EU locks horns with Apple and Ireland in EUR14.3B tax battle

The EU is going head to head with Apple and Ireland once again in a high-stakes courtroom battle which could have a lasting impact on how multinational firms are regulated in the bloc.

EU competition regulators appealed to the European Court of Justice in Luxembourg today to override a lower tribunal decision and make Apple pay back Ireland EUR14.3bn 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 favourable tax terms in EU states.

According to the Commission lawyer Paul-John Lowenthal, the outcome of the case "will determine whether member states may continue to grant multinationals substantial tax breaks in return for jobs and investments," reports Reuters.

A seven year dispute

The case dates back to a European Commission probe in 2016 which found that two tax rulings in 1991 and 2007 issued by the Irish revenue service to Apple had "substantially and artificially lowered the tax paid by Apple in Ireland since 1991". Apple's effective tax rate in Ireland was as low as 0.005% in 2014.

The Commission believed that such arrangements constituted illegal state aid, giving Apple an unfair advantage over its competitors. In 2016, the Commission found the tech giant guilty of underpaying taxes totalling EUR13.1bn between 2003 and 2014 and ordered it to pay the money to Ireland along with EUR1.2bn worth of interest. The money was subsequently recovered from Apple and placed in an escrow fund.

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

They won the case, and the court overturned the judgement. The EU's second-highest court said the Commission had not succeeded in "showing to the requisite legal standard" that the tech giant had received an illegal economic advantage in Ireland over its taxes. However, the money remained in the escrow account in case the EU decided to appeal -- which they did.

The commission did not accept the decision and in September 2020 announced that it would lodge an 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 key decisions on its products are made at its Silicon Valley headquarters and that profits should be taxed there. Daniel Beard, a lawyer for Apple, told the court today that "the commission just got the facts wrong about what activities went on in Ireland," Bloomberg reports.

The Commission however believes that the activities of two of Apple's units -- Apple Sales International and Apple Operations Europe -- should be taxable in Ireland due to the fact that the majority of the profits from these units is generated from outside the US.

If the Commission wins, the money, which is roughly equal to Ireland's entire annual healthcare budget, will be paid over to the Irish State. Although its track record is not looking too peachy so far.

The Commission has failed to persuade EU courts of the merits of its policy in a number of high profile cases before the courts over recent years, including a EUR30m claim against Starbucks, a EUR250m demand on Amazon and the EUR30bn pursuit of back taxes from Fiat Chrysler.

The danger for Vestager and the wider Commission is that defeat before Europe's highest court would embolden member states in the use of special tax arrangements to encourage foreign direct investment.

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