Vulcan Insight

The future of EU corporation tax is uncertain as ECJ rules in favour of Apple & Ireland

15 July 2020

In a landmark ruling the General Court of the European Union has annulled the European Commission’s 2016 decision to order the Irish Government to recoup €13.1 billion in back taxes from Apple.

In an unprecedented move at the time the European Commissioner for Competition, Margrethe Vestager, ordered the Irish Government to recoup the money from the US tech giant, over what it alleged were two special rulings made for Apple. The rulings allowed Apple to pay “substantially and artificially” lower rates of corporation tax since 1991.

In its 2016 decision the Commission assessed that the structure offered to Apple allowed the company to establish a taxation system in which its taxable profits “did not correspond to economic reality,” and led to Apple paying an effective corporation tax rate that declined from 1% in 2003 to only 0.005% in 2014. Following its assessment, the European Commission decided that, while those specific provisions of Irish tax law were no longer in force, they had amounted to illegal state aid under EU rules.

Apple manages its European operations and global sales division from Cork. It was argued by the European Commission that only a fraction of global profits were allocated to Ireland, and therefore subject to tax in Ireland. The vast majority of global profit remained untaxed through allocation to a “head office” that was not based in any country and did not have any employees or even a premises.

In its decision the Judges of the EU’s General Court wholly rejected the European Commission’s argument that Ireland’s then-legal tax system allowed selective competitive advantage to Apple and constituted illegal state aid. Specifically, the Court rejected the Commission’s argument that “the Irish tax authorities had granted the two Apple subsidiaries an advantage as a result of them not having Apple Group intellectual property licences, and, consequently, all of their trading income, obtained from the Apple Group’s sales outside North and South America, to their Irish branches.”

In other words, as Apple’s two Irish subsidiaries did not hold any intellectual property licences for the company’s products, they would not have directly recorded any such profits. Therefore Ireland’s tax authorities were right in not considering IP-related profits for the company’s Irish tax bill.

The court’s decision will have a significant impact on the European Commission’s powers to enforce competition rules in the EU’s single market and reign in the global, “stateless” digital companies. In addition, while the practices are no longer in force, the ruling may have significant implications for corporation taxation policy across the European Union, particularly regarding corporation tax competition, in light of ongoing OECD and European Commission work on fair minimum taxation of multinational corporations as well as taxing digital services.

Ironically, or pre-planned by the European Commission, the General Court’s ruling also coincides with the Commission announcing its new tax package, including a prominent Action Plan to fight tax evasion and to make taxation simple and easy; a legislative proposal on administrative cooperation among member states; and a Communication on tax good governance across the world.

Most importantly, in light of today’s Apple ruling the Commission’s Action Plan set out plans for the Commission to lead a “deep reform of the corporation tax system to tackle aggressive corporation tax competition and harmful tax practices among the EU27”.

Crucially, and possibly in response to countries such as Ireland, the Netherlands, and Luxembourg who continue to block any substantial EU-level reforms on taxation, the Action Plan confirmed that it will explore all legal options to allow proposals on taxation to be adopted by ordinary legislative procedure, including article 116 TFEU.

In a major shift in EU-level decision making on taxation policy, the threat of using article 116 TFEU would not only remove the unanimity requirements in the Council, an action supported by a growing number of member states, but also involve the European Parliament, which has just established a brand-new sub-committee on taxation matters, as a full co-legislator.

With a large majority of Parliamentarians strongly opposed to intra-EU tax competition, any involvement by the European Parliament would be a worst-case scenario for countries such as Ireland or the Netherlands.

While some will see today’s ruling as a major victory for Apple and Ireland, its long-term benefits have to be questioned. The European Commission’s likely appeal of the decision at the European Court of Justice and its clear intention to reform Europe’s corporation tax system, is a heavy tide to swim against.

Paschal Donohoe, Irish Finance Minister and new President of the Eurogroup will have a key role to play in this. While Mr. Donohoe has publicly committed himself to defending Ireland’s corporation tax rate at EU-level negotiations, his role as Eurogroup President, and the necessary objectivity that will be expected from him, will undoubtedly somewhat limit his political positioning once the subject arrives at Eurogroup and EU Finance Minister level.