EU Appeal of $15 Billion Apple Tax Case Faces Uphill Battle

When the European Commission squared off against Ireland and Apple over 13 billion euros ($15 billion) in alleged illegal tax subsidies, everyone expected the loser of the first round to appeal.

But after the EU’s second-highest court ruled soundly in favor of Apple and Ireland last week, the Commission may face a tough fight if it chooses to appeal.

The decision handed down by the General Court of the EU was “a very, very strong judgment in favor of Apple and Ireland,” said Tom Woods, head of tax and legal at KPMG in Dublin. “It’s not as certain it will be appealed, given how strong the judgment was.”

The decision came as a blow to the marquee case in the Commission’s use of state aid investigations to limit tax competition between EU member states. At stake in a potential appeal is not just a sizable chunk of cash for Apple—currently being held in escrow—but possibly also the Commission’s strategy in cracking down on what it sees as aggressive tax planning.

The Commission will “carefully study the judgment and reflect on possible next steps,” in deciding whether to appeal the case, a spokesperson told Bloomberg Tax.

The Court said the Commission had misinterpreted the facts of the case—misunderstanding Apple’s structure and Irish tax law—in its determination of how much profit should have been attributed to and taxed by Ireland. A loss on factual grounds is harder to appeal than if the Court had decided the case based on points of law.

The General Court’s decisions can be appealed to the Court of Justice within two months. Appeals must be limited to arguments about legal principles, rather than facts of the case.

‘Facts, Not the Law’

“You must appeal on the basis that the court got some point of law wrong,” said Seamus Coffey, a lecturer in the Department of Economics at University College Cork and former chair of the Irish Fiscal Advisory Council. “An initial reading of the ruling suggests that the scope for such an appeal to be successful is limited.”

The Apple case is the largest in a handful of investigations the Commission has launched into the tax rulings governments grant multinationals. The Commission wasn’t challenging the rulings themselves—relatively common agreements that give governments and companies certainty about the company’s tax planning over a period of time—but whether the tax arrangements allowed in the rulings are appropriate.

The Commission had alleged that under the Irish rulings, Apple attributed profits to “head office” entities that “existed only on paper and couldn’t have generated such profits.”

The entities took advantage of a mismatch of tax laws: Irish tax law at the time saw the profits as being subject to U.S. tax, while the U.S. tax code at the time allowed taxes on them to be indefinitely deferred.

The court—weighing in on an appeal from Apple and Ireland of the state aid ruling—said the Commission failed to prove that the profits should have been attributed to Ireland, based on the functions being performed there. Although the court didn’t deny the Commission’s ability to use state aid to challenge tax rulings, it said the Commission misinterpreted the facts of the case.

“Apple was doing very, very little in Ireland, and that is just the way the rules work,” said Stephen Daly, a lecturer in corporate law at Kings College London. “Apple was taxed in Ireland on the basis of the activities it carried out in Ireland.”

The Court actually sided with the Commission on points of law, because it didn’t deny that the Commission had the right to make adjustments to how much profit is attributed under a tax ruling—just that the Commission made that determination incorrectly, said Pierre-Antoine Klethi, a senior associate at Loyens and Loeff in Luxembourg . “What the commission lost on was on the facts, not the law.”

The court’s opinion was a “comprehensive” rejection of the Commission’s argument, Coffey said. The Commission had argued that Apple’s profits should be attributed to a branch the company held in Ireland and that the documentation around the rulings was insufficient. But the court rejected those arguments.

“The general court not only pointed out the incomplete nature of the Commission investigation, but they went one step further and said if you just looked at what was happening on the ground with Apple you would see that there is not actually much happening in Ireland, at all,” Daly said.

Continuing the Fight?

But appeal or not, the EU’s larger goal should be reforming corporate tax rules, said Alex Cobham, chief executive at the Tax Justice Network.

“The problem, ultimately, will remain the same. Whether there’s an appeal or not; whether Apple wins or not: The international corporate tax rules are broken beyond repair,” Cobham said.

The EU regulator has signaled that the setback won’t stop its effort to crack down on corporate tax avoidance.

“We will decide on next steps once we have concluded our assessment of the judgment,” Margrethe Vestager, the EU antitrust chief, said July 16 in public remarks. “But one thing is clear—the fight against aggressive tax planning is a marathon and not a sprint, and it takes place on very hilly ground.”

Vestager said the Commission’s state aid enforcement will continue. “If Member States give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the European Union.”

“The Commission stands fully behind the objective that all companies should pay their fair share of tax,” the Commission spokesperson said. It’s “now looking at various options to deliver on this political commitment.”

The Commission will also explore provisions under the treaties that form the EU “that allow taxation proposals to be adopted by qualified majority rather than unanimity,” the spokesperson said.

Apple didn’t return requests for comment. In a statement released after the court’s ruling last week, the company said it has paid “more than $100 billion in corporate income taxes around the world in the last decade and tens of billions more in other taxes.”

The case, “was not about how much tax we pay, but where we are required to pay it,” the statement said.

The cases are: T-778/16, Ireland v. Commission, T-892/16, Apple Sales International and Apple Operations Europe v. Commission.

-- With assistance from Aoife White and Stephanie Bodoni.