EU closes horns with Apple and Ireland in €14.3 billion tax battle

The EU is once again taking on Apple and Ireland in a high-stakes courtroom battle that could have a lasting impact on how multinational companies are regulated in the bloc.

EU competition regulators today appealed to the European Court of Justice in Luxembourg to overturn a lower tribunal’s decision to oblige Apple Ireland to pay back €14.3 billion in taxes plus interest.

The case is the most high-profile of EU watchdog chief Margrethe Vestager’s campaign against so-called “sweetheart” deals that offer multinationals favorable tax conditions in EU member states.

According to the Commission’s lawyer, Paul-John Lowenthal, the outcome of the case will “determine whether Member States are allowed to continue granting multinationals substantial tax breaks in exchange for jobs and investment”. reports Reuters.

A seven-year dispute

The case dates back to a 2016 European Commission investigation, which found that two tax rulings in 1991 and 2007 issued to Apple by Ireland’s tax authorities had “significantly and artificially reduced the tax paid by Apple in Ireland since 1991”. Apple’s effective tax rate in Ireland was just 0.005% in 2014.

The Commission considered that such schemes constituted illegal State aid, giving Apple an unfair advantage over its competitors. In 2016, the Commission found the tech giant guilty of underpaying taxes totaling €13.1 billion between 2003 and 2014 and ordered it to pay the money to Ireland, along with €1.2 billion in interest. The money was then recovered from Apple and placed in an escrow fund.

Apple and Ireland appealed the decision and the case was heard in the EU General Court for two days in 2019.

They won the case and the court overturned the verdict. The EU’s second highest court said the Commission had failed “to demonstrate to the required legal standards” that the tech giant in Ireland had received an illegal economic advantage on its taxes. However, the money remained in the escrow account in case the EU decided to appeal – which they did.

The commission did not agree with the decision and announced in September 2020 that it would appeal, which was heard today.

Broader implications

At the heart of the debate is exactly where value is created and where it should be taxed. Apple argues that major decisions about its products are made at its Silicon Valley headquarters and profits should be taxed there. Daniel Beard, a lawyer for Apple, told the court today that “the commission simply got the facts wrong about what activities were going on in Ireland,” Bloomberg reports.

However, the Commission considers that the activities of two of Apple’s divisions — Apple Sales International and Apple Operations Europe – should be taxable in Ireland because most of the profits from these units are generated outside the US.

If the Commission wins, the money, roughly equivalent to Ireland’s entire annual healthcare budget, will be transferred to the Irish state. Though his track record doesn’t look too rosy so far.

The Commission has failed to convince the EU courts of the merits of its policies in a number of high-profile cases brought before the courts in recent years, including a EUR 30 million claim against Starbucks, a EUR 250 million claim to Amazon and the prosecution of back taxes of 30 billion euros from FiatChrysler.

The danger for Vestager and the wider Commission is that a defeat before Europe’s highest court would encourage member states to use special tax schemes to encourage foreign direct investment.

CJEU Advocate General Giovanni Pitruzzella will issue a non-binding opinion on November 9, followed by the Court’s ruling.