This Chartered Accountants Tax Case digest considers the judgement of the General Court of the European Union on whether Ireland implemented State aid in favour of the Apple Group. This case concerns the appeal of the decision of the Commission on 30 August 2016 on State aid provided by Ireland to Apple. The Commission found that two advanced tax decisions (tax rulings) issued by Revenue to two companies within the Apple Group constituted unlawful State aid.

There is an air of anticipation on whether the Commission will appeal the decision of the General Court. An appeal can only be brought before the Court of Justice on a point of law, which may be difficult given that the outcome was largely determined on facts. This appeal must be brought within two months and 10 days of the notification of the General Court’s decision. With the concepts of company management and control being a focal point for the international corporate tax reform agenda, led by the OECD, the Apple case may be one of the last tests of the current corporation tax system.

Background

Apple Operations Europe (AOE) and Apple Sales International (ASI) were bound by a cost-sharing arrangement, with their ultimate parent, Apple Inc. The companies agreed to share the costs and risks associated with the R&D activities connected to the Apple products and services. Apple Inc. remained the official legal owner of the cost-shared intangibles (Apple IP). AOE and ASI were granted a royalty-free license to the cost-shared intangibles. This enabled them to manufacture and sell Apple products in the territories assigned to them.

ASI was also party to a marketing services agreement with Apple Inc. ASI paid a fee, being a percentage of the ‘reasonable costs incurred’ plus a mark-up to Apple Inc., for marketing services.

ASI has an Irish branch, which is responsible for procurement, sales and distribution activities associated with the sale of Apple-branded products to related parties and third-party customers. AOE’s Irish branch is responsible for the manufacture and assembly of a specialised range of computer products in Ireland, which it supplies to related parties in the EMEIA region.

The Commission’s State-aid decision

The Commission considered the tax rulings granted by Revenue to ASI and AOE, to have been granted in effect by the Irish State. In the Commission’s State-aid decision, the rulings reduced ASI and AOE’s tax liability, and as a result, the Commission viewed Ireland as having renounced tax revenue, giving rise to a loss of State resources. As the Apple companies operated in all Member States, the tax rulings, according to the Commission, gave rise to a distortion of competition in the EU. Further, as the tax rulings had led to a reduction in ASI and AOE’s tax base, for the purpose of establishing corporation tax in Ireland, a tax-advantaged had been conferred on the two companies. Also, as the tax rulings were granted only to ASI and AOE, it was presumed they were selective in nature. The Commission considered the tax rulings to constitute a derogation from the ordinary rules of corporation tax in Ireland.

The Commission’s primary reasoning for State aid

The Commission contended that the profits of the head offices of ASI and AOE should be allocated to the respective Irish branches on the grounds that the branches performed the functions related to the Apple IP, which were crucial to the companies trading activities. The Commission’s view was that the profits of ASI and AOE’s sales activities correspond to the profits from the use of the Apple IP licences.

Ireland and ASI and AOE contested the primary reasoning of the Commission on the basis that:

1. Analysis of the advantage and selectivity conditions should be separate.
2. Errors were made in:
• the assessment of the referenced framework and normal taxation under Irish tax law due to the incorrect application of Section 25 TCA 1997,
• the application of the arm’s length principle; and
• the analysis in the context of the OECD 2010 Report on the Attribution of Profits to Permanent Establishments of 22 July 2010 (the OECD Approach).
3. The assessment of the Apple Group activities was incorrect.
4. The conclusions on the selective nature of the contested tax rulings included presumed selectivity surrounding derogations from Irish tax law, with no regard for the treatment of undertakings in comparable situations.

Analysis of the advantage and selectivity conditions

While the General Court did recognise that advantage and selectivity were two separate conditions, the Court considered the simultaneous examination of the conditions to be irrelevant, provided they were, in fact, both examined. Accordingly, the complaint on this issue was rejected as unfounded.

Errors in the Commission’s primary reasoning

The referenced framework

The reference framework used by the Commission in its analysis of whether a selective advantage arose was the Irish corporate tax system. The General Court rejected the complaint of Ireland and ASI and AOE that the reference framework should be Section 25 TCA 1997. The provision, in and of itself was considered insufficient for the purpose of consistently applying corporation tax to non-resident companies. The chargeable profits of an Irish branch are subject to corporation tax in Ireland making a non-resident company subject to the conditions for the application of corporation tax, as it applies to resident companies. Accordingly, the General Court found the ordinary rules of taxation on corporate profits to be the correct reference framework.

Irish tax law

Section 25 TCA 1997 provides that a non-resident company is subject to corporation tax on the chargeable profits of the trade directly or indirectly attributable to the activities of the Irish branch and any income from property or rights used by or held by the branch. The General Court considered that Section 25 TCA 1997 clearly relates only to the profits derived from the trade of an Irish branch and excludes profits derived from other trades carried on by the non-resident company. The General Court considered it apparent from the judgment in S. Murphy (Inspector of Taxes) v. Dataproducts (Dub.) Ltd. [1988] I. R. 10 note 4507 (Dataproducts) that the question in determining the profits of the branch was whether the Irish branch has control of the property.

The General Court found that the Commission did not attempt to show that the Irish branches controlled the Apple IP, but chose an ‘exclusion’ approach, which applied the Apple IP licenses to the Irish branches, as ASI and AOE, the non-resident companies, were regarded as not having employees or a physical presence to manage them. Accordingly, the Commission was considered to have incorrectly applied Section 25 TCA 1997.

The arm’s length principle

The General Court considered it correct that the Commission had relied on the arm’s length principle in assessing the application of Section 25 TCA 1997 and determining the profits allocated to the Irish branches. However, Ireland contended that the Commission’s primary line of reasoning failed to consider the economic reality, structure, and features of the Apple Group, and was therefore inconsistent with the arm’s length principle.

Section 25 TCA 1997 applies to the activities of the branch, which are calculated at their market value. The Commission concluded the Apple IP licences should have been allocated to the Irish branches, without any attempt to show the allocation of value from the activities carried on by those branches. The General Court held the argument raised by Ireland on this point to be well-founded.

The OECD Approach

The OECD Approach to the allocation of assets, functions and risks between the Irish branches and other parts of the companies, was considered to be appropriate by the General Court. Ireland and ASI and AOE contended that the Commission’s approach was inconsistent with the OECD Approach, as they allocated profits relating to the Apple IP licences to the Irish branches, despite the fact that the executives of ASI and AOE did not perform active or critical functions in the management of the licences. The OECD Approach requires an analysis of the functions performed within the branches.

The Commission’s primary line of reasoning relied on the application of the Apple IP licenses to the branches on the basis that there were no employees capable of managing the Apple IP outside of the branches, without considering if the Irish branches performed those management functions. The General Court found the Commission’s primary reasoning to be inconsistent with the OECD Approach.

The Commission’s assessment of activities within the Apple Group

The General Court found that the Commission had not successfully shown that the Apple IP licenses should have been allocated to Irish branches in determining the chargeable profits of ASI and AOE. The General Court considered the conclusion of the Commission, that the functions and activities performed by the ASI branch justified the allocation of the Apple IP licences and related income arising to the branch to be unsupported in evidence in many respects. Similarly, reliance on the AOE Irish branch’s involvement in the creation of processes and expertise in the manufacture of products it was responsible for could not justify the allocation of the Apple IP licences and related income arising to the branch.

The General Court also disagreed with the Commission’s view that the boards of directors did not have the ability to perform the essential functions of the companies in delegating to individual executives who were not members of the Irish branches’ staff.

Conclusions regarding the Commission’s assessment that there was a selective advantage

On the basis that the Commission had made errors in its assessment of Irish tax law and the activities within the Apple Group in its primary reasoning, the General Court found that the Commission did not succeed in showing that the contested tax rulings constituted an advantage for the purposes of Article 107(1) TFEU.

The Commission’s subsidiary and alternative lines of reasoning

The General Court went on to consider Ireland and ASI and AOE submissions in contesting the subsidiary and alternative lines of reasoning taken by the Commission. The General Court expressed regret towards the incomplete and occasionally inconsistent nature of the contested tax rulings, however, the defects identified by the Commission were not considered sufficient to prove the existence of an advantage for the purposes of Article 107(1) TFEU. In the alternative line of reasoning, the Commission was considered not to have proven that the contested tax rulings were the result of discretion exercised by the Irish tax authorities, and accordingly, that selective advantage had been granted to ASI and AOE.

Conclusion

The General Court found that the Commission did not succeed in demonstrating that tax rulings issued by Revenue to ASI and AOE constituted a selective advantage for the purposes of Article 107(1) TFEU. The General Court furthered that the
legal requisite standard to show a selective advantage for the purposes of Article 107(1) TFEU had not been met by the Commission in the contested decision. Accordingly, the General Court ruled that the contested decision must be annulled in its entirety.

The full judgment, in this case, is available from the Court of Justice of the European Union website: http://curia.europa.eu/juris/document/document.jsf?text=&docid=228621&pageIndex=0&doclang=en&mode=req&dir=&occ=first&part=1&cid=9547309