Niall Moran* (Dublin City University)
This article assesses where we stand in the joined cases Ireland and Apple v Commission in the aftermath of AG Pitruzella’s recent opinion.
In 2014, the European Commission opened investigations into decisions of the tax authorities in Ireland, The Netherlands and Luxembourg relating to corporate income tax to be paid by Apple, Starbucks, and Fiat Chrysler, respectively, and whether these decisions complied with EU state aid law. €14.3 billion is at stake in the Apple case, dwarfing the €30 million that was at stake in both the Starbucks and Fiat Chrysler cases.
The Commission issued decisions in these three investigations finding that all three governments had unlawfully granted state aid in breach of Article 108(3) TFEU. The Commission found that in line with these decisions against The Netherlands (2015), Luxembourg (2015) and Ireland (2016), the governments were “required to recover” the amount of the state aid granted under Article 16 of Regulation (EU) 2015/1589.
In each instance, both the state and company in question sought the annulment of the Commission decision. The Netherlands and Starbucks, Luxembourg and Fiat Chrysler, and Ireland and Apple all brought actions before the General Court. This article now considers the reasoning of the Courts in these three cases, with an emphasis on the arm’s length principle,[1] which is interpreted as part of the selectivity assessment in these cases.
In all three cases, the Commission decision found that the arm’s length principle had also not been properly applied. This resulted in a reduction of tax liability that constituted a selective advantage and a finding of state aid under Article 107 TFEU. This article briefly recaps the Court’s findings in Starbucks and Fiat Chrysler, before turning to the Apple case.
In Starbucks, the Commission decision found that the Advance Pricing Agreement (APA) concluded between the Dutch government and Starbucks endorsed methodological choices “that cannot be considered to result in a reliable approximation of a market-based outcome”, as required in line with the arm’s-length principle (paragraph 412).
In 2019, the Commission’s decision was annulled by the General Court. The Court found that the Commission failed to demonstrate that an advantage had been conferred on Starbucks within the meaning of Article 107 TFEU. The Court found that mere non-compliance with methodological requirements does not necessarily lead to a reduction in tax burden and that it was necessary for the Commission to establish that these errors “do not allow a reliable approximation of the arm’s length outcome” (paragraph 101). The mere finding of a methodological error does not suffice to demonstrate that an advantage was conferred under Article 107 TFEU (ibid). The Commission did not appeal this decision.
In Fiat Chrysler, Luxembourg’s tax ruling made methodological choices for transfer pricing purposes “that cannot be considered to result in a reliable approximation of a market-based outcome resulting in a reduction in FFT’s Luxembourg tax base” (paragraph 317).
In 2019, the Commission’s decision was upheld by the General Court. However, on appeal in 2022, the decision was annulled by the Court of Justice. This decision also came down to Article 107 TFEU and the Court of Justice held that the Commission had erred in its finding that a selective advantage had been granted.
The Grand Chamber found that the Commission had erred in its identification of the reference system forming the basis of its analysis (paragraph 112).[2] It found that the General Court had erred in “disregarding national tax rules” as “The autonomy of a Member State in the field of direct taxation, as recognized by the settled case-law . . . cannot be fully ensured if…the examination carried out under Article 107(1) TFEU is not based exclusively on the normal tax rules laid down by the legislature of the Member State concerned” (paragraph 94).
Ireland and Apple v European Commission
This case concerns the value derived from IP licenses and whether profits from these licences should be attributed to Apple’s Irish branches or to its head offices in the US. These licences were held by Apple Sales International (ASI) and Apple Operations Europe (AOE). Both companies are incorporated in Ireland, but are not tax resident in Ireland (unlike Apple Distribution International for example which is also tax resident in Ireland). The Commission found IP licences of ASI and AOE seemed to be exclusively held for the Irish branches, as the Irish branches are solely responsible for the procurement, manufacturing, sales and distribution of Apple products outside the Americas.
Apple submitted that no Apple IP or profit derived from an Apple IP is attributable to the Irish branches because the “significant people functions” with respect to IP are all performed outside of Ireland (Commission decision, paragraph 204). Apple contends that key strategic decisions all took place in the US (paragraph 205), while the Commission contends that the boards of ASI/ AOE did not actively manage them, that the IP licences should have been allocated to Apple’s Irish branches, and that this constitutes a selective advantage.
The Commission decision found that the Irish tax rulings endorsed methods for allocating profit to Apple’s Irish branches that “depart from a market-based outcome” thus lowering their taxable base (paragraph 412). As in Starbucks and Fiat, a selective advantage was found resulting in a finding of state aid under Article 107 TFEU.
In 2020, the Commission’s decision was annulled by the General Court. At this point, there was a sense in some quarters that this case would follow the previous two cases. The Court held that the Commission failed to show that the Irish tax authorities had granted Apple any such advantage. Ireland and Apple submitted that the Commission incorrectly applied section 25 of the Taxes Consolidation Act ’97. They submitted that the Irish taxation system, and section 25 in particular, precludes an ‘exclusion’ approach. Such an approach involves the examination of a non-resident company’s profits and if profits cannot be allocated to other parts of that company, they are allocated by default to the Irish branches.
The Irish government submitted that the relevant analysis for the application of section 25 must cover “the actual activities” carried out by Irish branches of a company (paragraph 179, judgment of the General Court). Under Irish law, profits generated from property that is controlled by a non-resident company cannot be attributed to the Irish branch of that company. Under Irish law, the pertinent question in determining the profits of the Irish branch is whether the Irish branch has control of the property in question (paragraph 180). The General Court concurred that the ‘exclusion’ approach is not in line with either Irish law or the OECD approach (paragraph 361).
Findings of the Advocate General
On 9 November 2023, AG Pitruzella recommended that the Court of Justice set aside the judgment of the EU General Court in relation to these two advance tax decisions and refer the cases back to the General Court or give final judgment itself. In his Opinion, AG Pitruzella noted that the Commission accepted that an ‘exclusion’ approach is incompatible with Section 25 of the TCA ’97; however the Commission stated that it did not apply such a line of reasoning (paragraph 23 of the Opinion). The AG concluded that the General Court had erred in concluding that the Commission had adopted an ‘exclusion’ approach in its reasoning (paragraph 30). Essentially this error was found to vitiate much of the conclusions of the General Court.
Rather, the AG found that the Commission had concluded that the IP licences had to be allocated to the Irish branches on the basis of its findings that 1) there was an absence of functions and risks assumed by the head offices; and, 2) the multiplicity and centrality of those assumed by the branches (paragraph 29). These findings were linked in the context of the legal test set out in recital 272[3] of the Commission’s decision “which specifically required a comparison between the functions performed, the assets used and the risks assumed by the various parties which made up ASI and AOE.” In terms of profit allocation, the AG thus found that the arm’s length principle involves taking into account the functions performed, assets used, and the risks assumed by respective branches.
Key questions that may be answered at the next stage include:
1) whether the Commission did actually adopt an ‘exclusion’ approach in its reasoning;
2) whether the functions performed at Apple’s head offices were such that profits derived from these IP licences could be allocated to them in an arm’s length context;
3) whether the Commission’s version of the arm’s length principle, which the Irish government claims is not relevant to branch profit attribution, is consistent with Member State sovereignty in the area of direct taxation; and
4) whether the tax treatment of ASI and AOE was consistent with the arm’s length principle and whether this principle has been consistently applied to the overall situation of the Apple Group.
If the CJEU follows the AG’s Opinion, this will have significant implications for advanced tax rulings, particularly in the area of profit allocation, and the potential for these rulings to be found to be incompatible with EU State aid law.
[1] The arm’s length principle is used to assess whether the financial support provided by a government entity to a company is on terms that a private market actor would offer in a similar situation. The key question in these cases is whether these tax rulings were taken at arm’s length.
[2] In state aid law, a selective advantage is established by means of a three-step test: 1) the identification of a ‘reference system’ in the Member State concerned; 2) the examination of whether the measure in question deviates from the reference system; 3) it is asked whether the measure can be justified based on the nature, structure, or guiding principles of the tax system.
[3] The legal test referred to is as follows: (272) “The profits to be allocated to a branch are then the profits that that branch would have earned at arm’s length, in particular in its dealings with the other parts of the company, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the assets used, the functions performed and the risks assumed by the company through its branch and through the other parts of the company.
The views expressed in this blog reflect the position of the author and not necessarily that of the Brexit Institute Blog.