Aditya Rathore

On 15^th July 2020, Apple and Ireland won their appeal against the European Commission report in European Union’s second-highest court, the General Court of the European Union (GCEU), involving a penalty of 14 Billion Euro which is supposed to be one of the largest ever in history to be levied on a corporation. This case was the centrepiece of the EU crackdown on tax arrangements in recent years. European Commission began its investigation into Apple-Irish tax arrangements in 2014, a time when the debate of corporations using tax avoidance tools to pay minimal or no taxes at all was at its pinnacle. After two years of investigation, the Commission in 2016 concluded that Ireland had granted selective economic advantage to Apple Inc. by taxing their profits at a maximum of 1% and even 0.005% in between a period of 10 years and calculated that Apple owed 14.3 Billion Euro in unpaid taxes and penalty to the state of Ireland. Apple appealed against this finding in the General Court of the EU and what is more interesting to note here is that even Ireland appealed, a country who was owed almost 14.3 Billion Euro by a corporation in unpaid taxes.

The debate of corporations using tax avoidance tools to pay minimal or no taxes is very exhaustive and wide, hence the author in this article will focus on this particular judgement and the possible ramifications of the judgement in the near future. The entire dispute can be understood in three phases: Pre-2014, 2014-2016, Post-2016 and the latest Judgement.

Pre-2014

From 1956 to 1980, Ireland attracted foreign companies on an incentive of a zero rate of taxation. Apple came to Ireland under this same policy in 1980 when it opened its production facility in 1980. However, from 1981 companies were required to pay a corporate tax of 10% and this was due to Ireland joining the European Economic Community in 1973. Thereafter in 1991, Apple signed the first advanced pricing tax arrangement with Ireland, also cited by the Commission in its report. These arrangements were made through Apple Operations Europe (AOE) and Apple Sales International (ASI), two Irish subsidiaries of Apple. Apple Operations Europe (AOE) is an Irish-registered holding company which finances the company’s various sub-divisions internally while Apple Sales International is also an Ireland based company which is managed from outside of Ireland and is responsible for all the profits that occur outside the USA. The agreement signed in 1991 was updated with some modifications in 2007 and re-signed between the parties again. These two agreements and the Apple Sales International was the focus of the European Commission’s investigation between their tax arrangements.

2014-2016

A US Senate Committee was formulated to look into the allegations of Apple Inc. sheltering billions in their world-wide profits to tax havens like Ireland. Tim Cook had appeared before the Senate Committee in 2013 and a year later in 2014, the European Commission started investigating the tax arrangement between Apple and Ireland. The investigation lasted for two years, beginning in 2014 and ending in 2016. On 30^th August 2016, the Commission concluded that Ireland’s two tax rulings of 1991 and 2007 by the Irish tax authorities amounted as state aid. This decision was reached upon the four pre-existing criteria of the European Union for state aid, which includes-

1. there has been an intervention by the State or through State resources which can take a variety of forms (e.g. grants, interest and tax reliefs, guarantees, government holdings of all or part of a company, or providing goods and services on preferential terms, etc.);
2. the intervention gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions;
3. competition has been or may be distorted;
4. the intervention is likely to affect trade between the Member States.

The commission in its finding held that because of the tax rulings given by Ireland to Apple, the company effectively paid taxes which do not corresponds with the economic reality in the European Union. The corporate tax rate to be paid by Apple effectively declined from 1% in 2003 to 0.005% in 2014 and this effectively resulted into an unfair advantage for the purposes of Article 107(1) TFEU. Following this finding, the Commission asked Ireland to recover 14 Billion Euro in unpaid taxes plus interest. This fine was calculated based on the ASI accounts and covers only a period from 2004-2014. The fine imposed by Commission is only for these 10 years because in 2015 Apple changed its tax structure and because the commission is only permitted for a full recovery of dues for 10 years from the start of the investigation. The figure concluded by the Commission is based on the existing corporate taxes of Ireland at the rate of 12.5%.

Post-2016 and the Judgement

After the decision of Commission, Ireland and Apple decided to appeal to the European Union General Court, the second-highest court in the EU. Meanwhile, Apple deposited 14.3 Billion Euro into an escrow account which is in effect a holding account. It was set up in 2018 and is being managed by Amundi, BlackRock Investment Management and Goldman Sachs Asset Management. The fund is being used to make low-risk investment decisions and the Irish taxpayer is immune from any losses that might occur. Apple argued in the court that the Commission’s order “defies reality and common sense”. Apple’s main argument was that its two Ireland based companies, AOI and ASI, are not involved in generating intellectual property through R&D. Instead, it was being done in the USA and hence the profits generated should be taxed in the USA itself and not anywhere else. The Irish government represented by its Attorney General had claimed that the Commission through its decision had breached into the sovereignty of Ireland and that the Commission had failed to prove that Ireland had been giving preferential treatment to Apple concerning paying of taxes.

The General Court of European Union in its judgement annulled the decision of the European Commission holding that the Commission failed to prove that Ireland did indeed provide Apple Inc. with an unfair advantage for the purposes of Article 107(1) TFEU. The Court held that the commission was wrong in its conclusion of Irish tax authorities granting ASI and AOE a competitive advantage by not allocating the Apple Group IP licenses to ASI and AOE and hence all of the Apple Group’s income outside America to Ireland. Also, the court held that the Commission failed to prove that the contested 1991 and 2007 rulings were as a result of the voluntary discretion by the Irish tax authorities and hence ruled that ASI and AOE were not granted selective tax advantage.

Conclusion

One thing that can be concretely concluded from this judgement is that taxing digital businesses within the existing tax laws is becoming harder with each passing day. This judgement of the General Court of the EU brings with itself a host of questions and implications for the future tax arrangements between corporations and countries in the EU and elsewhere. It is one of the first judgements to link national tax affairs of a country to its competition policy. However, it is interesting to note that the case was raised by the Competition Commissioner and not the Taxation Commissioner of EC. The EC had claimed that Apple did not break any law but instead concluded that the deal between the two was illegal because it provided an unfair competitive advantage to Apple and this, in turn, amounted to state aid. This case also raises a very pertinent question for European Union and member countries: who should be deciding how corporations are to be treated in Europe, the EU or the member states? With the General Court awarding it in the favour of Apple and Ireland, it has become clear that member states do have considerable independent power within the Union. Furthermore, this decision is to give a big blow to the EU’s attempt to have a harmonised corporate tax rate across all the member states. Even countries like the USA and Canada have not been able to achieve uniform tax rates across all their states and this judgement will make it all the more difficult to achieve.

This case has added to the existing ongoing debate of the tax avoidance strategies employed by the multinationals to save their profits from being taxed. The court has merely accepted that no law was broken but it certainly does not mean that the tax avoidance strategies used by the multinationals are acceptable. Both the parties still have two months and ten days to appeal the case to the highest court, the European Court of Justice. It is now to be seen whether this case will go in appeal or not.

Aditya is a law student at the National Law University, Odisha.

Picture Credits: 9to5mac.com

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