Paul Gallagher, the State's Attorney General during the depths of the financial crisis, has had a busy time getting back up to speed since Taoiseach Micheál Martin picked him a little over two weeks' ago for a second stint in office.
But there was one dossier that didn't require much reading in: the Apple file.
The Tralee native, who advised the last Fianna Fáil-led administration from the dying days of the Celtic Tiger era in 2007, through the subsequent economic collapse and Troika bailout, picked up a number of gigs representing the State after returning to private practice following the 2011 general election.
None was more important than his role on the legal team assembled to fight the Republic's legal appeal after the European Commission decided four years ago that Apple had received €13.1 billion of illegal state aid through a "sweetheart" tax deal that gave it an unfair advantage over other companies.
Gallagher was in full flight for much of the time as Ireland’s lead barrister in open hearings before the EU’s second-highest court in Luxembourg last September, claiming the commission’s case was “fundamentally flawed”, “confused and inconsistent”, and subjecting the country to “entirely unjustified criticism”.
But he chose to do away with rhetorical flourishes when summing up.
“I just want to finish up and say this: the commission ultimately fail to come to grips with something that is very simple. They ignore the fact that ultimately they have to prove that there was an advantage,” he said. “They weren’t able to say that there was one company which was treated less favourably than Apple.”
The EU General Court ruled on Wednesday that it agreed. The commission's case, spearheaded by competition commissioner Margrethe Vestager, "did not succeed in showing the requisite legal standard that there was an advantage" that flew in the face of EU law, it said.
"Much of the criticism levied at Ireland in relation to how we have handled the taxation matter has been given a very comprehensive answer today," Minister for Finance Paschal Donohoe said that afternoon. "This is a matter that has caused reputational difficulty during the many years in which it has played out. I think the ruling that has been made here today will lead many to reassess their view of our corporate tax regime and some of the statements that have been made about it."
In reality, however, Ireland's tax regime is under more threat than ever, according to tax and legal experts. The Central Bank, Irish Fiscal Advisory Council and debt ratings agencies have all warned the days of Ireland's reliance on windfall corporation taxes are numbered, even if the haul has been boosted, ironically, in recent years by multinationals moving intellectual property from tax havens under initial Organisation for Economic Co-operation and Development (OECD) efforts to clamp down on tax avoidance.
EU officials now threaten to go it alone and proceed digital tax proposals, seen as a major threat to the Republic’s tax take, if wider agreement isn’t reached among members of the OECD next year. The OECD process is already in trouble, with the US, a critical party as home to the world’s biggest tech groups, having pulling back from the talks last month and unlikely to re-engage until after US elections in November.
Meanwhile, having failed to tackle what it sees as "aggressive" tax planning under state-aid rules in the case of Apple in Ireland, Starbucks in the Netherlands and a Belgian tax scheme for 39 multinationals – which were also scuppered by the General Court – Brussels has opened another front.
EU officials signalled this week that they are looking into using a never-before triggered clause in EU treaty law – known as Article 116 – that would allow the commission to act against member states whose tax policies are deemed to be distorting competition in the single market. Such a move would only require a qualified majority of EU member states and backing from European Parliament, and get around normal national vetoes on tax matters, something that's prized by Ireland.
The commission will be "bruised" by the outcome of the Apple, Starbucks and Belgian so-called excess tax case, according to Laura Treacy, a Brussels-based partner with law firm McCann FitzGerald.
“The outcome of these tax cases may now tip the agenda toward EU-wide legislative intervention and now the commission knows the level of proof required it may have more success in future cases,” said Treacy.
Three words
The world's biggest-ever anti-trust case can be traced back to three words Apple chief executive Tim Cook said at a US Senate hearing in May 2013: that the iPhone maker had a "tax incentive arrangement" with Ireland.
It also prompted the commission to ask EU members for details of about 1,000 other tax "rulings" by domestic authorities, which would put companies like Starbucks and Amazon under the spotlight.
Cook told the US Senate subcommittee that Apple had been paying a top tax rate of 2 per cent on the income of two Irish-based subsidiaries, Apple Sales International (ASI) and Apple Operations Europe (AOE), over the previous three years.
It prompted immediate denials from the then government that Apple had cut special deals with Revenue. Within a week, Cook had also backtracked, saying the company did not use “tax gimmicks”. But, by then, Brussels was on the prowl.
Vestager presided over a decision in August 2016 that Apple owed Ireland €13.1 billion – or €14.3 billion, when interest was added. She said that the “selective” deals between both had allowed the tech group get away with paying an effective rate of 0.005 per cent on European profits in 2014 alone. Both Ireland and Apple launched legal appeals within months.
The commission’s case was mainly two-fold and centred on two tax opinions – or “rulings” as they are referred to – handed out by Revenue, in 1991 and 2007, the year the first iPhone was unveiled and Apple’s profits started to balloon.
The primary argument was that the rulings allowed Apple to push most of its European sales through employee-less “head office” parts of ASI and AOE in Cork, which were non-resident for tax purposes. Only the activities of Irish “branches” within the same units were subject to tax in the State.
ASI, by far the more profitable of the two units, is responsible for the sales and distribution of iPhones and other products outside of the US, and AOE is a manufacturing and assembly operation.
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 in Dublin. Apple, on the other hand, argued it was held outside the branches – and ultimately controlled from group headquarters, in Cupertino, California.
Burden of proof
The burden of proof, however, lay with the commission. The EU General Court’s ruling was clear. “The commission has not succeeded in showing that… the Apple Group’s IP licences should have been allocated to those Irish branches when determining the annual chargeable profits of ASI and AOE in Ireland,” it said.
The second strand to the commission’s case was that even if the Irish branches did not hold the IP, Revenue officials did not apply a proper arm’s-length principle of transfer pricing when it came to working out what profits could be taxed in the Republic.
Here, the court’s opinion did not back up Ireland Inc’s claims of total vindication on Wednesday. The ruling said there were “inconsistencies” and “defects” in the methods used in Revenue “rulings” in 1991 and 2007 in establishing with Apple tax advisors what profits were taxable in the State.
“The content of those exchanges is fairly vague and makes it apparent that the discussions between the Irish tax authorities and the Apple Group’s tax advisors at the two meetings held were decisive for the purpose of determining the chargeable profit of those companies, without there being any documented objective and detailed analysis regarding the functions of the branches and the assessment of those functions,” it said.
However, the court concluded that the commission failed to show the outcome was flawed – and that Apple paid less tax in Ireland than it should have.
"This is certainly a blow to the commission," said Marco Hickey, head of the EU, competition and regulated markets team in law firm LK Shields, noting that Vestager has only two months and 10 days to lodge an appeal with the Court of Justice of the European Union (ECJ), the EU's highest court.
Legal and tax experts say it is questionable whether the commission will mount an appeal, which could take a further two to three years and leave most of the €14.3 billion sitting in an escrow account in the meantime.
"Historically the ECJ has seldom overturned the decision of the General Court," said Peter Vale, a tax partner with Grant Thornton in Dublin.
McCann FitzGerald’s Treacy noted: “The commission may only appeal on points of law and not on any of the factual findings of the General Court. The commission was successful on quite a few key points of law in this case, but lost on others and also on a number of factual findings. It is interesting to note that the commission did not appeal the Starbucks decision [last year].”
The court, in both cases, established the principle that the commission is within its rights to verify whether tax rulings in countries are in line with state-aid rules, she said. However, it did not prove that either Starbucks or Apple had received any advantage.
Still, the court ruling highlights, for many, that using state-aid rules is not a way to secure tax justice. The EU did not have the scope in its investigation, for example, to pursue how Apple was able to book its non-US sales through Irish units that weren’t resident anywhere for tax purposes.
Winding down
Against the back drop of negative Apple headlines, then finance minister Michael Noonan announced in late 2013 a winding down of a practice where companies could be resident in Ireland but "stateless" for tax purposes.
The following year, Apple made its AOE unit in Ireland tax resident in the state, while ASI and another local unit, Apple Operations International (AOI), took up tax residency in Jersey, where corporate profits are tax-free.
The Apple tax case highlights the "extreme nature" of tax planning by multinationals and the need for "fundamental and urgent tax reforms at an EU and global level ... to ensure that authorities have appropriate tools to deal with this issue", said Michael McCarthy Flynn, senior policy and research coordinator at Oxfam Ireland.
“These includes a digital service tax, a minimum effective tax rate, effective measures against tax havens and new rules that require companies to disclose where they generate their profits and where they pay their taxes, for each country they operate in,” he said.
Apple acknowledged in a statement on Wednesday welcoming the General Court decision that global tax overhauls are needed.
“This case was not about how much tax we pay, but where we are required to pay it. We’re proud to be the largest taxpayer in the world as we know the important role tax payments play in society. Apple has paid more than $100 billion (€88 billion) in corporate income taxes around the world in the last decade and tens of billions more in other taxes,” a spokesman said.
“Changes in how a multinational company’s income tax payments are split between different countries require a global solution, and Apple encourages this work to continue.”
Meanwhile, Gallagher, whose €612,242 Apple case fees accounted for a little over 7 per cent of the total €8.43 million legal and consultancy bill as of March, will be earning his keep providing crucial counsel to the Government as it navigates shifting sands in international tax.
“There is going to be change in this arena in the coming years,” said Donohoe. “Ireland wants to be a constructive contributor to it.”
