Taxation: EU Court verdict in Apple case a setback for use of state aid rules against tax rulings

Jonathan WatsonThursday 3 September 2020

In its decision, the Court found there was not enough evidence to show Apple had broken EU competition rules and overturned the decision.

‘We will carefully study the judgment and reflect on possible next steps,’ said Margrethe Vestager, Executive Vice-President of the European Commission, in a statement.

Vestager – who has made attaining a global solution to digital taxation a priority area – added that ‘if Member States give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the EU.’

It also deprives the public purse and citizens of funds for much needed investments – the need for which is even more acute during times of crisis, Vestager added.

The Commission can appeal against the decision at the Court of Justice of the European Union.

‘Ireland has always been clear that the correct level of tax was charged and Ireland provided no state aid to Apple,’ claimed Irish Minister for Finance Paschal Donohoe in a statement. ‘Ireland continues to make appropriate changes to its tax regime in line with developments in the international tax environment and remains committed to that process.’

According to John Kettle, a former Chair of the IBA Public Law Committee and the Head of International at McCullough Robertson in Australia, the Commission lost because it could not meet the legal proofs. ‘It presumed too much in its thesis and did not substantively prove its case so, in essence, the competition/state aid argument never got going,’ he says. ‘It’s a basic lesson. A regulator has to prove its case, all elements of it, not merely aver it.’

Keith O’Donnell is Managing Partner of international tax organisation Taxand’s Luxembourg branch ATOZ. He believes that EU state aid rules are not the right tool for questioning tax rulings. ‘There is still a lot of room for improvement on the side of the European Commission in challenging the transfer pricing position of taxpayers,’ says O’Donnell.

Transfer pricing is a standard accounting practice that represents the price that one division in a company charges another division for goods or services provided. Some multinational companies use it to charge a higher price to divisions in high tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low tax countries.

‘The power granted to the Commission as a principle to challenge the transfer pricing position of taxpayers may still create a lot of legal uncertainty for them,’ O’Donnell adds. ‘The European Commission acts as a transfer pricing expert, giving its own interpretation of the arm’s length principle in very complex transfer pricing cases, often without much consideration of whether the same decision would have been taken in comparable circumstances.’

Taxation is a sovereign competency, says Kettle. ‘More than that, for many sovereigns, the ability to exercise tax powers is like controlling the exploitation of a natural resource. It constitutes the essence of sovereignty. So, there would need to be a blatant and systematic exploitation of that power by a sovereign for it to be captured by other EU Treaty provisions, like state aid.’

It’s a mistake to use competition policy to force through some form of tax equalisation or harmonisation just because it is too difficult otherwise to secure the tax changes some EU Member States want via the existing Treaty and legislative framework, he adds.

For Mike Lane, Head of Slaughter and May’s Tax practice, the ruling is ‘based on what the relevant Irish law actually said and did rather than what some might like it to say or do to fix a perceived problem of under or no taxation.’

‘Changing the rules of international taxation is a job for countries themselves to do prospectively, with the assistance of organisations like the Organisation for Economic Co-operation and Development (OECD),’ he adds.

However, the OECD’s bid to develop a more equitable approach to taxing multinational companies was dealt a major blow in June when the United States government decided to suspend talks with European countries on plans for a new global tax framework for technology companies.

In this context, the sight of a national government going to great legal lengths to avoid receiving billions in tax may seem somewhat odd. A 2018 study by the University of California, Berkeley and the University of Copenhagen described Ireland as ‘the world’s biggest tax haven’ – a claim rejected by the country’s Minister for Finance.

Ireland, in common with a number of other EU Member States, has based its ‘national business model’ on procuring profit shifting at the expense of its neighbours, says Alex Cobham, Chief Executive of activist think tank the Tax Justice Network. ‘Powerful tax justice reforms are needed, rather than broader application of state aid rules.’

According to Chiara Putaturo, Inequality and Tax Policy Advisor at Oxfam, Europe needs ‘a digital service tax, a minimum effective tax rate, effective measures against tax havens and new rules that require companies to disclose where they generate their profits and where they pay their taxes, for each country they operate in’.

This last option would aim to force all large multinationals to show, on a comparable basis, just how much their taxable profits are ‘misaligned’ from the locations of their real economic activity. ‘That would allow the public to make choices about companies they buy from, and to see if policymakers are serious about making progress against tax abuse,’ says Cobham.