Giovanni Pitruzzella, a former chairman of Italy’s competition authority who is now a key adviser to Europe’s highest court, sent shock waves through Government buildings in Dublin and Silicon Valley in California on Thursday when his opinion on the long-running case over Apple’s Irish tax affairs was published.
The Government had been fairly optimistic that the advocate general at the European Court of Justice (ECJ) would back up a July 2020 ruling by the EU’s second-highest court, the general court, that the European Commission had failed to prove to the “requisite legal standard” that Apple had received illegal tax aid in the Republic.
Instead, Pitruzzella said the general court had made a “series of errors of law” in reaching its conclusions. He recommended that the ECJ set aside the general court’s judgment and that it be sent back down to the lower court for a new ruling on the case’s merits.
Remind me, how much is at stake?
The commission said in August 2016 that Apple owed the Government more than €13 billion of back taxes, covering the decade to 2014, plus interest.
The total bill was put at the time at €14.3 billion. That was subsequently put into an escrow account, with the funds held mainly by way of investments in European government bonds, rather than hard cash. The size of that pot had fallen to €13.4 billion by the end of last year. This was down to the effects of pervasive negative rates on European bonds in recent years and Apple being allowed to take out some money to pay taxes in other jurisdictions.
So, what does the advocate general’s opinion mean in reality?
First of all, the reason this is before the ECJ in the first place is down to the EU competition commissioner Margrethe Vestager deciding in late 2020 to appeal the general court decision.
The advocate general’s opinion is meant to aid the ECJ judges presiding over the appeal to come to a judgment. Such opinions are very influential and are followed in the majority of cases by the court.
The ECJ is expected to issue its ruling in about six months.
What has the advocate general taken issue with in the general court ruling?
To understand this, it’s probably best to look at the heart of the case.
The commission’s case was centred on two tax opinions – or “rulings” as they are referred to – handed out by Ireland’s Revenue Commissioners, in 1991 and 2007, the year the first iPhone was unveiled and Apple’s profits started to balloon.
Its primary argument was that the rulings allowed Apple to push most of its European sales through employee-less “head office” parts of two Irish-based subsidiaries, Apple Sales International (ASI) and Apple Operations Europe (AOE), which were non-resident for tax purposes. Only the activities of Irish “branches” within the same units were subject to tax in the State.
The commission’s view was that valuable intellectual property (IP) behind Apple products lay inside the Irish branches, meaning that most of the profits were taxable by Revenue here. Apple, on the other hand, argued it was held outside the branches – and ultimately controlled from group headquarters, in Cupertino, California.
One of the advocate general’s key findings is that the general court “misinterpreted” how the commission had come to the view that the IP lay in the Irish branches.
It was not, as the general court stated, simply down to the fact that the head offices having no employees or a physical presence, he said. Instead, he said, it was down to the linking of two separate findings: the facts that there were no functions or risks assigned to the head offices but plenty of them assumed by the branches.
Does all this mean that Apple may end up paying Ireland the more than €13 billion that the commission originally ordered?
The opinion does not comment on what the final tax bill should be, if any, notes Kevin Mangan, co-head of tax at law firm Mason Hayes & Curran.
“But given his extensive reasoned acceptance of many of the commission’s key appeal arguments and the fact that there may now be a full rehearing of the case, the full €13 billion, plus interest, calculated by the commission in its original state-aid finding remains firmly on the table for now,” Mangan said.
Why didn’t Ireland want to take the money in the first place?
Successive Irish governments have taken the stance that the commission’s 2016 decision was an attack on the Republic’s sovereignty when it comes to taxation. The view was that anything that questioned the basis of the State’s tax policy could damage its attractiveness for foreign direct investment.
How long is the case likely to drag on for?
Years, according to experts, including Ronan Dunne, partner and head of EU, competition and state aid at law firm Philip Lee.
But, in the meantime, the opinion must be regarded as a big win for Vestager, who has had limited success in using state aid rules to take on multinationals over tax.
Last November, the ECJ overturned an earlier court ruling that the commission was correct in ordering Fiat Chrysler to pay Luxembourg €30 million in back taxes.
The general court moved in 2019 to quash a commission order that Starbucks pay the Netherlands up to €30 million. Meanwhile, an ECJ advocate general said in June that the commission and general court were wrong in finding that Luxembourg had granted €250 million of illegal tax benefits to Amazon.
And what does it mean for Ireland’s corporate tax policy?
It’s certainly embarrassing. But things have already moved on in the past decade.
Within months of the commission beginning to look into Apple’s Irish tax affairs in 2013, then minister for finance Michael Noonan announced that he was closing the loophole that had been used by Apple – and others – that allowed a company to be incorporated in the Republic but be “stateless” in terms of tax residency.
Ireland has been a big beneficiary from some of the international corporate tax regime changes that have taken place in the past decade, partly due to the Apple case galvanising political will to tackle tax avoidance.
A host of other US multinationals subsequently moved IP to the State in and around 2019 on foot of changes to guidelines from the Organisation for Economic Co-operation and Development (OECD) on the pricing of transactions between two parts of the same group (known as transfer pricing) and changes to the US tax regime. This has contributed to massive corporate windfall taxes flowing into the exchequer in recent years.
