On September 10th, 2024, in a groundbreaking decision, the Court of Justice of the European Union (CJEU) ruled against Apple and the state of Ireland, upholding the European Commission’s (EC) assertion that Ireland aided Apple with preferential tax treatment. In this ruling, the CJEU has overturned a 2020 ruling by the EU General Court (GC).
In this article, we’ll explore the background, and the rationale of the CJEU’s ruling in the Apple State Aid case, and discuss its potential impact on corporate taxation. We’ll begin by diving into the setting of this case.
The dispute and the accusation
In a 2016 Decision, the European Commission concluded that the Irish government had provided unlawful State aid to Apple in two rulings dated 1991 and 2007. In these rulings, Apple was allegedly allowed to reduce its tax liabilities in Ireland significantly.
Apple’s mechanism for reducing tax liabilities
Apple transferred the Intellectual Property (IP) rights of some of its products and services to offshore entities in low-tax jurisdictions like the Cayman Islands. This allowed the company to attribute the profits associated with said products to those off-shore entities reducing their tax liabilities in Ireland.
That aside, Apple’s Irish subsidiaries were paying fees to Apple’s offshore entities for using intellectual property rights. These fees were then recorded as expenses by the Irish subsidiaries, reducing their taxable profits. This is simple transfer pricing and the dispute doesn’t lie there.
Violation of the Arm’s-length principle
According to the EC’s accusation, Apple was not following the Arm’s-length principle in transfer pricing which dictates that prices charged between related entities should be the same as those charged between independent parties in comparable circumstances.
Allegedly, Apple’s Irish subsidiaries were paying inflated fees to their offshore entities to increase profits in a low-tax jurisdiction while also decreasing tax liabilities in Ireland.
Ireland’s defence and the EU General Court ruling
Apple and the State of Ireland challenged the EC’s decision in the EU General Court. Their primary arguments against the accusations made by the EC were as follows:
- Ireland argued that the 1991 and 2007 tax rulings were consistent with Irish tax law and that there was no selective advantage for Apple – any company operating in Ireland under similar circumstances would have received the same tax treatment.
- Both Apple and Ireland contended that the Arm’s length principle was followed while arranging the transfer pricing between Apple’s Irish subsidiaries and its offshore entities. That means the transaction terms would be acceptable to independent parties.
The 2020 ruling by the EU General Court
In July 2020, the GC sided with Apple and Ireland on the grounds that the European Commission had failed to provide sufficient reason why the IP licenses should have been allocated to Irish branches while determining profit rather than to offshore branches.
It further ruled that Apple’s transfer pricing arrangements were not conclusive evidence of State aid. It said the EC’s reasoning was based on ‘erroneous assessments of normal taxation under the Irish tax law applicable in the present instance’.
The CJEU’s ruling and confirmation of EC’s initial decision
The European Commission challenged the GC judgement before the CJEU on May 23, 2023. On September 10, 2024, CJEU issued a judgement to set aside the judgement by the GC and ruled that Ireland recover the aid from Apple.
Breaking down the verdict
One of Ireland’s primary contentions revolved around the ‘exclusion’ approach. Ireland argued that the European Commission (EC) had incorrectly applied this approach when assessing Apple’s tax arrangements. They maintained that the EC had erroneously applied the ‘exclusion’ approach without accounting for the specific functions performed by Apple’s Irish branches. The GC had agreed to this contention. But the CJEU had a different take.
- The CJEU found that the GC had misinterpreted the European Commission’s decision.
- It upheld EC’s approach of comparing the activities of the Irish branches to those of the head offices instead of group-level entities.
- It was determined that the EC had allocated profits based on the functions performed, assets used, and risks assumed by the Irish branches and the head offices.
- The General Court was criticized for comparing the functions performed by the Irish branches to those performed by Apple Inc. at a group level.
Implications for UK businesses
The CJEU’s decision reinforces the notion that MNCs cannot avoid paying taxes by artificially shifting profits to low-tax jurisdictions. This ruling will also force many companies to rethink and review their transfer pricing strategies.
The ruling emphasises the importance of maintaining robust transfer pricing documentation as an economic rationale for inter-company transactions. The adherence to the Arm’s-length principle must be demonstrated clearly in such documents.
Most importantly, this CJEU ruling confirms the EU’s commitment to ensuring fair competition and eradicating harmful tax practices. This ruling is reminiscent of a judgement by the European Court of Justice (ECJ) in the 1970s when it found the American aluminium giant Alcoa guilty of anti-competitive behaviour. A case like this every once in a while refreshes our perspective on the keen relationship between taxation and profiteering.
Conclusion
This marks a significant victory for the European Commission and a warning for companies engaging in aggressive transfer pricing practices. It will be a crucial landmark on the global tax landscape and it reminds us all of the importance of understanding tax laws and staying compliant and audit-ready.