Thunderclap in Luxembourg. The General Court of the European Union (EGC) has annulled the European Commission’s decision ordering Ireland to recover €13 billion in tax benefits from Apple, on Wednesday 15 July, on the grounds that the institution was unable to show that these benefits were the result of illegal State Aid granted to the US multinational (Cases T-778/16 and T-892/16).
In its decision adopted in August 2016 (see EUROPE 11612/1), the Commission found that two Irish tax rulings granted to Apple in 1991 and 2007 violated EU State Aid rules.
These two tax rulings endorsed the methods used by two Irish subsidiaries of the US giant - Apple Sales International (ASI) and Apple Operations Europe (AOE) - to determine their taxable income in Ireland.
However, for the Commission, these methods of calculation “did not correspond to economic reality”, as they made it possible to allocate virtually all the sales profits recorded by the two companies to “head offices” which “existed only on paper and could not have generated such profits”.
The former Competition Commissioner and now Vice-President of the Commission in charge of ‘A Europe Fit for the Digital Age’, Margrethe Vestager, estimated at the time that “this selective treatment” had allowed Apple “to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014 ”.
The Commission then ordered Ireland to recover €13 billion plus interest in unpaid taxes, which led Ireland and Apple to file an appeal before the EU General Court.
Inflicting a major setback on the Commission, the General Court, in the end, ruled in favour of the latter.
According to the European judges, the Commission was wrong to conclude that the Irish authorities granted “a selective economic advantage and, by extension, State Aid” to ASI and AOE on the ground that those subsidiaries had not allocated to their Irish branches all of ASI’s and AOE’s commercial income obtained from the Apple group’s sales outside the American continent.
Furthermore, the EGC considered that the Commission had failed to demonstrate the existence of methodological errors in the contested rulings which would have led to a reduction in the taxable profits of the two subsidiaries in Ireland. While it acknowledges the incomplete nature of those tax rulings, the General Court was of the opinion that the deficiencies identified by the Commission are not sufficient to prove the existence of an infringement of the EU rules on State Aid.
Reactions.
Taking note of the Court’s judgement, Margrethe Vestager said that the institution will study the decision carefully and reflect on “possible next steps”.
She also assured that the Commission “stands fully behind the objective that all companies should pay their fair share of tax”, while stating that “ State Aid enforcement needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency”.
Contacted by EUROPE, the Commission did not wish, at this stage, to provide more information on the “next steps” it might envisage.
For their part, Ireland and Apple welcomed the General Court’s decision.
For the Irish Finance Ministry, the Court’s decision confirms Ireland’s view that “there was no special treatment provided to the two Apple companies”.
“This case was not about how much tax we pay, but where we are required to pay it”, reacted Apple, saying they were proud to be “the largest taxpayer in the world”.
Others, such as the S&D and Greens/EFA groups in the European Parliament, said that this judgement should lead to a “wake-up call” for the European Union in tax matters.
“EU state aid rules are clearly totally insufficient to tackle the problem [of tax dumping in Europe] ”, said German Green MEP Sven Giegold.
According to him, the German EU Council Presidency should try to push forward certain tax reforms currently blocked at Member State level (see EUROPE 12172/22), such as the Common Consolidated Corporate Tax Base (CCCTB) or country-by-country public reporting (see EUROPE 12384/3).
To this end, he is calling on the EU Council to move to qualified majority voting (rather than unanimity) on tax matters and on the Commission to use the ‘bridging clause’ (Article 116 TFEU) to make new proposals in this area, in order to avoid a Member State veto.
The same goes for the NGO Oxfam for whom “fundamental and urgent tax reforms at an EU and global level are needed”, mentioning a tax on digital services, a minimum effective tax rate, effective measures against tax havens and rules obliging companies to reveal where they generate their profits and where they pay their taxes.
Lastly, by coincidence, it should be noted that this judgment comes on the same day that the Commission presented a new tax package (see EUROPE 12528/2).
See the judgment: https://bit.ly/2OpY17P (Original version in French by Damien Genicot with the editorial staff)