European Commission vs Apple and Ireland (Appeal)

PLEASE READ THE FULL JUDGMENT HERE Dr Daniel N Erasmus generated this summary, which was also published on his website, www.taxriskmanagement.com.YOU CAN ALSO READ HIS SUMMARY OF THE CASE LEADING UP TO THIS HERE

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Case Information

• Court: Court of Justice of the European Union (CJEU), Grand Chamber
• Case No: C-465/20 P
• Applicant: European Commission
• Defendant: Ireland, Apple Sales International Ltd, Apple Operations International Ltd, Apple Operations Europe Ltd
• Judgment Date: 10 September 2024

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The CJEU’s judgment of 10 September 2024 overturned the General Court’s previous ruling, confirming that Ireland’s tax rulings to Apple Sales International (ASI) and Apple Operations International (AOI) provided an unfair advantage. These rulings allowed Apple’s subsidiaries to reduce their tax liabilities in Ireland through inappropriate transfer pricing mechanisms. The court ordered the recovery of unpaid taxes, aligning with the European Commission’s position that these arrangements constituted unlawful state aid under Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).

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Some Historical Context – The Cases Leading Up to the CJEU Decision

Background of Apple’s Tax Structure:

Apple’s tax arrangements in Ireland have been under scrutiny since the early 2010s, primarily due to allegations that its subsidiaries, Apple Sales International (ASI) and Apple Operations International (AOI), benefited from tax rulingsA tax ruling is a formal decision provided by a tax authority, clarifying how specific tax laws and regulations apply to an individual taxpayer or a corporate entity in particular circumstances. Often sought before a significant financial transaction or investment, tax rulings offer legal certainty by outlining the tax implications and obligations in advance. Such rulings are pivotal for multinational... granted by the Irish government. These arrangements allowed Apple to allocate profits generated by the sale of intellectual property (IP) rights to the Irish branches of ASI and AOI. However, the profits attributed to these branches were disproportionately low, considering the economic activities carried out. Most of the profits were allocated to “head offices” of these entities, which existed only on paper and had no real employees or physical presence, leading to minimal taxation. This tax setup became the subject of an in-depth investigation by the European Commission, which claimed that Apple’s tax arrangement constituted illegal state aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses... under EU law because it gave Apple a selective advantage not available to other companies operating in Ireland. This investigation culminated in a landmark ruling by the Commission in 2016, which set the stage for the series of legal battles that followed.

European Commission Decision (2016)

The European Commission, led by Commissioner Margrethe Vestager, concluded in August 2016 that Apple had benefited from a series of favorable tax rulingsA tax ruling is a formal decision provided by a tax authority, clarifying how specific tax laws and regulations apply to an individual taxpayer or a corporate entity in particular circumstances. Often sought before a significant financial transaction or investment, tax rulings offer legal certainty by outlining the tax implications and obligations in advance. Such rulings are pivotal for multinational... issued by Ireland, reducing its effective corporate tax rateThe Effective Tax Rate (ETR) measures the percentage of a company’s pre-tax profits that is paid as tax. Unlike statutory tax rates, which are legally prescribed by a jurisdiction, the ETR provides a more accurate picture of a company’s actual tax burden by incorporating various deductions, credits, and exemptions available. It is a crucial metric for assessing a company’s tax... to less than 1% on its European profits for several years. The Commission’s decision was based on the fact that Apple’s tax structure allowed the company to allocate most of its profits to its Irish-based entities but only pay a fraction of the taxes that other companies operating under normal conditions would have paid. The key issue was whether these tax arrangements violated the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the..., which ensures that transactions between related companies (i.e., within the same group) should be priced as if they were between independent entities operating at market conditions. The Commission argued that the Irish tax rulingsA tax ruling is a formal decision provided by a tax authority, clarifying how specific tax laws and regulations apply to an individual taxpayer or a corporate entity in particular circumstances. Often sought before a significant financial transaction or investment, tax rulings offer legal certainty by outlining the tax implications and obligations in advance. Such rulings are pivotal for multinational... issued in 1991 and 2007 were not consistent with the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the..., and, therefore, Ireland had granted Apple an unfair competitive advantage by lowering its tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure.... The ruling ordered Ireland to recover €13 billion (approximately $14.5 billion) in unpaid taxes from Apple, representing the tax Apple should have paid under normal circumstances.

General Court Ruling (2020)

In July 2020, the General Court of the European Union (GCEU) overturned the Commission’s decision. The GCEU ruled in favor of Apple and Ireland, concluding that the Commission had failed to demonstrate that Apple had received a selective advantage through its tax arrangements. The General Court emphasized that the Commission did not adequately prove that the Irish tax authorities had granted Apple an advantage by departing from the normal application of the Irish tax lawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... The General Court’s judgment was based on the following key points:

• Insufficient evidence: The court found that the Commission did not provide enough evidence to substantiate its claim that Apple’s tax arrangements violated the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the....
• Application of Irish tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public...: The General Court stated that Ireland’s tax lawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public..., particularly Section 25 of the Irish Taxes Consolidation Act (TCA) 1997, were applied correctly, and Apple’s allocation of profits to its Irish branches was consistent with the law as written.
• Economic substance: The court accepted that Apple’s head offices, although minimal in terms of employees and physical presence, did exercise control over the IP rights and had a legitimate basis for the allocation of profits.

This ruling was a significant victory for Apple and Ireland, but it did not mark the end of the dispute. The Commission, maintaining its stance that the tax rulings constituted illegal state aid, decided to appeal the General Court’s decision to the Court of Justice of the European Union (CJEU).

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Court of Justice of the European Union (CJEU) Appeal (2024)

Key Points of the Judgment:

Background

This case arose from an investigation by the European Commission into tax rulings issued by Ireland that allegedly allowed Apple to pay significantly reduced taxes. Apple’s subsidiaries, ASI and AOI, are incorporated in Ireland but are not tax-resident in any jurisdiction. The European Commission’s investigation concluded that Apple’s subsidiaries were granted selective tax advantages, which distorted competition in the EU.

Core Dispute

The core issue was whether the tax rulings issued by Ireland to Apple allowed the multinational to avoid paying taxes that would otherwise have been owed if the correct application of the arm’s length principle had been enforced. The European Commission argued that the profits allocated to Apple’s Irish branches were not in line with market conditions.

Court Findings

The CJEU found that Ireland’s tax rulings constituted illegal state aid. The court determined that the tax treatment given to Apple did not align with the normal taxation rules applicable to other companies operating in Ireland. The selective treatment of Apple amounted to a derogation from the arm’s length principle, violating Article 107(1) TFEU.

Outcome

The CJEU set aside the General Court’s earlier judgment that had annulled the European Commission’s decision. It upheld the European Commission’s finding that Ireland’s tax rulings provided Apple with an unfair tax advantage, and the aid must be recovered.

Transfer Pricing Method Used

In this case, the arm’s length principle was central. The Commission argued that the profits attributed to Apple’s Irish branches were inconsistent with market conditions, leading to a reduced tax liability for the company. The failure to adhere to the arm’s length principle was a critical factor in classifying the tax arrangements as unlawful state aid.

Major Issues and Areas of Contention

1. Selective Tax Advantages: The core argument was whether the tax rulingsA tax ruling is a formal decision provided by a tax authority, clarifying how specific tax laws and regulations apply to an individual taxpayer or a corporate entity in particular circumstances. Often sought before a significant financial transaction or investment, tax rulings offer legal certainty by outlining the tax implications and obligations in advance. Such rulings are pivotal for multinational... gave Apple selective advantages unavailable to other companies, thus violating EU competition laws.
2. Arm’s Length PrincipleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the...: A key contention was whether Apple’s transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... complied with the arm’s length principle, which governs how profits should be allocated within a multinational group.
3. Territorial Taxation: Apple and Ireland argued that the profits attributed to ASI and AOI were consistent with Irish law. However, the European Commission argued that the Irish branches were allocated an artificially low level of profit, leading to tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities....

Was This Decision Expected or Controversial?

This decision was controversial. The case is part of a broader EU crackdown on tax avoidance strategies employed by multinational corporations. Many expected the CJEU to follow the General Court’s judgment, which had previously favoured Apple and Ireland. However, the decision to side with the European Commission highlights the importance the EU places on combating aggressive tax planning, even when compliant with domestic laws.

Significance for Multinational Enterprises (MNEs):

The judgment reinforces that MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... must adhere to the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the... when engaging in intra-group transactions. It demonstrates that the EU will scrutinize tax rulings and transfer pricing arrangements that appear to provide selective tax advantages. For multinationals, this case underlines the need to ensure that transfer pricing methodologies are robust and defensible in light of EU state aid rules.

Significance for Revenue Services:

For tax authorities, this decision underscores the necessity to ensure that tax rulings and agreements with MNEs comply with international norms, particularly the arm’s length principle. Revenue services must be vigilant in assessing whether transfer pricing agreements are in line with market conditions to avoid the risk of state aid investigations and recoveries.

Importance for MNEs to Engage Transfer Pricing Experts:

This case highlights the critical importance for MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... to work with transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... experts to ensure compliance with international and local tax lawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... Engaging specialists helps in structuring tax-efficient operations that withstand scrutiny under EU state aidState Aid refers to financial assistance provided by public bodies, typically governments, which can selectively benefit certain businesses or industries. This concept is critical in European Union (EU) law, where such support can distort competition and trade within the single market. State Aid, regulated under EU law, aims to ensure fair competition and prevent Member States from favouring local businesses... rules and the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the....