Apple loses landmark tax dispute with the EU

Apple lost a €13-billion battle against unpaid taxes, a landmark in European Union law over “sweetheart tax deals”.

The European Court of Justice reversed an earlier ruling that favored the technology group and found that Ireland “granted Apple illegal aid” which it was obliged to recover.

Experts said that the long-awaited decision could have significant implications for how multinationals manage their profits.

The ruling relates to a case from 2016, in which Margrethe vestager, European Competition Commissioner, claimed that Apple received “illegal state aid” from Ireland. The case focuses on Apple’s exclusion of its profits from Ireland, for tax purposes, if they are generated outside the United States. These profits were routed through two Irish subsidiaries that used intellectual property licenses.

The European Commission has ruled that Ireland made “sweetheart” deals with Apple to allow it to establish two subsidiaries in Ireland. These terms were not offered to other countries, and Apple received tax benefits of €13 billion. Apple won its appeal in 2020, but now the European Court of Justice overturns that ruling.

The Irish government stated that the ruling is “now only of historical significance”, but it added that they would start the process of releasing the assets from an escrow account estimated to have held €13.8 billion by the end of the last year.

Dan Neidle is a tax attorney and founder of Tax Policy Associates. He said that the decision was a “massive victory” for the Commission: “Their [strategies] of using state aid and competition law to override the domestic tax rules have succeeded. Most observers and I thought that it would not. “We were wrong.”

He said that there would be “significant consequences” and that EU members states and multinationals will have to reconsider using “transfer prices” to allocate profit between different countries.

Alex Haffner is a partner in Fladgate’s competition department. He called the ruling “dramatic”, and added that it shows “the EU authorities are ready to use their collective muscle to bring Big Tech down when necessary”.

Farhan Azeem is the head of transfer prices at PKF, a firm that audits and accounts. He said: “Multinationals who have benefited from setting up a European center in Ireland should expect to be scrutinized more.” The days of sweetheart deals are over.

Vestager also won a second victory when the top court of Europe backed up her efforts to crackdown on Google’s anti-competitive behavior. The court dismissed an appeal filed by Alphabet (Google’s parent company) against a €2.4bn fine imposed by the European Commission seven years ago.

Vestager, 56 and due to retire this year, tried to challenge other multinationals on their taxes with mixed results. She called the Apple decision a “huge victory for European citizens and fiscal justice”. She said that the commission will continue to work on preventing harmful tax competition, aggressive tax planning and tax evasion by EU countries and multi-nationals through legislative proposals and enforcement.

“Our investigations have contributed decisively to a mental shift, a change in attitude among the member states.” “They have helped trigger and accelerate legislative and regulatory reform,” Vestager stated.

Apple claimed to have paid $577m in taxes, or 12.5% of its profit in Ireland in accordance with the tax laws of that country during the time period covered by the European investigation. Apple accused the commission “of trying to retroactively alter the rules, and ignoring that our income, as required under international tax law, was already subjected to taxes in the United States.”

The issue has never been how much we pay in taxes, but to which government. We pay all taxes wherever we are and there is no special deal.

Tim Cook had previously dismissed the position of the Commission as “total politics crap”.

Ireland’s low tax rates, which helped it attract technology companies for their European headquarters to be located in Ireland, also challenged the previous ruling. It said that its treatment of intellectual properties transactions was in line other countries within the Organisation for Economic Co-operation and Development. Ireland does not grant preferential treatment to companies or taxpayers, it stated. Ireland will respect the rulings of the court in relation to the tax due.

The ruling is in response to the changing tax landscape for multinationals. More than 140 countries have signed on to a global tax which aims to impose an annual minimum of 15% on profits made by global companies. The agreement aims to eliminate the incentives for countries that act as tax havens.

Paul Monaghan is the chief executive of Fair Tax Foundation, an enterprise that promotes tax compliance. He said, “The commission should be commended for its persistence in challenging Ireland over the unfair state assistance they gave to Apple through huge tax breaks.

Apple’s tax evasion has been hard-wired since many years. Apple still funnels income and profits from the UK, Europe, and elsewhere to Ireland. Ireland is a tax haven and charges little or no corporate tax. Ireland, which is a tax haven in full-blown form, has created new loopholes around intellectual property. The global minimum tax will likely impact this.