The European Union’s top court has issued a final ruling in an ongoing legal battle over tax benefits, finding that Apple must pay billions in back taxes.
This week, the Court of Justice of the European Union (CJEU) confirmed a 2016 European Commission finding that Ireland granted Apple unlawful aid. Specifically, the CJEU found that companies belonging to the Apple Group received tax advantages that were “unlawful and incompatible with the internal market, and from which the Apple Group as a whole had benefited. According to Commission estimates at the time, Ireland had given illegal tax benefits worth €13 billion to Apple.
Background
The case stretches back more than a decade. In 2013, an initial inquiry was launched into whether Apple had engaged in sweetheart deals with Ireland to lower its tax bills. A formal investigation was initiated by the European Commission in 2014.
The Commission eventually found that tax rulings issued by Ireland to Apple “substantially and artificially” lowered the tax paid by Apple in Ireland since 1991. Those rulings created a tax arrangement between two Irish companies, Apple Sales International and Apple Operations Europe, which did not correspond to the economic reality. In fact, according to the Commission, and long suggested by critics of Apple’s tax structures, almost all sales profits recorded by the two companies were attributed to “head offices,” which existed only on paper. The result? Apple paid an effective corporate tax rate of 1% in 2003 and just 0.005% in 2014.
Apple’s CEO Tim Cook had previously declared fiscal year 2014 “one for the record books.” And in the same year, Apple boasted that international sales accounted for 60% of the 4th quarter 2014 revenue. However, the Commission found that Apple consistently avoided tax on almost all profits from sales in the E.U. by booking the profits in Ireland instead of in the country where the product was sold. This tax treatment was, the Commission found, “illegal under E.U. state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.”
The Commission ordered the recovery of what it called “illegal state aid” for a ten-year period preceding its first request for information in 2013. That means that Apple got a break on any activities the Commission deemed improper beginning in 1991 but was required to pay up for the period from 2003 to 2014. That bill totaled €13 billion ($14.5 billion U.S. at the time), plus interest.
Apple denied the allegations that it benefitted from any deal made with Ireland, with Cook saying, “The structure we have was applicable to everybody — it wasn’t something that was done unique to Apple. It was their law.”
While Ireland also claimed that it did nothing wrong, it switched gears in 2014, the same year the investigation began in earnest, with an announcement that it would end tax-favored breaks used by companies like Apple and Google.
After the 2016 ruling, Apple posted a customer letter on its website blasting the ruling as “unprecedented” and saying that “it has serious, wide-reaching implications.” The company also signaled that it would appeal, which it did.
(Apple posted a subsequent letter to its website in 2017, noting, “When Ireland changed its tax laws in 2015, we complied by changing the residency of our Irish subsidiaries and we informed Ireland, the European Commission and the United States. The changes we made did not reduce our tax payments in any country. In fact, our payments to Ireland increased significantly and over the last three years we’ve paid $1.5 billion in tax there — 7 percent of all corporate income taxes paid in that country.”)
In 2020, the General Court annulled the Commission’s decision, holding that the Commission had not sufficiently established that those companies enjoyed a selective advantage.
However, on appeal, the Court of Justice set aside the General Court’s 2020 judgment and issued its final judgment in the matter, confirming the Commission’s initial 2016 decision that Apple had received an unfair advantage.
CJEU
The CJEU, established in 1952, is located in Luxembourg and interprets E.U. law to ensure it is applied in the same way in all E.U. countries. The CJEU is divided into two courts—the Court of Justice and the General Court. The Court of Justice deals with requests for preliminary rulings from national courts, certain actions for annulment, and appeals, while the General Court rules on actions for annulment brought by individuals, companies, and, in some cases, E.U. governments.
An appeal may be brought before the Court of Justice against a judgment or order of the General Court. If the appeal is successful, the Court of Justice can set aside the decision of the General Court. Where permitted, the Court of Justice may give final judgment in the case—that’s what happened here. (Otherwise, the matter would be referred back to the General Court, which is bound by the decision given by the Court of Justice on the appeal.)
Transfer Pricing
The allegations in this case primarily focused on transfer pricing issues. Transfer pricing is a tricky concept affecting multinational corporations and how they allocate costs and–ultimately–taxable profits. In a typical scenario, a parent company may set up several subsidiary companies all over the world and move goods, services, and assets from one to another—that’s completely okay. However, transactions between those companies are supposed to be at “arm’s length,” meaning that the goods, services, and assets are transferred for the same price as they would have been between unrelated parties. But often, that’s not what happens.
With a wink and a nudge, transactions are often structured to shift profits from high-tax countries to low-tax countries to cut their tax bills. The most popular target for transfer pricing abuse is intangible property, including licenses for manufacturing, distribution, sale, marketing, and promotion of products in overseas markets. Since intangible property doesn’t really have a physical home—unlike, say, real estate—it’s easy to transfer it to countries that offer certain benefits, including more favorable tax treatment. (That’s what was in dispute in the recent Coca-Cola tax dispute with the IRS.)
As part of its initial ruling in 2016, the Commission contended that the arm’s length principle was a good benchmark for establishing whether a company was receiving a selective advantage. The Commission claimed that the Irish tax authorities had departed “from a reliable approximation of a market-based outcome in line with the arm’s length principle” by incorrectly allocating assets, functions and risks to the head office of the Apple companies “although those offices had no physical presence or employees outside Ireland.” Ultimately, the Court of Justice agreed.
Reactions
Margrethe Vestager, Executive Vice-President of the European Commission EU fit for Digital Age and Commissioner for Competition, called the ruling a “huge win for European citizens and tax justice” in a statement posted on X, formerly known as Twitter.
In a statement posted on the web, the Irish Department of Finance noted that officials are now examining the detailed judgment carefully. They went on to says, “The Irish position has always been that Ireland does not give preferential tax treatment to any companies or taxpayers.
Apple
Apple, which is headquartered in Cupertino, California, is ranked 12th on the Forbes Global 2000 (2024), a list of the largest companies in the world using four metrics: sales, profits, assets and market value. Last year, the company reported over $100 billion in profits.
In order to comply with the 2016 decision, Apple had been required to pay the taxes owed into an escrow fund with the understanding that the proceeds would be released when there was a final determination. That’s the case now, as the ruling cannot be appealed further.
The company told Forbes, in a statement, “This case has never been about how much tax we pay, but which government we are required to pay it to. We always pay all the taxes we owe wherever we operate and there has never been a special deal. Apple is proud to be an engine of growth and innovation across Europe and around the world, and to consistently be one of the largest taxpayers in the world. The European Commission is trying to retroactively change the rules and ignore that, as required by international tax law, our income was already subject to taxes in the US. We are disappointed with today’s decision as previously the General Court reviewed the facts and categorically annulled this case.”
The case is Commission v Ireland and Others (Case C-465/20 P).
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