondly, the multiplicity and centrality of the functions performed and risks assumed by those branches, applying the legal test set out in recital 272 of the decision at issue."

On this basis, the ECJ is critical of the decision of the General Court, which had highlighted the method itself and the presumptions in the Commission's decision as objectionable. The ECJ believes that it can show that the Commission, both on the issue of activity in the foreign company and other issues in the case, has not only made an assessment based on a presumption, or an "exclusion approach", but had gone deeper into the facts and the analysis itself. The decision was therefore upheld, in a decision that reached the diametrically opposite result of the lower court. 

Ireland is now required to collect the outstanding tax claims from Apple. It is worth noting that the disputed claim was deposited in a separate account following the Commission's decision in 2016, so it is now a question of transferring these funds from Apple to Ireland. The transfer of these funds in line with the escrow arrangement is in itself a complicated affair that is expected to take several months to complete. 

The decision of the ECJ is final and cannot be further appealed. The Irish Minister of Finance, Jack Chambers, said the following about this large transfer of funds to Ireland:

"The government will need to carefully consider what is the best course of action to take with this revenue, and I will be engaging with the party leaders over the coming weeks on the matter."^[1]

It should be noted that Ireland stood firmly on Apple's side throughout the case, both because Ireland was included in the matter through a separate case consolidated for a joint hearing with the Apple case, and because the parties both argued that the tax decisions from 1991 and 2007 were correct.

For players who need to orientate themselves after this latest decision, it is important to emphasise the importance of having clear documentation related to decision-making processes, organisation, risk distribution and the like between the various branches. Roles and tasks that are allocated to different parts of the organisation must be complied with and documented. For managers and employees, it is also important to clarify where in the system and within which part of the organisation they are employed and where they perform their function. This should be both documented and followed up in day-to-day operations.

When I wrote about the decision from the General Court, I concluded by pointing out that there was still some way to go towards an effective and coordinated cross-border taxation system. Although the result has now been reversed, the timeline of this case shows the challenge of following up on these types of cases. The case dates back to the first tax ruling from Ireland in 1991, and the final decision was not issued until September 2024. The Commission initiated its case with the first enquiries to Ireland in 2013, while the actual decision from the Commission came in 2016. Ireland's Minister of Finance has stated that the country has long since changed its tax rules so that the case only has "historical relevance". This shows that although such court cases can be important and may be worth pursuing, the final and important clarifications lie to a greater extent in a coordinated regulatory framework and clarifications that harmonise tax rules across national borders.

^{[1] https://www.gov.ie/en/speech/361b9-statement-by-minister-chambers-on-judgement-by-the-court-of-justice-of-the-european-union-in-the-apple-state-aid-case/#:~:text=Both%20Ireland%20and%20Apple%20rejected,put%20forward%20by%20the%20Commission.}