EU court reaches surprising conclusions in Apple state aid case

By Aisling Donohue, Partner, Andersen, Dublin

In a decision that took much of the tax world by surprise, the General Court of the European Union today quashed a decision by the European Commission that Ireland had granted Apple an illegal State aid. A Commission decision had concluded that, on account of the aid, Apple owed Ireland €13bn in additional taxes.

The court dismissed many of the initial objections made by both Ireland and Apple as to whether the Commission was acting ultra vires its powers, and whether it could rely on OECD guidance in terms of determining what the taxable profits ought to have been.

From the Commission viewpoint, these conclusions will have come as a relief. The court confirmed the competence of the Commission to investigate tax laws and tax rulings under State aid law and to rely on the OECD arms’ length standard to support that investigation.

From the Commission viewpoint, these conclusions will have come as a relief. The court confirmed the competence of the Commission to investigate tax laws and tax rulings under State aid law and to rely on the OECD arms’ length standard to support that investigation

However, the General Court crucially held that as a matter of Irish tax law, Apple’s IP belonged in Cupertino and not in Ireland, and as a result, the taxable profits of the Irish branches should have reflected the activities in those branches, and not the entire activity of the multinational group.

Because the EU Commission had argued that the absence of staff and tangible assets outside of Ireland indicated that the IP must have been assets of the branches, they failed to consider what Irish tax may have been due had normal transfer pricing rules been followed to calculate the taxable profits of those branches excluding the IP.

While the court expressed sympathy with the Commission that the Irish Revenue agreements with Apple lacked detail and rigour, because the Commission didn’t 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 they failed to satisfy it. 

Somewhat amusingly, the lack of documentary evidence by Irish Revenue led the General Court to assume that un-minuted meetings may have considered the matters in more detail and corrected the procedural failings in the documentary evidence.  So, the failure of Irish Revenue to provide the minutes of the meetings may have assisted Apple and Ireland in this case.

Because the Commission failed on evidentiary grounds, it is difficult to see an appeal to the Court of Justice as such an appeal would be required to be on a point of law.

Because the Commission failed on evidentiary grounds, it is difficult to see an appeal to the Court of Justice as such an appeal would be required to be on a point of law.

It may be possible for the Commission to assert that the General Court was incorrect in determining that the exclusion of the IP assets from the branches was incorrect as a matter of law and, on that basis, an appeal might be possible.

It may also be possible for the Commission to initiate new proceedings for some of the years at issue using the guidance delivered by the court, but if they accept that the IP should be excluded then it is unlikely that any new determination of aid would be anything close to €13bn.

– Aisling Donohue is a Partner at Andersen, Dublin.