The General Court of the European Union annulled, on 15 July, the contested decision taken by the Commission regarding the Irish tax rulings in favour of US tech giant Apple because it held that the Commission had failed to show to the requisite legal standard that there was an advantage for the purposes of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).
In Ireland v Commission (Case T-778/16) and Apple Sales International and Apple Operations Europe v Commission (Case T-892/16), the Commission had adopted a decision in 2016 concerning two tax rulings issued by the Irish Revenue, on 29 January 1991 and 23 May 2007, in favour of Apple Sales International (ASI) and Apple Operations Europe (AOE), which were companies incorporated in Ireland but not tax resident in Ireland.
The contested tax rulings endorsed the methods used by ASI and AOE to determine their chargeable profit in Ireland, relating to the trading activity of their respective Irish branches. The 1991 tax ruling remained in force until 2007, when it was replaced by the 2007 tax ruling. The 2007 tax ruling then remained in force until Apple implemented a new business structure in Ireland in 2014.
The Commission decided that the tax rulings in question constituted State aid unlawfully put into effect by Ireland that was incompatible with the internal market. According to its calculations, Ireland had granted Apple €13 billion in unlawful tax advantages, which it demanded as recovery of the aid in question.
The General Court endorsed the Commission’s assessments relating to normal taxation under the applicable Irish tax law, in particular having regard to the tools developed within the OECD, such as the arm’s length principle, in order to check whether the level of chargeable profits endorsed by the Irish tax authorities corresponded to that which would have been obtained under market conditions.
However, it considered that the Commission had incorrectly concluded, in its primary line of reasoning, that the Irish tax authorities had granted ASI and AOE an advantage as a result of not having allocated the Apple Group intellectual property licences held by ASI and AOE, and, consequently, all of ASI and AOE’s trading income, obtained from the Apple Group’s sales outside North and South America, to their Irish branches.
According to the General Court, the Commission should have shown that this income represented the value of the activities actually carried out by the Irish branches themselves, in respect of the activities and functions actually performed by the Irish branches of ASI and AOE on the one hand, and the strategic decisions taken and implemented outside those branches on the other.
In addition, the General Court considered that the Commission had not succeeded in demonstrating, in its subsidiary line of reasoning, the methodological errors in the contested tax rulings that would have led to a reduction in ASI and AOE’s chargeable profits in Ireland. The Court said it regretted the incomplete and occasionally inconsistent nature of the contested tax rulings, but the defects identified by the Commission were not, in themselves, sufficient to prove the existence of an advantage for the purposes of Article 107(1) TFEU.
Furthermore, the General Court considered that the Commission had not proved, in its alternative line of reasoning, that the contested tax rulings were the result of discretion exercised by the Irish tax authorities and that, accordingly, ASI and AOE had been granted a selective advantage.
While the court expressed sympathy with the Commission that the Irish Revenue agreements with Apple lacked detail and rigour, because the Commission did not produce evidence of the appropriate counterfactual, the procedural failings on the part of Irish Revenue were insufficient in and of themselves to evidence an aid.
The magnitude of the procedural failings by Irish Revenue may have been highly indicative of aid; however, the burden of proof rested with the Commission, and it failed to satisfy it.
Commission Executive Vice-President Margrethe Vestager said in a statement: “We will carefully study the judgment and reflect on possible next steps. The Commission’s decision concerned two tax rulings issued by Ireland to Apple, which determined the taxable profit of two Irish Apple subsidiaries in Ireland between 1991 and 2015. As a result of the rulings, in 2011, for example, Apple’s Irish subsidiary recorded European profits of US$ 22 billion (c.a. €16 billion) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland.
“The Commission stands fully behind the objective that all companies should pay their fair share of tax. If Member States give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the EU … 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.”
The Irish Department of Finance said in a statement: “Ireland has always been clear that there was no special treatment provided to the two Apple companies – ASI and AOE. The correct amount of Irish tax was charged taxation in line with normal Irish taxation rules. Ireland granted no state aid and the decision today from the Court supports that view.”