INSIGHT: The Apple Case Decision in Perspective

The General Court of the European Union (GC) recently issued its judgment on the Apple case on July 15, 2020 (Case T-778/16, Ireland v European Commission, and Case T-892/16, Apple Sales International and Apple Operations Europe v Commission).

The General Court’s Decision

At issue were European Commission decisions according to which the tax rulings issued by Ireland to the Apple Group constituted state aid.

The tax rulings in question were issued on January 29, 1991 and on May 23, 2007, in favor of two Irish companies in the Apple group (Apple Sales International and Apple Operations Europe, “ASI” and “AOE” respectively). In particular, the tax rulings approved the methods used by ASI and AOE to determine their taxable profits in Ireland.

According to the Commission, through those decisions Ireland granted Apple a selective tax treatment, which constitutes illegal state aid under EU law.

In this respect, the Commission held that the tax decisions artificially transferred the tax paid by Apple in Ireland since 1991 and in addition had given that company a significant advantage in relation to other companies that were subject to Irish domestic tax legislation.

According to the Commission’s estimate, Ireland granted Apple an illegal tax advantage of 13 billion euros ($15.3 billion).

However, the GC decided, as it also did in the Starbucks case, to annul the Commission decision.

In its statement of the reasons for the annulment decision, the GC starts by saying that the Commission incorrectly concluded that Ireland had granted ASI and AOE an advantage. According to the GC, the Commission should have demonstrated that the profits that allegedly were excluded from taxation through the issuance of tax rulings constituted income from the activities actually carried out by the Irish branches.

The GC also considered that the Commission was unable to demonstrate that the choice to use the operating costs of Irish branches as an indicator of the level of profit for the purposes of transfer pricing was inappropriate and led to the concession of an advantage.

Finally, the GC concluded that the Commission was unable to demonstrate that the Irish tax authorities exercised a discretion which resulted in more favorable treatment given to ASI and AOE, compared to other companies in a similar situation.

The “Shock Waves”

The Commission’s position regarding the issue of tax rulings by the tax administrations of several member states, in specific cases and to certain taxpayers—in particular multinationals—has raised many doubts and uncertainties in the field of taxation.

The fact that the Commission started, in particular from its 2016 Communication, to consider the possibility that such tax rulings could constitute indirect vehicles for the granting of state aid, also weakened one of the few mechanisms that allowed taxpayers to “link” the tax administration to one of the several possible interpretations of the tax law. This connection that tax rulings promote seems desirable in an area of law that is constantly changing, and that includes rules and decisions which are increasingly complex. These are rules and decisions that often try to adapt what is laid down in EU directives and Organization for Economic Co-operation and Development (OECD) guidelines to the idiosyncrasies of each legal system, so that this new attitude by the European Commission will gradually cause a reputational crisis in these mechanisms which introduce legal certainty and security.

The Portuguese Perspective

In Portugal, taxpayers also have the possibility of obtaining a prior binding interpretation from the tax administration regarding a certain tax rule or regime applicable to their specific situation. The request for binding information is the closest provision to a tax ruling in the Portuguese legal system and represents the mechanism with the widest application, able to be presented by any taxpayer and to have any tax question as its object.

Taxpayers can also obtain legal certainty regarding the tax administration’s position through the conclusion of advance pricing agreements (APAs) and tax contracts. APAs are established in the corporate income tax code and can be unilateral, bilateral or multilateral, depending on the number of states with which the taxpayer intends to enter into an agreement and with which it “negotiates,” and have a maximum duration of three years. APAs bind the tax authorities and taxpayers, to the extent that there are no significant changes to the applicable tax law, to the economic and operational circumstances and to the facts and assumptions underlying their conclusion.

Tax contracts are regulated by the general tax law and are also entered into between the tax administration and taxpayer. As a rule, they were implemented as a mechanism to grant tax benefits or establish the level of incidence of a specific tax, or of a specific tax regime, and are also binding for both parties.

Although APAs represent the most significant risk in practice of constituting state aid, at this time their application in Portugal is still very limited. As far as it is possible to determine based on information available from an official source, in 2016 there were only four APAs in force.

Request for Binding Information

With regard to preliminary binding information decisions, it should be noted that they bind the tax authorities, but not the taxpayer. In other words, the tax administration cannot act contrary to the content of the information issued that is favorable to the applicant; however, it may act in disagreement with information that is unfavorable to it. The taxpayer can also challenge an act or decision that has been carried out by the tax administration in disagreement with the interpretation previously conveyed in binding information.

The tax administration is bound to make the information issued available on its website within 30 days. The publishing of the decisions and information, in addition to being a guarantee of transparency, enables taxpayers other than those who submitted the request for binding information to be aware of the most recent position of the tax administration regarding a certain norm or tax regime that interests them, or that is applicable to them.

Other taxpayers can derive a certain degree of legal certainty from this, particularly as they can rely on the interpretation provided by the tax administration to an individual taxpayer to support their own position. As a recent example, in the decision handed down by the Arbitral Tax Court (case no. 132/2019-T, dated March 3, 2020), it was held that the claim of a taxpayer grounded on the existence of a uniform and repeated interpretation by the tax administration and conveyed in various binding information was capable of creating a legitimate expectation as to the interpretation and application of this same standard. This decision confirms that the legal certainty provided by the mechanism for binding information requests can intersect and apply to a whole range of taxpayers, not only those taxpayers who have approached the tax administration.

This distinguishes the requests for binding information from some of the tax ruling regimes that are in force in other legal systems and which are based on the confidentiality of the decisions issued, since in the Portuguese legal system the requests for binding information are mandatory. This may be one of the reasons why Portuguese requests for binding information may “escape” the label of potential indirect grant of state aid—because they are public and can be invoked by taxpayers other than just those who requested the information.

Another relevant issue relates to the disclosure that the taxpayer makes of its actual situation to the tax administration. Most taxpayers do have some resistance to formulating binding requests for information, given the voluntary exposure that they will make of their specific tax situation. This resistance intensified with the entry into force of the rules regarding the exchange of information between states.

Portugal may request and provide tax information deemed relevant for the transfer pricing audit, based on:

• Council Directive 2014/107/EU, regarding the automatic and mandatory exchange of information in tax matters, amending “DAC1";
• the second Directive 2014/107/EU2 on administrative cooperation in tax matters (“DAC2”);
• the double taxation conventions concluded under the OECD Model Convention;
• specific agreements concluded for the Exchange of Fisheries Information (TIEA); and
• the Convention on Mutual Administrative Assistance in Tax Matters.

In particular, with regard to the DAC2 framework, the Portuguese tax administration can transmit information related to transfer pricing to the tax administration of other member states, and also exchange other information that may be helpful to the competent tax administrations of other member states. The tax administration should also spontaneously exchange information with another member state whenever it has reason to assume that there may be a loss of tax in the other member state or have reason to assume that “tax savings” may result from artificial profit transfers within groups of companies.

However, there are no public statistics in Portugal showing that any of the mechanisms for the exchange of information was triggered in the context of transfer pricing so the question of whether the tax administration verified or confirmed the fiscal result in other states cannot be answered satisfactorily. It is this uncertainty regarding the exchange of information between states that can also contribute, together with the Commission’s position on state aid in tax matters, to the weakening of binding information requests and other instruments available to achieve greater legal certainty in tax matters.

Bearing in mind the Commission’s recent decisions on tax rulings as state aid, it should however be noted that, as a result of prior binding information, a more favorable or preferential regime will be difficult to apply. It means that it will not easily be through a request for binding information that the application of a lower tax rate will be determined, or a tax exemption granted, because that will result from the applicable legal regime.

Tax Amnesties

In this context it is also possible to consider tax amnesties as a mechanism also referred to by the Commission as being capable of constituting illegal state aid.

According to the Commission, for tax amnesties to be compatible with state aid rules, it is necessary that:

• these regimes apply to any company, regardless of the sector, size, or pending tax debts;
• these regimes do not imply any selectivity in favor of a certain company or sector; and
• there is no intervention by the tax administration in the concession or in the intensity of the measure it applies.

At least in the last two decades, the amnesties granted by Portugal have proved to comply with these conditions and, to that extent, do not constitute state aid. Most recently, four programs, known as “debt reduction” (but true “fiscal amnesties”), were approved in 2005, 2010, 2012 and 2016.

Globally, these amnesties have led to incentives to tax regularization of defaulting taxpayers, through the pardoning of interest, costs or fines associated with non-compliance. The amnesties were therefore susceptible of being applied for and invoked by taxpayers who found themselves in the situations provided for by the respective legal norms, creating no circumstances of favoritism or selectivity, nor of distortion of competition.

It therefore seems difficult for the Commission to be able to establish a procedure identical to those with reference to Portugal, insofar as requests for binding information, provided for in Portuguese law, do not have the same characteristics as the other tax rulings hitherto released.

Conclusion

It is possible to see a tendency on the part of the Commission to use state aid rules as an alternative, perhaps more effective, to other rules to combat tax evasion and erosion of member states’ tax revenues.

These fiscal provisions as they stand show the difficulties in ensuring that multinational groups are taxed in the same way as independent companies, due to the EU unanimity requirement in such tax matters.

Part of the strength of the state aid rules stems—in addition to the possible liability of managers and consultants—from their potential effects, such as the imposition of recovery of the benefit illegally granted and the retroactivity of this tax extending up to 10 years, which is a longer period than normally applicable in most member states.

In other words, the Commission has made efforts, through the application of the state aid rules, already solidified in the different legal systems, to obtain the results that it would like to be able to achieve through the application of rules and guidelines of another nature, and which are established by the OECD, the UN or the EU, to combat tax fraud and evasion.

This trend is particularly evident in the Apple case, where the Commission qualified the tax ruling issued by Ireland in 1991 (and renewed in 2007) as an undue advantage under state aid rules, since it allowed Apple a more advantageous tax regime; the Commission having determined the recovery of the tax amount that would be due (with interest) if there had been no illegally granted benefit (approximately 13 billion euros).

Without admitting the difficulty of applying tax rules—such as the general anti-abuse clause or those on transfer prices—the European Commission resorted to the measures envisaged to regulate state aid to achieve what it was not possible to achieve through the application of the tax law.

From this perspective, the decision of the GC, as in the Starbucks case, may provide a kind of “warning” to the Commission, in order to discourage the use of the rules on state aid as a way of combating tax evasion without justified and well-supported evidence.

Strictly speaking, if the GC chose to support the position taken by the Commission, by creating more “precedents” it would be making possible the use of the state aid rules to combat tax evasion, allowing this body itself to replace member states in their own competence. Such a reality would strip the tax rules created by the OECD BEPS plan of their usefulness, and become a “crutch” of the EU to replace the fundamental role of the 27 countries in the struggle to maintain their tax bases, which has been moving very slowly.

Rogério Fernandes Ferreira is a Partner with RFF & Associados.

He may be contacted at: rogeriofernandesferreira@rffadvogados.pt

The author would like to thank the RFF lawyers who contributed to this article.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.