Ireland’s legal arguments in Apple State aid tax case published

by Mary Cosgrove

The Irish government’s grounds for appealing the European Commission’s €13bn State aid decision in the Apple case were made public today, showing that despite the large legal fees incurred to date, Ireland does not have a strong case.

The Irish government’s summary of legal proceedings, published in the Official Journal of the European Union, reveals that Ireland has advanced nine grounds for its appeal of the Apple case before the European Court of Justice. These arguments can be categorised as substantive, procedural, and political.

The Apple dispute

The bulk of the €13bn Apple dispute concerns tax rulings, issued by Ireland to Apple in 1991 and 2007, which provided that income related to intellectual property rights held by Apple Sales International (ASI), an Irish registered non-resident company, were not taxable in Ireland. The theory advanced by Apple was that the rights were actually held by a “head office” outside of Ireland.

In the EU Commission’s view, though, these amounts were taxable in Ireland as there was no “head office” capable of managing the intellectual property rights. Thus, the income must be attributed to the Irish branch and the rulings were State aid, the Commission said. Alternatively, the Commission argued that the rulings understated profits properly attributable to activities carried out in Ireland.

Ireland’s arguments

The document released today reveals that in its appeal, Ireland will argue that no advantage was granted to Apple because Irish law was correctly applied.

Ireland maintains that only the Irish branch profits of ASI (and of a second, similarly structured subsidiary, Apple Operations Europe (AOE)), could be taxed under Irish legislation because no provision in Irish law taxes the intellectual property income of nonresidents if it is not held directly by an Irish branch.

Ireland also argues that the arm’s length principle was not applicable in Ireland under Irish law at the time and, in any case, the reports submitted by Apple to the Commission had illustrated that the branch profits were appropriate under that principle.

Procedural arguments

Ireland also alleges that the Commission’s investigation contained several procedural irregularities.

Ireland claims it did not have sufficient opportunity to reply to the findings, that the Commission did not act “impartially,” that the Commission’s finding “could not have been foreseen” at the time the contested rulings were issued, and that the decision was not properly explained.

Further, the Irish government argues that the Commission over-reached in relation to its powers for political reasons. It is claimed that the Commission is attempting to “unilaterally . . .  substitute its own view of the geographic scope and extent of the Member State’s tax jurisdiction.”

Further, Ireland argues that State aid rules “cannot remedy mismatches between tax systems on a global level.”

Ireland’s case

It was revealed last week that the Irish government has spent €1.8m to date defending this case. It would appear that much of this is on legal fees as the appeal document lists 11 lawyers representing Ireland.

Despite the team of lawyers on the case, this official document does not suggest that Ireland has a particularly strong case.

Each of the points raised had already been addressed in the Commission’s 130-page decision. As the appellant in this case, the onus is now on the Irish government to prove that the Commission was incorrect, and that does not seem to have been accomplished.

In my view, the procedural and political arguments will hold little sway with the Court.

In its 1998 “Notice on the application of the State aid rules to measures relating to direct business taxation,” the Commission had clearly set out the ways in which tax measures, including tax rulings, could be deemed to be State aid.

Even if the decision to pursue the Apple rulings had a political element, so long as the State aid regulations apply, the Court will consider the case on its merits.

Substantive arguments

In respect of the substantive arguments, Ireland’s insistence that the arm’s length principle does not apply is difficult to justify as a 2010 document produced by the Irish Revenue Commissioners on the introduction of transfer pricing legislation declares that “the principle of arm’s length pricing has been a part of Irish tax law for many years.”

It will be very difficult for Ireland to prove that the taxable profits of the Irish branches complied with this principle when the Commission found that there was no scientific method used to determine profits at the time of the ruling.

In addition, the Commission found that a report prepared by PwC and submitted by Ireland proved that ASI’s branch profits were twenty times lower than would be expected (albeit, after the Commission adjusted the PwC calculations to omit comparable business that had gone bust).

IP income attributed to branches

This leaves one main area of argument – the question of whether or not the intellectual property rights income could and should be attributed to the Irish branch and therefore should be taxed in Ireland.

The Commission’s argument hinges on the “head office” not having the capacity to manage these rights, while Ireland appears to challenge this on two fronts: the first being that even if a “head office” has no resources, so long as the rights are not managed by the Irish branch, they are not taxable, and second, the intellectual property rights were managed by Apple Inc.

It remains to be seen if the appeal lodged by ASI and AOE will expand or just repeat these grounds of appeal.