The Court of Justice of the European Union has overturned the EU General Court’s judgment of July 2020 (see EUROPE 12528/1), which had itself annulled the European Commission’s 2016 decision that Ireland had granted a selective advantage to Apple through tax rulings constituting unlawful State aid (see EUROPE 11612/1), in a final judgment handed down on Tuesday 10 September (Case C-465/20 P).
“Once in a while tax justice can be done”, said a delighted European Commissioner for Competition, Margrethe Vestager, admitting that she had shed a few tears on learning of the Court of Justice’s verdict.
In June 2016, the Commission found that two advance tax rulings granted by the Irish authorities to Apple, in 1991 and 2007, were in breach of EU state aid rules. These two tax rulings endorsed the methodology used by two Irish subsidiaries of the American giant - Apple Sales International (ASI) and Apple Operations Europe (AOE) - to determine their taxable profits in Ireland. By authorising these subsidiaries to allocate their profits to head offices that existed only on paper, these calculation methods did not correspond to economic reality, the Commission concluded.
“These head offices existed only on paper. No tables, no chairs, no activities. The profits were thus not taxed anywhere”, said Ms Vestager. She cited the example, in 2011, of an Irish subsidiary of Apple whose declared annual profits of €16 billion were taxed at only €50 million, thanks to the contentious tax rulings. This same subsidiary paid only €10 million in tax in 2011, “representing an effective tax rate of around 0.05% of total annual profits”, noted the Commissioner.
In its judgment, the Court of Justice takes the view that the General Court was in error when it held that the Commission had not sufficiently proved that the Irish branches of ASI and AOE should have been attributed the profits generated by the exploitation of the Apple group’s intellectual property licences for the purposes of determining the annual taxable profits of ASI and AOE in Ireland. In particular, the General Court wrongly upheld the objections raised by Ireland and by ASI and AOE concerning the Commission’s assessments of the activities of the Irish branches of ASI and AOE.
Considering the actions to be ready for judgment, the Court of Justice confirmed the appropriateness of the Commission’s approach, according to which, under Irish law, the activities of the branches of ASI and AOE in Ireland had to be compared with those of other entities of those branches, particularly their head offices outside Ireland.
€13 billion to recover. As a result of this judgement, Ireland, which had challenged the Commission’s initial decision, will have to recover around €13 billion in tax due, plus interest. Apple had placed this sum in a segregated account while the legal proceedings took their course.
Noting that such a case could not happen again in Ireland thanks to subsequent tax reforms and more thorough audits of multinationals, Ms Vestager drew the following general lessons: - Member States retain exclusive competence to define their corporate tax systems; - the Commission can exercise control in order to prevent companies from benefiting from unfair tax advantages by means of advance tax rulings which derogate from national law; - national tax authorities must abide by their own rules, and the onus is on the Commission to prove that Member States have deviated from the parameters they themselves have set.
Asked about her work over the last ten years, the European Commissioner noted that the strengthening of European legislation - including the automatic exchange of information on tax rulings between Member States - had helped to re-establish a level playing field between companies. However, progress is still needed on two legislative proposals currently blocked in the EU Council, namely the one on the use of shell companies for tax purposes (see EUROPE 13431/12) and the other which aims to harmonise transfer pricing rules within the EU (see EUROPE 13336/15).
The former Danish Finance Minister also noted that “aggressive tax planning remains widespread” in the EU, with “Ireland, the Netherlands, Luxembourg and Belgium [seeming] to be central when it comes to profit shifting”. “The cost is high for European citizens”, she stressed.
Reactions. In a press release, the Irish government undertook to comply with the Court’s judgment. It pointed out that this case is a thing of the past, as the two tax rulings granted in 1991 and 2007 are no longer in force. It went on to point out that national law on corporate residence rules and the attribution of profits to branches of non-resident companies operating in Ireland has been amended.
Reacting to the Court’s judgment, Pasquale Tridico, Chairman of the European Parliament’s Subcommittee on Tax Matters (FISC), hailed it as a “historic” judgment, which considers as illegal certain tax advantages granted to multinationals that cut off the public funding needed for education and health. “We now expect the future European Commission to propose legislation that bans all forms of tax avoidance and competitive advantages for tech giants and large corporations within the European Union”, he said in a statement.
The MEP went on to advocate the creation of a “centralised European register” of trust beneficiaries.
See the judgment of the Court of Justice: https://aeur.eu/f/ddc (Original version in French by Mathieu Bion)