Apple-EU Clash Over $14 Billion in Back Taxes, Explained

Apple Inc. will have to pay a $14 billion tax bill to Ireland after the EU’s top court ruled that the country’s approval of beneficial tax positions dating back decades amount to illegal state aid—preferential tax treatment given to a company over others.

The European Court of Justice on Tuesday sided with the European Commission after an eight-year fight over Ireland’s tax treatment of two Apple affiliates. It ruled that a lower court win for Apple should be overturned because judges incorrectly decided that the commission’s regulators had made mistakes in their assessment.

The ruling is a boost for EU antitrust chief Margrethe Vestager, whose mandate in Brussels is about to end after two terms.

How did we get here?

According to EU law, countries aren’t allowed to give companies preferential treatment—state aid—over other businesses. This can include a tax authority approving one company’s highly beneficial tax position over another.

The Apple-EU case is just one high-profile legal battle in a series of dust-ups between multinationals and the Commission, the executive branch of the European Union.

The European Commission began several investigations in 2013 into tax rulings that countries granted to multinationals, to determine whether they received unfair, select advantages from the countries. Fiat Chrysler Automobiles NV, Starbucks Corp., and Nike Inc., among other companies, came under the Commission’s scrutiny.

These legal challenges, many of which the commission has lost, were started under Vestager. Her term as commissioner is up at the end of this year.

The Apple case was Vestager’s biggest swing in a crackdown on “sweetheart” tax deals between EU countries and large corporations.

Changing tax landscape

Importantly, the state aid cases examine tax positions held by major corporations before a seismic shift in the international landscape, largely due to countries’ work at the Organization for Economic Cooperation and Development to limit profit shifting from high-tax jurisdictions to low-tax jurisdictions.

In 2015, the OECD published a series of standards aimed at ensuring that when companies applied transfer pricing methods for the use of assets like intangible property, they were attributing profits to entities that took risks and made important decisions about the IP rather than to shell companies.

Six years later, more than 140 countries agreed to an international tax deal that includes a 15% global minimum tax on large multinationals. The tax, known as Pillar Two of the deal, seeks to impose the tax on multinationals in each country where they operate.

The minimum tax went into effect in January and is effective in about 40 countries.

What are the arguments?

The Commission said Irish tax rulings gave inappropriate tax benefits to Apple to the tune of €13 billion euros ($14 billion) decades ago, and Apple should have to pay that back.

The EU first launched its investigation into Apple’s transfer pricing arrangements—which dictate how multinational groups value transactions between their entities—in 2014. Two years later it filed the case and accused Apple of improperly directing profits from two of its Irish subsidiaries—Apple Sales International and Apple Operations Europe—out of Ireland and to a “head office” which didn’t reside in any country and remained untaxed.

Only a fraction of the profits of the subsidiaries were taxed to their Irish affiliates, the EU said.

The Commission also disputed the methods allowed under Irish tax rulings by which the profits were allocated to those entities.

The Irish government’s tax rulings on how companies price their intercompany transactions aren’t illegal. But the EU Commission argued the tax benefits granted to Apple amounted to selective tax treatment of the corporation, and therefore, illegal state aid.

In its appeal of Apple’s 2020 win in the EU’s General Court, the Commission argued that the judges made several mistakes in deciding for the company.

Apple said there’s nothing wrong with the tax rulings it got in Ireland, and it shouldn’t have to pay back the taxes. The company argued that the Commission misunderstood Irish tax law and the rulings that the company received.

In a 2017 statement, Apple said it paid billions in taxes and that its tax structures were positioned to comply with Irish and US laws, not to avoid paying taxes.

“The debate over Apple’s taxes is not about how much we owe but where we owe it,” the company said.

Ireland, for its part, has backed the company against the Commission and said the company paid the proper amount of taxes.

What was the Advocate General’s opinion?

Advocate General for the EU Court of Justice Giovanni Pitruzzella said in his nonbinding opinion that Apple’s win in the European General Court should be thrown out.

The General Court had previously ruled in favor of Apple, stating that the European Commission failed to show “the requisite legal standard” that Ireland’s tax agreements with Apple broke state-aid law.

But in his opinion, Pitruzella said the General Court’s decision should be reassessed because it was rife with legal mistakes.

As a result of these errors, the legal challenge should be “set aside in its entirety,” he said at the time.

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