A skyrocketing tax dispute that has lasted for nearly a decade and involves 13 billion euros may usher in a reversal. The parties involved are not unfamiliar to the public, including Apple, the European Commission, and Ireland, which is considered a tax haven.
Recently, Giovanni Pitruzzella, an important advisor to the European Court of Justice and Attorney General, stated that in a 13 billion euro (14 billion US dollars) tax order, the European Court made a series of legal errors in making a ruling in favor of Apple. The court needs to conduct a new evaluation and recommend setting aside the lower court's ruling to re-examine the case.
Previously, in 2020, the EU General Court ruled that although it supported the EU's right to investigate national tax arrangements, the European Commission had failed to provide sufficient evidence to prove that the Irish government had violated the "prohibition of state aid" clause of the EU competition law by using tax as a national resource to provide Apple with inappropriate benefits. Therefore, the European Commission's determination was invalid.
In an interview with reporters, relevant experts stated that regardless of the final ruling of this case, it will have a significant impact on the tax avoidance strategies of multinational enterprises on the sidelines, as well as the ongoing series of multilateral agreements.
Apple may encounter major setbacks
Attorney General Pitruzella's statement on November 9th was believed to have led to significant setbacks for Apple and the Irish government in the process. According to convention, courts usually follow the perspective of the Attorney General in European Court of Justice cases when making final rulings.
Taxation has become the focus of controversy in the past decade.
In June 2014, the European Commission announced the launch of an in-depth investigation into Apple's corporate tax transfer pricing arrangements to examine whether the Irish tax authorities' decision on Apple's corporate income tax payment complies with the rules of state aid. Also initiated are tax investigations on Starbucks (Netherlands) and Fiat Finance and Trade (Luxembourg, the world's top ten car companies).
As stated in the press release announcing the launch of the investigation in 2014, in the context of multinational corporations actively engaged in tax planning, the European Commission is studying whether certain tax practices in some member states comply with EU national aid rules to ensure a fair competitive environment. Many multinational corporations are utilizing tax planning strategies to significantly reduce their tax obligations and reduce their global tax burden by utilizing the technical nature of the tax system. This radical tax planning approach has eroded the tax base of already financially strapped member states
In 2016, the European Commission released its investigation results. The European Commission believes that Ireland has provided Apple with inappropriate tax incentives of up to 13 billion euros. This selective treatment allowed Apple to reduce its effective corporate tax rate on European profits from 1% in 2003 to 0.005% in 2014.
At the time, Margrethe Vestager, who was responsible for competition policy, said, "According to EU state aid rules, member states cannot provide tax incentives to selected companies, which is illegal
However, Apple and the Irish tax authorities do not accept the relevant conclusions, and Ireland challenges them to the European Union's ordinary court. In July 2020, the EU General Court overturned the decision of the European Commission that Ireland provided illegal state aid to Apple through selective tax breaks, arguing that the European Commission had failed to prove that Apple had obtained a tax economic advantage.
At that time, Margrethe Vestager, the Executive Vice President of the European Commission, stated that the ordinary court's judgment made some legal errors. Ensuring that all companies, regardless of size, pay a fair share of taxes remains the primary task of the committee. The European Commission appealed to the European Court of Justice on September 25, 2020. As of now, the European Court of Justice has not issued a judgment.
Focus on tax rulings and selective advantages
Within the EU, Irish taxes are highly competitive. For a period of time, Ireland's corporate income tax rate remained at 12.5%. Many multinational corporations have their European headquarters located in Ireland. The relationship between Apple and Ireland began with the manufacturing center established by Cork in 1980.
In this case, the tax rulings issued by the Irish government against two Apple Group companies have become the focus of attention.
According to the European Commission's "Notice on the Concept of State Assistance under Article 107 (1) of the Treaty on the Functioning of the European Union" (hereinafter referred to as the "Notice"), the role of tax rulings is to determine in advance the application of the ordinary tax system to specific cases based on specific facts and circumstances.
According to the Notice, tax rulings may grant recipients a selective advantage in the following situations: (1) the rulings abuse the tax laws of member states and result in a decrease in tax amounts; (2) This ruling does not apply to other operators with similar legal and factual conditions; (3) Compared to other taxpayers with similar facts and legal conditions, regulatory agencies have applied more favorable tax treatment to specific entities.
To ensure the maintenance of a unified market, the EU has a very detailed national aid system. In identifying various forms of aid, including tax incentives, that exceed necessary limits and distort competition in the EU's internal market, the EU's national aid rules are very detailed, and a large number of supporting guidelines have been issued, including specific quantitative indicators for different situations Han Wei, Executive Director of the Competition Law Research Center at the University of the Chinese Academy of Social Sciences, said.
These two tax rulings were made in 1991 and 2007 respectively, involving Apple Group (consisting of Apple Inc. and all companies controlled by Apple Inc.) and its two subsidiaries located in Ireland, namely Apple Sales International (ASI) and Apple Operations Europe (AOE).
Apple Group transports most of its European sales through the non employee "headquarters" of ASI and AOE companies located in Cork. The European Commission believes that ASI and AOE are not tax residents of Ireland for tax purposes. According to Irish tax regulations, even if a company has its registered address in Ireland, it will not be recognized as a tax resident of Ireland as long as the parent company or company headquarters is not in Ireland but in another country.
In addition, Apple Inc. has signed cost sharing agreements and marketing service agreements with ASI and AOE. According to the cost sharing agreement, both parties agree to share the costs and risks associated with Apple Group's product development. Apple Inc. holds legal ownership of intellectual property, while ASI holds economic rights to Apple's intellectual property outside the United States.
The European Commission believes that since 1991, two tax rulings issued by Ireland to Apple have artificially significantly reduced the taxes paid by Apple in Ireland, which violates EU country aid rules. Ireland has been instructed to recover Apple's unpaid taxes from 2003 to 2014, which the committee estimates could reach up to 13 billion euros (plus interest).
Han Wei reminds that the promulgation of tax rulings should comply with the regulations on national aid. If a tax ruling cannot reliably reflect the results of the normal application of the ordinary tax system, the ruling may give the applicable party a selective advantage, that is, compared to other companies in similar factual and legal situations, the member state may rule that the applicable party's tax burden is reduced.
How does it affect geometry?
Tax incentives are certainly an important means of attracting investment in a region, but when preferential tax policies are only granted to individual enterprises by a government, it is easy to cause unfair competition within the same industry. In the special context of the European Union, it can also cause unfair competition among member states within the EU, "said Wang Xinrui, a partner at Shihui Law Firm.
How to understand the "series of legal errors" mentioned by Pitruzella? How will the Apple tax case go in the future?
Wang Xinrui stated that at this stage, especially for such a complex case, it is difficult to infer a specific reference. However, considering that errors in the application of the law are a significant factor in the successful acceptance of appeals by the European Court of Justice, Pitruzella's statement indicates that there is a high likelihood of significant substantive progress or turning points in this case. However, Pitruzella's current opinion does not have legal effect, and everything still needs to be formally ruled by the European Court of Justice in the coming months
In response to Attorney General Pitruzella's statement, Apple stated, "The ruling of the ordinary court is very clear. Apple did not receive a selective advantage or national assistance, and we believe that this ruling should be upheld
Even for Ireland, which can receive 13 billion euros in taxes, Finance Minister Michael McGrath TD stated in response to the Attorney General's statement, "Ireland's position has always been, and still is, that Ireland has paid the correct taxes and has not provided national assistance to Apple. We are now waiting for the judgment of the European Court of Justice on this matter
Why did the European Commission appear to be "ungrateful"? Han Wei analyzed that there is inevitably still a certain degree of tension between the interests of EU member states and the overall interests of the EU, such as the fact that the European Commission handles a large number of national aid cases every year. Competition policy is the foundation of EU economic integration, and ensuring market unity and a fair competitive environment in member states is a prerequisite for the healthy operation of the EU. The handling of cases similar to the Irish apple tax reflects the fundamental position of competition policy in the EU and is also the fundamental responsibility of the European Commission
The Apple tax case is just a microcosm of the European Commission's crackdown on member states' 'sweet heart tax transactions'. Sweetheart tax transaction "refers to the preferential treatment provided by member governments to multinational corporations, such as tax reductions and exemptions, in order to attract investment from multinational corporations, promote domestic economic growth, and increase employment opportunities. Its final judgment not only concerns the payment of 13 billion euros in taxes, but also has a more profound impact.
In practice, Apple is not the only company that utilizes the differences in tax systems among countries for tax avoidance structures. Internet giants such as Facebook (now Meta), Google, and Amazon also have similar structures. Regardless of the final ruling of the European court in the Apple tax case, it will focus on the tax avoidance strategies of multinational enterprises that are currently on the watch, and even a series of multilateral agreements such as the Organization for Economic Cooperation and Development that are still in the process of being promoted The 15% global minimum tax rate plan established by the OECD has had a significant impact Wang Xinrui said.