Tuesday marks the latest twist in the long-running state aid debacle between Apple and Ireland.
Then the Court of Justice of the European Union (CJEU) will hear the European Commission’s appeal in the case.
It follows the 2020 ruling by the General Court of the EU that overturned the Commission’s 2016 finding that Apple underpaid Ireland between 2003 and 2014 by €13.1 billion in tax.
Remind me of the background of this case?
Its origins can be traced back to a 2013 appearance by Apple’s boss, Tim Cook, before a US Senate committee.
During the hearing, Apple’s tax settlements were intensively investigated.
The company was accused by senators of harboring billions of dollars in profits in “ghost companies” in Ireland that paid no taxes elsewhere.
Ireland was even labeled a “tax haven” – a serious accusation that has since been repeated by some critics of our tax regime.
The European Commission watched and a year later launched an in-depth investigation into Apple’s tax affairs in Ireland.
And the outcome of that was the dazzlingly large tax ruling?
Yes, after a lengthy investigation, the Commission found in 2016 that two tax rulings in 1991 and 2007 issued to Apple by the tax authorities had “substantially and artificially reduced the tax paid by Apple in Ireland since 1991”.
The Commission considered that these determinations effectively constituted a method of determining taxable profit for two Irish-based companies – Apple Sales International and Apple Operations Europe – managed from outside Ireland and responsible for all of Apple’s sales outside Ireland . America.
In its ruling, the Commission claimed that the turnover provisions did not reflect economic reality because almost all of the profits made by the two companies were attributed internally by Apple to a “headquarters”.
But the Commission concluded that the headquarters only existed on paper and therefore could not have generated such profits.
This was a problem because longstanding EU state aid rules make it illegal for one country to grant preferential treatment to one company over another when they are both subject to the same tax rules in that country.
However, its effects went beyond Ireland.
According to the Commission, Apple booked all its EU-wide sales in Ireland, rather than in the countries where its iPhones, iPads, etc. were sold.
In addition, it did not have to pay tax on almost all profits, it was claimed.
The result, the Commission stated, was that Apple owed Ireland €13.1 billion in unpaid taxes for the period between 2003 and 2014 (when Apple changed its structures), as well as €1.2 billion in interest.
Has Apple appealed?
Yes, Apple and Ireland were not happy with the findings and decided to appeal the ruling.
Apple vehemently denied at the time that it had any sort of special deal and has then and ever since maintained in the strongest possible terms that wherever it operates it pays the taxes it owes.
“The European Commission has attempted to rewrite Apple’s history in Europe, ignoring Ireland’s tax laws and in the process turning the international tax system upside down,” CEO Tim Cook wrote in a public letter in August 2016.
And he warned that the impact could have a very damaging effect on investment and job creation in Europe.
Concerned about the external perception of the country, the government also took the decision to appeal the ruling.
Ireland has long been criticized by some outsiders for its corporate tax rate of 12.5%, which has proven to be the basis for foreign direct investment (FDI) for decades.
In government circles, therefore, the view was that anything that questions the basis of the country’s tax policy may not be good for future investment.
It also had to be seen to support Apple, which pays more taxes here every year than any other organization or individual.
What was the outcome of that appeal?
The case was heard by the General Court of the EU for two days in September 2019.
And the following July, the court ruled, quashing the Commission’s findings.
The court ruled that the Commission had wrongly stated that Apple Sales International and Apple Operations Europe had received a selective economic advantage and, by extension, state aid.
It said the Commission could not demonstrate “to the required legal standard” that Apple enjoyed preferential treatment amounting to unlawful state aid.
But the Commission did not accept the decision and said it would appeal in September 2020.
Commissioner Margrethe Vestager claimed the court made a number of “legal errors”.
“The judgment of the General Court raises important legal issues relevant to the Commission’s application of state aid rules to tax planning cases,” she said at the time.
Commissioner Margrethe Vestager
“The Commission also respectfully believes that the General Court made a number of errors of law in its judgment.”
“Ensuring that all businesses, large and small, pay their fair share of tax remains a top priority for the Commission. The General Court has repeatedly upheld the principle that, while Member States are competent to enact their tax laws, they should do with regard to EU law, including state aid rules,” she added.
Fast-forward almost three years and the Court of Justice is now about to hear that appeal.
Do we know what both sides are likely to argue?
The European Commission has said little publicly about the grounds on which it intends to appeal to the CJEU.
However, only questions of law can be submitted to the court.
On the other hand, Apple expects that the Commission’s focus will have to be on the facts of the case, as the tech company does not believe there is a legal basis for the appeal to succeed.
Apple continues to believe that the case is not about how much it owes, but where it owes it.
Ireland is also a party to the appeal, although it will have a separate legal team alongside Apple.
Ahead of the hearing, the Treasury Department said the government still believes the Court’s decision is the right one.
“Ireland has always been clear that the correct amount of tax has been paid and that Ireland has not provided any state aid to Apple,” the company said in a statement.
The hearing is expected to take several days.
The Advocate General’s non-binding opinion is then likely to be issued three to six months later, with the court’s final binding ruling not likely until 12 months after hearing the appeal.
What about the €13.1 billion? Where is that now?
Including interest, the figure is actually more €14.3 billion.
Following the Commission’s original ruling, the money was transferred by Apple to an escrow or temporary escrow account in 2018.
The objective of the investment policy is to preserve the capital value of the escrow fund as much as possible in light of the prevailing market conditions.
The agreed risk appetite for the escrow fund is “low”, allowing investment only in low-risk securities, such as highly rated fixed income securities with short to medium maturities.
The most recent available data on the fund’s value is as of December 31, 2021, when it was worth €13.635 billion, up from €13.986 billion at the end of 2020.
The reduction was a result of negative interest rates prevailing at the time, costing €105 million, and a “third country adjustment” of €246 million caused by Apple being held liable for paying any tax on the same profit for the same period to another country .
If the Commission wins its case, the money in escrow here will go to the Treasury — which would be an extraordinary extra windfall at a time when the state’s Treasury is expected to be flooded with cash.
If the Commission loses, the money goes back to Apple.
In the meantime, however, the big winners of this situation are the escrow fund managers, who received €6 million in 2021.
And of course the lawyers.