€13bn Apple Case Targets Ireland

Arriving on stage in the Steve Jobs Theater in Cupertino, California on Monday, a vivacious Tim Cook unveiled Apple’s latest line of products. The CEO, who has been heading the tech giant for 13 years, informed the crowd — comprising analysts, media, social influencers from over 30 countries and millions of online viewers — that the company was launching groundbreaking technologies that he believed would significantly improve people’s lives.

Among the new products were a variety of innovations including an Apple Watch with sleep apnea detection capabilities and the iPhone 16 and 16 Pro, engineered to work seamlessly with Apple’s response to the growing dominance of generative AI, Apple Intelligence.

Following the launch, the 63-year-old spent time interacting with attendees, posing for pictures and listening to feedback during a first glimpse of Apple’s latest offerings.

In an interesting twist, the decision to host the major event on a Monday, a departure from the tech behemoth’s tradition of Tuesday or occasional Wednesday launches, allowed Apple to make its announcements ahead of the presidential debate between Kamala Harris and Donald Trump on Tuesday. It also created a separate distinction from another Apple event scheduled for Tuesday.

Meanwhile, roughly 9,100 km away and hours after the launch, the EU’s leading court seated in Luxembourg, passed an impactful judgement regarding Apple’s longstanding alleged Irish tax dispute tracing back to 2007 – the same year the tech titan sold its first iPhone.

The 80-page ruling by the European Court of Justice (ECJ) upheld the European Commission’s 2016 judgement that Apple had illegally benefited from Irish state aid and was required to pay Ireland €13 billion in back taxes with interest. Hours after the ruling, an emotionally moved Margrethe Vestager, EU competition commissioner and the Danish politician who was committed to the case for the last eight years, told the press about her relief on hearing the judgement.

In private discussions, her advisors warned her to prepare for the worst outcome. She confessed to bracing herself with a firm resolve for another expected humiliation in the legal arena, following past state-aid tax cases against Amazon, Fiat and Starbucks’ European branches that had each failed in the Luxembourg courts.

Admitting to her preparedness for a loss, she expressed surprise at the emotional impact of their win. “It was crucial,” she stated, “to demonstrate to European taxpayers that tax justice can occasionally prevail.”

The Shockwave
This stunning final verdict on the largest antitrust case in history has left the Government frantically trying to manage further criticism from rival parties ahead of a pending general election. The focus is on how the commission conducted the fight and the conjecture about how the unexpected profits should be utilised.

The damage to reputation has reignited worry about the influence on foreign direct investment (FDI). Officials in Brussels, buoyed by the victory, may continue to target Ireland’s tax policies, leading to questions about whether other global corporations in Ireland could now be vulnerable.

“The long-term implications of the decision on Ireland’s status as a desirable location for FDI can only be evaluated over time, but it’s undisputedly a triumph for Vestager,” opined Ronan Dunne, a Partner and Head of Competition, Regulated Markets and EU Law at Philip Lee law firm. “This judgement breaks a consecutive string of [commission] losses in relation to tax rulings.”

Vestager’s tenure as the EU’s chief competition regulator may conclude in November. Yet, she signalled that Ireland and other nations, including the Netherlands, Belgium, and Luxembourg, continue to be closely monitored by Brussels. During her press conference, she mentioned these four EU states as playing key roles in enabling multinational corporations to shift their profits.

Margrethe Vestager’s probing into the “strong-arm” tactics of big businesses pertaining to tax planning has incited a shift in regulations both in Ireland and worldwide over the past ten years, motivating a significant upturn in Ireland’s corporate tax revenues. This year, anticipations by economists such as those from Davy and Goodbody Stockbrokers predict Irish corporate tax revenues to reach an unprecedented amount of about €30 billion, in comparison to the €7.35 billion collected in 2016.

Apple, having relocated substantial intellectual property assets to Ireland in 2015, ranks amongst the main donors. This inquiry into Apple originated from testimony provided by Cook in 2013 to a sub-committee in the US Senate, in which he referred to a “tax benefit agreement” that the firm had in Ireland since it established a base in Cork in 1980.

The Irish Government instantly repudiated that Revenue had executed special arrangements with Apple – or with any other company. Cook retracted his statements within a week, stating the company did not resort to “tax tricks”, but it was too late.

His statement sparked concern in Brussels and led to the Commission asking EU countries to elaborate their rulings for about 1000 other tax considerations, leading to entanglements with Fiat and Amazon’s subsidiaries in Luxembourg, and a Starbucks branch in the Netherlands.

In June 2014, the Commission formally launched an investigation into Apple, alleging its tax agreements in Ireland were illicitly created to financially benefit the company in return for employment opportunities. Their concluding verdict in August 2016 emphasised Apple’s negligible corporation tax (0.0005 per cent) paid on its European proceeds two years prior.

The underlying premise of their allegations were two tax verdicts – or “rulings” – issued by Revenue to Apple in 1991 and 2007. These verdicts offered Apple an unfair edge over other companies, enabling it to streamline vast European sales through “head office” parts of two subsidiaries in Cork (ASI and AOE), void of employees, non-resident for tax implications in Ireland – or elsewhere. Essentially, they were rootless.

The Commission faced difficulties distinguishing “branches” in Ireland liable for tax – within the subsidiaries – from the actual head offices.

ASI managed sales and distribution of iPhones and other goods internationally, excluding the US, while AOE facilitated manufacturing and assembly processes. According to the commission, the precious intellectual property (IP) tied to Apple devices was housed within the Irish divisions of ASI and AOE. This notion suggested that most of the profits were subject to taxation by Revenue. Conversely, Apple posited that the IP was beyond the branches and primarily controlled from Cupertino.

The commission also contended that Ireland didn’t invoke the arm’s length principle in determining the taxable gains of the Irish units. This principle suggests that transactions between two divisions of the same group should be conducted as though there was no direct link. As such, transactions should match open-market prices. Meanwhile, the Irish Government countered by stating the arm’s length transfer pricing guidelines were not established in Ireland during the 1991 and 2007 Apple tax decisions. The government staunchly maintained that the commission attempted to retroactively apply guidelines launched by the OECD in 2010.

The legal intricacies of the case have periodically sent shock waves rippling across the Atlantic over the past few years. A General Court in Luxembourg, the second-highest court in the EU, overturned an appeal made by Apple and Ireland against the commission’s ruling in July 2020. The court stated that the commission did not conclusively prove the IP licenses should have been distributed to the Irish branches when calculating taxable profits for ASI and AOE.

A subsequent appeal by the commission led to an advocate general, a primary adviser to the court, insisting last November that the General Court had made several legal errors. Advocating for the nullification of the 2020 decision, he asked for a new ruling based on its own merits. In a surprising move, the ECJ went one step further this Tuesday passing a final decision on the case. They stated that the lower court had made a mistake in its judgement, affirming that the commission had successfully argued its case to meet the necessary legal standards.

“I was taken aback by this ruling. I did not anticipate it,” expressed Stephen Daly, a reader in tax law from Kings College London. “My assumption was that the commission’s chances of winning were quite slim, considering it had faced a series of losses in similar cases over the past few years.”

The government declared in the past week that the tax concerns surrounding Apple have now become historical issues as current legislation has been changed. The Revenue Office maintained its stance that no firm or taxpayer has been offered unique tax benefits.

Following the US Senate hearings a few years ago, Finance Minister at that time, Michael Noonan, initiated a process to close down, by 2020, existing loopholes that permitted firms to be registered in the Republic yet not pay state taxes. This move intended to end the notorious tax tactic commonly referred to as the ‘double Irish’.

Apple subsequently transferred its intellectual property to the Republic through an internal acquisition conducted in 2015 by an Irish subsidiary of AOI. The resulting deferred tax assets from the estimated €217.4 billion acquisition were almost fully exhausted, causing Apple’s tax contributions in Ireland to increase sharply in recent times, as outlined in an assessment by Seamus Coffey, a lecturer in economics at University College Cork.

In addition, about five years ago, numerous US multinationals moved their intellectual property to the Republic because of revisions to OECD transfer pricing instructions and the US fiscal protocol.

Notably, Daly said that other global firms that used Apple’s tax structures should be concerned. However, this view was not unanimous as Apple’s specific and unusual tax configuration of an overseas ‘head office’ and a local ‘branch’ in its Irish operations was considered a unique case. Marco Hickey, SC, head of EU competition and regulated markets at LK Shields Solicitors, shared this perspective and believes that the judgment doesn’t automatically question the past tax strategies implemented by Ireland for other active corporations in the country.

On this matter, co-head of Mason Hayes & Curran’s law firm tax department, Kevin Mangan, emphasised that the ‘selective advantage’ given to Apple was proven by the commission to have originated from 1991 and 2007 Revenue letters, not from any standard principles of Irish tax law. Therefore, he indicated that historical corporate structures with risk-based resource allocation shouldn’t lead to significant concerns.

In light of the Apple case that put Ireland under the spotlight, Hickey asserts that Ireland has been diligent in following State aid rules. It is evident from the commission’s records over the past quarter-decade where only four state-aid recovery decisions have been taken against Ireland compared to Germany’s 70, Spain’s 40, Italy’s 48, France’s 18, and Greece’s 22. Hickey drew attention to the fact that at the beginning of this week, Ireland’s Apple case was the sole Irish case amongst 80 active cases against EU member countries.

Nevertheless, Peter Vale of Grant Thornton Ireland perceives that the ECJ’s decision will give ammunition to those claiming Ireland to be a tax haven. He observed this, notwithstanding the fact that it was complicated characteristics of the US tax law that enabled corporations like Apple to establish tax structures in Ireland.

Vale argued that despite Apple’s and Ireland’s committed defence against the European Commission’s judgments, the ongoing legal battle has certainly tarnished Ireland’s prestige.

Apple clarified this week that the focus of the case was not about the amount of tax it should pay, but rather to which government the tax is due. The corporation revealed that it has already paid $20 billion in taxes on the same profits to the American government, which the commission argues, should have been taxed by Ireland.

It also announced on Tuesday a one-off $10 billion charge for this year to settle complications brought about by the ECJ’s verdict.

Back in 2018, the ECJ compelled the Irish Government to seize the contested taxes and interest from Apple and deposit it into an escrow account. As per the Finance Department, the account primarily holds European government bonds and is presently valued at over €14 billion. This is after €455 million of the total amount was transferred between 2019 and 2021 to anonymous nations laying claim to the same profits as per the account regulations.

Finance Minister Jack Chambers indicated that it is likely that Ireland will receive the majority of the €14 billion, although other adjustments from third countries remain possible. The Department later cleared the air by stating that they do not anticipate any further claims from other nations.

The UK Government has reassured that the finances set to be moved over soon will not be allocated towards the upcoming pre-election budget, nor commonplace expenses. Every political party is likely to propose plans for this unanticipated capital in their manifestos, ahead of the mandatory election before mid-March next year.

Various proposed uses for this fund include repaying the national debt – presently sitting around €220 billion, diverting the finances into two recently established sovereign wealth funds to accrue unexpected taxes, or channeling it into addressing discernible shortfalls in housing, transport, and energy sectors in Ireland, as suggested by Goodbody economist Dermot O’Leary.

During a meeting with the Minister for Enterprise, Peter Burke in June, Apple executives aired their concerns over the prospective outcome of the tax case, pointing out the “intense competition” from other nations aiming to attract multinational companies away from Ireland. Minutes from the meeting, disclosed under the right to information legislation, revealed that Apple also mentioned infrastructure issues in Cork that are obstructing their expansion plans there.

Despite being reached, Apple had no comment to make on the meeting. However, their representatives underscored their over four-decade-long presence in Cork, where they employ over 6,000 individuals and they are also in the process of constructing a new facility for an additional 1,300 staff members, set to open in the upcoming year.

Meanwhile, in the US, Apple’s stocks took only a minor hit of 0.5% on Tuesday, as investors on Wall Street processed the judgement – therefore ensuring Apple’s status as the highest-valued company in the world right now, standing at $3.39 trillion.

Eight years ago, when the original commission decision was made, Apple was valued just below $590 million.

Condividi