Apple’s grounds for appealing the EU Commission’s State aid decision against Ireland were published today in summary form, revealing some overlap with Ireland’s arguments but also some interesting divergences.
The summary, published in the Official Journal of the European Union, reveals that Apple entered its appeal before the General Court of the EU with the assistance of a mere six lawyers, compared to the 11 employed by Ireland. That said, the summary of the Apple appeal appears somewhat more succinct than its Irish equivalent.
Apple is being advised by a team from Freshfields in the Netherlands and Germany and by Monkton Chambers in London.
To borrow from a famous Sherlock Holmes mystery, the curious incident of the dog in the night time is that there is a lack of any barking by Irish tax lawyers.
This makes the first ground of appeal, that the Commission erred in its interpretation of Irish tax law, a little interesting. One might have expected that such a plea required some expertise in Irish tax law.
Irish law & Apple accounts
The Apple appeal on this ground is notably less detailed than the comparable ground of appeal as lodged by Ireland. While both Ireland and Apple concentrate on s25 of the Irish Taxes Consolidation Act, the EU Commission, in para 70 of its letter to Ireland, made express reference to s76A.
S25 charges to Irish corporation tax the profits of an Irish branch of a foreign company, but s76A mandates that those profits be calculated from a set of accounts produced in accordance with Irish GAAP or IFRS.
Ireland told the Commission that such accounts were not available and had not been produced, despite the fact that a 1991 agreement with Revenue required Apple to produce such accounts, and despite s76A mandating the production of such accounts since 2005, at the latest.
This is the crucial point from which all other arguments flow. Irish tax law was not complied with here. How far the final calculation strayed from what was required by Irish tax law, this author cannot say. But stray it certainly did, and in a manner the significance of which was not acknowledged by either Apple or Ireland.
Since Ireland owes a duty of “sincere co-operation” to the Commission in these proceedings, unlike Apple, which can claim attorney-client privilege and can enjoy a traditional adversarial relationship, it is puzzling that Ireland glossed over the significance of the production of the accounts, since that is the determinative requirement under Irish tax law.
Transfer pricing, Irish subs & US profits
Apple’s second ground of appeal is that the arm’s length principal forms no part of State aid law. The Commission addressed this in detail in its letter to Ireland, relying on the Belgium Co-Ordination Centres case (cases C-182/03 and C-217/03), so it will be interesting to note how Apple and Ireland plan to distinguish that case law, which will require significantly more than the bullet point which we have seen today.
The third and fourth grounds of appeal are interesting. For the first time, Apple has expressly attributed the profits of its Irish subsidiaries to the United States.
To date, Apple has referred to the intellectual property being developed in the US under the cost sharing arrangement, but here they are talking about the commercialization of the IP happening in the US.
This would tend to indicate an argument that the US is driving sales, negotiating contracts, etc., for the rest of the world. Apple must have a high degree of comfort that the IRS is okay with this argument.
The problem is, though, that if the IRS is genuinely okay with a non-US company generating profits in the US without paying tax there, why was a stateless Irish company required at all?
The fourth, fifth, and sixth grounds of appeal deal with what the correct transfer pricing ought to have been, if the arm’s length standard applied.
The sixth ground of appeal suggests that Apple believes that other taxpayers were taxed in the same way and thus there can be no selectivity. Since Irish Revenue cannot share the details of the taxation of other taxpayers with Apple, Ireland can make this argument but Apple simply cannot.
Apple’s ninth ground of appeal, that the Commission was wrong to compare Apple to other taxpayers because the facts are different, is worrying, indicating that Apple has had some visibility to the facts of those other taxpayers, in breach of Irish Revenue rules ensuring taxpayer confidentiality.
In its seventh ground of appeal, Apple argues that there was procedural unfairness on the part of the Commission, which warrants the nullification of the decision. The risk here is that Ireland may have failed in its duty to sincerely cooperate with the Commission, indeed, may be continuing to do so, and, as such, the issue rests with Ireland, and not the Commission.
For good measure, Apple rounds off with pleas that the Commission decision was retroactive (as all State aid decisions are), not impartial (hardly surprising), in breach of Apple’s fundamental human rights, and included an unforeseeable interpretation of State aid law (not if you had read the Commission’s website from 1996).
Amount versus existence of aid
It looks like Apple is appealing every possible point, and while there is some overlap between Apple and Ireland’s grounds for appeal, there are interesting differences.
Ireland concentrates far more on Irish State sovereignty in the field of direct taxation, while Apple, interestingly, concentrates far more heavily on what happens in the US.
While one assumes that Apple must have a high degree of confidence that the IRS will not move to tax this income, one wonders whether such provocative statements of fact were entirely necessary.
If the arguments would have resulted in materially different branch accounts, on which this author can offer no view, that could speak to the quantum of any aid, but not to the existence of the aid.
However, the existence of the aid and not the quantum of the aid is what is being litigated here, since the quantum of any aid can only be determined in domestic Irish tax proceedings, many of which are still held in private.