It’s a case that Apple Chief Executive Tim Cook has lambasted as “total political crap.”
And on Wednesday, we’ll find out whether he’s right, when the EU General Court will rule on the legality of European Competition Commissioner Margrethe Vestager’s order that Ireland should recover €13 billion in unpaid taxes (plus interest) from the iPhone maker.
When Vestager unleashed her hammer blow against Apple’s tax affairs in Ireland in 2016, it was the crowning moment of her campaign to use the EU’s state aid rules in a novel way — as a weapon against multinational tax avoidance. The EU was charting new territory by effectively classing the sweetheart tax deals offered by countries to companies as an illegal subsidy.
The good news for Vestager is that the EU court has already taken her side on that fundamental point — much disputed at the time by companies and lawyers — that state aid rules could be used in the tax justice campaign. The legality of her approach was established through similar but far smaller cases involving the tax affairs of Italian carmaker Fiat in Luxembourg and of U.S. coffeehouse chain Starbucks in the Netherlands.
But the Starbucks judgment also laid bare a broader trend: that Brussels fails to be sufficiently rigorous in supporting its conclusions with hard evidence, a problem that also came to the fore in the Apple hearing.
A reversal on a high-profile case such as Apple would threaten to erode Vestager’s political capital, at a time when she is trying to resist Franco-German attempts to rewrite the EU’s competition rules.
“A whole or partial annulment in Apple would lead to big headlines and would have significant economic implications. On the main points of principle, however, the Commission’s approach was already validated in Fiat and Starbucks [pending before the Court of Justice of the EU],” said Alfonso Lamadrid, a competition lawyer at the firm Garrigues.
The challenge of Vestager’s 2016 decision by Ireland and Apple is such a high-profile case that it’s bound to be appealed to the Court of Justice, the EU’s top court, regardless of who wins at the General Court, said Raymond Luja, a tax law professor at Maastricht University. “It got too much attention not to,” he said.
Wednesday’s decision will carry a lot of weight, however, as only the General Court can rule on facts. And the Apple case is described as a very factual case.
Brussels’ standoff with Apple is expected to last well beyond the final verdict in the tax case, however, after Vestager in June launched fresh antitrust probes into the company’s App Store and Apple Pay that could take years, and potentially be followed by remedies procedures and damages claims.
While Vestager has confronted a host of companies like Amazon, Engie and Ikea in her state aid tax probes, the financial and the political dimensions of the Apple case dwarf all others. Merely the interest Apple needed to pay on top of its bill amounted to around €1.3 billion, more than the total recovery amounts in the other cases combined.
The Commission timed the original announcement on August 30, 2016, for maximum media impact, a Commission official said, as most people were back from holidays but most public activity hadn’t picked up yet.
The Obama administration weighed in with a letter from then-Secretary of the Treasury Jack Lew to then-Commission President Jean-Claude Juncker and a white paper on the Commission’s tax probes that was published a week before the Apple announcement. “Pursuing civil investigations — predominantly against U.S. companies — under this new interpretation creates disturbing international tax policy precedents,” Lew wrote to Juncker.
Vestager certainly stirred the pot of global tax avoidance. Her cases, which landed around the time of the revelations in the LuxLeaks and the Panama Papers, are said to have accelerated corporate tax reform in countries including Ireland, Luxembourg and Cyprus.
The main global stage for tax reform, however, the OECD, which was still very much top-of-mind in Jack Lew’s letter, was crippled last month after the U.S. took a step back.
While Vestager partly built her image of a powerful tech enforcer on the Apple case, seeing the tax bill decimated or even worse annulled would be a major setback in what is already a difficult second term in Brussels.
Since November 2018, the Commission has suffered an unusual series of defeats in court, some in cases that were still initiated or even finalized by Vestager’s predecessor Joaquín Almunia. Most recently, the General Court rocked Vestager’s tough stance on telecom mergers by annulling her decision to block a major telco deal in the U.K.
Vestager is also under pressure from the EU’s largest member countries, France, Germany, Italy and Poland, to change the bloc’s competition rules in support of the largest European companies.
But all of that does not — or should not — matter to the judges of the EU General Court.
The question they will need to answer is whether the Commission could prove that the Irish tax administration gave an advantage to Apple that other companies could not get, and if that advantage really was €13 billion.
Ireland approved Apple’s profit allocation through two tax rulings in 1991 and 2007, allowing the company to funnel the bulk of the hundreds of billions of profits it made worldwide (outside the Americas) to an untaxed subsidiary with no staff.
Apple argued it could park the profits there to eventually bring them back and tax them in the U.S., as this is where it creates the real added value of its products.
Much of the discussions at the September 2019 hearing in court centered around whether those profits should have in fact been taxed in Ireland.
“The answer is written on every Apple product: ‘Designed by Apple in California,’” Apple lawyer Daniel Beard told the five-judge panel of the EU General Court, adding that the U.S. was where the profits should be taxed because that’s where the high value added from design and intellectual property was generated.
According to the Commission, those profits should have been attributed to the “real” subsidiary in Ireland, where they should have been subject to the country’s 12.5 percent corporate tax rate because the Irish branch did in fact carry out significant functions to manage Apple’s intellectual property.
Perhaps the most crucial question the judges will need to settle is whether the obscure circumstances and content of the disputed tax rulings could shift the burden of proof. This means that it would no longer be for the Commission to prove that the company received an advantage, but for Ireland to prove it did not.
“I think at the end of the day, the case will hinge on the question of the proper allocation of the burden of proof,” said Lamadrid at Garrigues.
The European Commission declined to comment ahead of the decision. Apple referred to the statements made by its lawyers in court.