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Apple wins the battle with the EU: the tax regime in Ireland is not state aid

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Apple wins the battle with the EU: the tax regime in Ireland is not state aid. The EU Court (EGC) delivered its decision against the European Commission in the Apple case. The US company does not have to repay $ 14.8 billion in state aid it received from Ireland.

The EU and its fight against aggressive corporate tax planning must refer to a ruling by the European Court (ECG) which identified Apple’s Irish tax regime not as “state aid”.

Apple and the Irish government have managed to overturn the controversial 2016 EU decision that Apple’s tax system in Ireland qualifies as state aid. According to the first EU decision, Apple should have paid 13 billion euros, plus a further 1.2 billion euros in interest.

The European Court of Justice (ECG) annulled the 2016 decision of the European Community stating that the Commission failed to demonstrate to the necessary legal requirements that there was an advantage under Article 107, paragraph 1. of the TFEU.

Referring to Article 107 (1) of the Treaty on a Functioning of the European Union (TFEU), the court found that the EC Competition Commission was wrong in finding that Apple’s Irish entities had been granted an economic advantage through state aid. Furthermore, it argued that the Commission has not shown that the contested tax rules were the result of the discretion exercised by the Irish tax authorities which led to a selective advantage for Apple’s Irish operations (i.e. ASI and AOE).

The decision of the EU court of justice on the apple and state aid case in Ireland

According to the General Court, the Commission should have shown that the revenue represented the value of the activities actually carried out by the Irish branches themselves, in view, inter alia, of the activities and functions actually performed by the Irish branches of ASI and AOE, by a on the other hand, and the strategic decisions taken and implemented outside those branches on the other.

If, however, the Commission had shown that the revenue of Apple’s Irish entities represented the value of the activities actually carried out by the Irish subsidiaries themselves, the decision might have been different. In this case, in fact, effective taxation of that income would have been appropriate.

However, the court expressed regret for the incomplete and sometimes inconsistent nature of the disputed tax rulings, but I stressed that in the Apple case, the flaws identified by the European Commission were not sufficient to prove the existence of a tax advantage.

The 2016 decision in the Apple case surprised almost everyone and the decision of the EU Court of Justice is no different. At the time the United States claimed that the EU was only discrimination against US companies. At the same time the Irish government was trying to defend its position with these special facilities linked to multinationals.

The result was a worldwide debate over whether Ireland had granted the company illegal tax benefits and as a dividing line between tax incentives and state aid. This decision may not have resolved this debate, especially as the EU Court of Justice has now set an important precedent in international tax law.

The controversial issue of state aid to multinationals

Both the Irish authorities and Apple have strongly denied any wrongdoing since the EU Competition Commission launched its state aid investigation and concluded under the leadership of Margrethe Vestager. The moot point was whether the Irish tax decisions granted to Apple in 1991 and 2007 violated EU state aid law or not.

The European Commission argued that these rulings gave Apple an unfair advantage over other companies. These aspects have allowed the American company to direct its profits from European sales through its Irish branch to an office located in a tax haven.

This is how the company posted profits of € 22 billion in 2011 and paid taxes of just € 50 million in Ireland, according to US Senate hearings. The European Competition Commission has argued that Apple’s effective tax rate in Ireland fell to an all-time low of 0.005% in 2014.

However, the American company claims that this rate is misleading because it includes Apple’s global revenue, and the global effective tax rate was 24.6%. The dispute over where Apple should pay taxes is part of a larger economic picture, however.

Apple has operated in European markets through Ireland for decades. The company first started the Irish business in Cork in 1980 and today has over 6,200 employees in the country, but the operation had a double structure: an operational headquarters parallel to the production plant.

Ireland as a gateway to Europe for US companies

At the time, the Irish government was looking to reposition its economy as the best entry point in Europe for US businesses and redesigned its tax system to attract foreign direct investment (FDI). To date, however, we can say that the Irish tax model has managed to attract both investments and disputes.

The Irish government approved Apple’s dual structure and allowed the company to operate at a very low tax cost. The company has long pointed out that its shares were above the limit and in line with tax law. However, it has always reiterated that it would move its operations to the United States if the corporate tax rate was reduced there.

In fact, after the Tax Cuts and Jobs Act (TCJA) was passed in 2017 in the US, Apple expanded its operations in the United States and transferred $ 250 billion to its home country because corporate income tax is was reduced by 21% and because a special (reduced) rate for repatriation was introduced.

The current situation of Apple

The decision by the EU Court of Justice is a great victory for Apple and the Irish government, but the business world has changed dramatically since the start of this case. This court decision may be of comfort to taxpayers, but the international situation is still complex.

Many tech companies restructured before the final verdict, including Google, precisely because Europe agreements aren’t what they used to be. Just think of the situation of the tax system known as “the double-Irish”. This structure, valid for many years, has now lost its appeal, as the United States has transformed its tax system to convince American companies to bring their investments “home”. The combination of tax scandals and controversies has accelerated changes in global fiscal policy.

In the same period, the OECD and the EU pursued a series of tax avoidance measures to reduce the shift in profits and the erosion of tax bases (EU BEPS project). The world of taxes has changed dramatically since the EU launched its investigation into Apple in 2013.

Businesses have had to adapt to the new international tax environment. However, this does not mean that there are no more opportunities for companies to reduce their tax rate; however, in different ways than in the past.

The new debate is where businesses should pay taxes (see the case of digital businesses), not so much if they pay enough. However, the business community will be eager to find cheaper ways to adapt despite having known for several years that substance testing has raised the bar.

Tax planning in the international arena

The aforementioned sentence, as anticipated, represents an important precedent in an uncertain international situation. The situation where even today many multinationals continue to exploit the favourable tax regimes implemented by some states with the aim of promoting the activities and offices of multinationals, reaching advantageous tax agreements for these companies.

For some States, in fact, being considered as the “gateway” to Europe for foreign multinationals is more important (at an economic level) than the possible direct tax revenues they can obtain. It is in this context that, in recent months, the international debate on the taxation of the digital economy is becoming more stringent.

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