The Commission suffers another setback in its fight against illegal state aid

On 15 July 2020, the European General Court (GC) rendered its verdict on the Commission decision of 30 August 2016 requiring obliging Ireland to claim the payment of € 13 billion of back taxes from Apple. The court annulled the decision; see Cases Ireland vs Commission T-778/16 and Apple Sales International and Apple Operations Europe vs Commission T-892/16).^[1]

On the very same day, the Commission proposes a package of measures to achieve a fairer taxation. The measures are aimed at boosting tax fairness; the fight against tax abuse, unfair tax competition and for increasing tax transparency will continue.^[2]

As regards the judgment, one should note that the GC does not deny the Commission's competence to challenge tax benefits granted to companies but criticizes the Commission's factual reasoning of the advantage as "not succeeding in showing to the requisite legal standard".

The European Commission had assessed the tax payment agreements between Ireland and the technology corporation in 2016 as unlawful state aid. The decision stated that Ireland should retroactively collect taxes from Apple for the years 2003 to 2014. Ireland had refused to claim the underpaid amount for 19 months before complying with the demand of the EU Commission to avoid infringement proceedings.

The case had begun together with the examination of state aid in favour of companies like Apple (Ireland), Starbucks (Netherlands) as well as Fiat Finance (Luxembourg) where the Commission had reviewed transfer pricing agreements between companies and the Member State concerned. Despite not being competent for direct taxation, the Commission's right of pursuing unfair advantages using state aid law was once again confirmed and thereby reinforced.

The Commission analyses whether decisions of the tax authorities on the amount of corporate income tax to be paid are in compliance with EU state aid rules. In advance tax rulings, the tax authorities "explain" to individual companies how the corporate tax they pay is calculated or how certain tax rules will be applied in their case. Tax decisions may constitute state aid within the meaning of EU rules if they selectively favour a particular company or group of companies.

The Commission has examined the Irish calculations used to determine the tax base and came to the conclusion that the taxable profit was underestimated, which unduly favoured the companies concerned by reducing their tax burden, granting them selective benefits. In the cases involving Apple, Starbucks and Fiat, the countries and the companies concerned applied to the European General Court requesting the Commission's decisions to be annulled.

In the Starbucks case (Kingdom of the Netherlands vs Commission and Starbucks Corp. and Starbucks Manufacturing EMEA BV vs Commission, Cases T-760/15 and T-636/16, ECLI:EU:T:2019:669)^[3], the General Court annulled the Commission decision of 21 October 2015, holding that the selective advantage to Starbucks was not proven.

In the Fiat Chrysler case (Grand Duchy of Luxembourg vs. Commission and Fiat Chrysler Finance Europe vs. Commission (Cases T-755/15 and T-759/15, ECLI:EU:T:2019:670) ^[4] the General Court upheld the Commission decision of 21 October 2015. The judgment of 24 September 2019 is under appeal (Cases C-885/19 P and C-898/15 P).

In Apple's case, the Commission considered that almost all of the company's profits were internally allocated to "administrative headquarters". The respective "administrative headquarters" were only fictitious and could not have generated such profits. According to the Irish legislation in force at the time, these profits were not taxed at all. This in turn would have resulted in the Group paying only 1 percent tax on its profits in Ireland in 2003. By 2014, it would have fallen further to 0.005 percent. Thus, the company paid only 50 euros in taxes on a profit of one million euros.

Other companies also maintain branches in different countries with the aim of avoiding as many tax payments as possible overall and several EU countries such as Ireland, Luxembourg and the Netherlands attract companies with particularly low corporate tax rates. The idea of a local subsidiary licensing intellectual property from another subsidiary abroad is also very popular. The costs involved compensate the locally generated profits and thus allow them to be taxed in a third country, which can be a tax haven such as Bermuda or Jersey. For its part, Ireland fears that it will become less attractive as a location for large companies if the tax framework has to change.

Apple insisted in the lawsuit that the company had paid 20 billion dollars in taxes in the USA during the period in question, since that is where the value creation took place.

Aid is only deemed to exist if the company in question was granted a benefit that other companies in the same situation did not receive. The Commission must prove this.

In their application for annulment of the Commission decision, Ireland and Apple, put forward 12 pleas in law alleging, in particular, that the Commission committed manifest errors of assessment by failing to correctly understand Irish law and the facts and that it made manifest errors of assessment in its assessment of the aid.^[5]

As stated above, the General Court annulled the decision on factual grounds. This is not necessarily the end of the litigation. The Commission can appeal the judgment on grounds of law. Or it can take another decision, revising the factual reasoning.

The Commission's Executive Vice-President Margrethe Vestager wrote: "The Commission will continue to look at aggressive tax planning measures under EU State aid rules to assess whether they result in illegal State aid. At the same time, State aid enforcement needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency."^[6]

Dr Rainer Bierwagen

[1] Court press release in English and French language at http://curia.europa.eu/juris/document/document.jsf?text=&docid=187579&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1.

[2] Commssion press release at https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1334

[3]http://curia.europa.eu/juris/document/document.jsf?text=&docid=221865&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=8661612+.

[4]http://curia.europa.eu/juris/celex.jsf?celex=62015TJ0755&lang1=de&type=TXT&ancre=.

[5]http://curia.europa.eu/juris/document/document.jsf?text=&docid=187579&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1

[6]https://ec.europa.eu/commission/presscorner/detail/en/statement_20_1356