Apple Ireland state aid appeal: the pleas

Ireland’s grounds for appealing the European Commission’s state aid decision in the Apple case (Case T-892/16), and those of Apple, have been published in the EU Official Journal. Apple’s arguments largely follow those of the Irish government, except that the company claims in addition that the decision breached its fundamental rights under the EU Charter (see http://bit.ly/2lu3g72).

The European Commission concluded in August that tax rulings issued by the Irish tax authorities in favour of two Apple subsidiaries, which operated in Ireland until 2015, constituted illegal state aid under EU law, allowing Apple to allocate profits in a way that reduced the taxes payable in Ireland by up to €13bn over ten years. The decision required Ireland to recover this amount, plus interest, from Apple. Both the Irish government and Apple are appealing the decision to the Court of Justice. The Irish government has advanced nine main arguments in support of its appeal (see http://bit.ly/2mkPMcZ). In summary, these are:

• The Commission has misunderstood Irish law and the relevant facts in holding that the Revenue Commissioners applied Irish tax law incorrectly in their 1991 and 2007 rulings in favour of the Irish branches of Apple Sales International (ASI) and Apple Operations Europe (AOE). These rulings applied Taxes Consolidation Act 1997 s 25 in taxing only the profits attributable to the Irish branches, which carried out routine functions only. All the important decisions within the companies were made in the US, such that profits deriving from Apple’s intellectual property were not properly attributable to the Irish branches.
• The Commission has misapplied state aid law in holding that the rulings granted ASI and AOE an ‘advantage’, since these companies did not pay any less tax than was properly due under the Irish legislation. In declaring the rulings to be selective, the Commission’s application of the arm’s length principle ignores the distinction between resident and non-resident companies.
• The Commission’s application of the arm’s length principle is inconsistent in relation to the overall situation of the Apple group.
• The Commission was wrong to reject expert evidence submitted by Ireland showing that the tax treatment of ASI and AOE was consistent with the arm’s length principle.
• The Commission is wrong to maintain that the arm’s length principle is inherent in Irish law, or that the Revenue Commissioners applied the legislation inconsistently.
• The Commission breached its own procedural requirements by failing to explain clearly its state aid theory during the investigation.
• The Commission infringed the principles of legal certainty and legitimate expectation by invoking OECD documents from 2010, which could not have been foreseen in 1991 or 2007.
• The Commission has breached the principle of fiscal autonomy of member states in attempting to substitute its interpretation of state aid rules for Ireland’s own view of the geographic scope and extent of its tax jurisdiction.
• The Commission has breached its duty to provide a clear and unequivocal statement of reasons in its decision.

Mary Cosgrove, lecturer of tax and accountancy at National University of Ireland, Galway, is sceptical of the Irish government’s arguments, which she believes ‘will hold little sway with the court’. She refers to a document produced by the Irish Revenue Commissioners in 2010 on transfer pricing, stating: ‘The principle of arm’s length pricing has been a part of Irish tax law for many years.’ The Commission also found inconsistencies in the Revenue Commissioners’ own methodology for determining profits of the Irish branches.

Apple puts forward 14 main arguments in support of its appeal. While largely following those of the Irish government, the company submits additionally that the European Commission breached its fundamental rights under the EU Charter.

• The Commission erred in its interpretation of Irish law, which was properly reflected in rulings on allocation of profits to the branches. This profit allocation was not required to be governed by the arm’s length principle.
• The arm’s length principle does not operate as the test for state aid under EU law.
• The Commission made fundamental errors relating to Apple’s activities outside of Ireland in relation to development and commercialisation of its intellectual property.
• The Commission made fundamental errors relating to Apple’s activities in Ireland by failing to recognise that the Irish branches carried out only routine functions.
• The Commission’s presumptions are contrary to the burden of proof, OECD guidelines and expert evidence.
• The Commission has failed to prove selectivity, wrongly treating the Apple companies as Irish resident companies to be taxed on their worldwide profits.
• The Commission breached procedural requirements by failing to articulate the primary line of reasoning in its decision.
• The Commission was wrong to reject expert evidence in connection with the arm’s length principle.
• The Commission was wrong to compare these rulings with others issued by Irish Revenue to third parties whose factual circumstances were different.
• The decision does not contain any explanation of how much is to be recovered under the subsidiary or alternative lines of reasoning, contrary to state aid rules and the principle of legal certainty.
• The Commission violated the principles of legal certainty and non-retroactivity by ordering recovery of the alleged aid.
• The Commission failed to conduct a diligent and impartial investigation.
• The decision breached TFEU art 296 and the EU Charter of Fundamental Rights art 41(2)(c) in failing to fulfil the obligation to provide ‘good administration’.
• The decision exceeds the Commission’s competence under TFEU art 107(1) in attempting to redesign Ireland’s corporate tax system.

Apple’s plea of a breach of its fundamental rights was described as ‘hilarious’ by German Green MEP Sven Giegold, who added: ‘There is no human right to receive tax subsidies.’ Nevertheless, most commentators agree that this is an important test case for the European Commission. Philipp Werner, competition partner at Jones Day, commented that just as these state aid cases being brought by the Commission are ‘novel, so the pleas are also novel’.