An EU court's ruling that Apple Inc. does not have to pay Ireland billions in back taxes and interest signals a significant departure from the European Commission's historic approach to "sweetheart" tax deals, lawyers told S&P Global Market Intelligence.
The General Court, Europe's second-highest, on July 15 said the EC did not prove that the Irish government gave the iPhone maker an illegal economic advantage when it calculated how much tax the company should pay. Apple paid €13.1 billion in back taxes and €1.2 billion in interest after the Commission ruled in 2016 that Ireland had given the firm unlawful state aid via two tax rulings in 1991 and 2007.
The court's decision could impact other state-aid cases against companies including Amazon.com Inc., Nike Inc. and French energy company Engie SA, lawyers said. While the cases are not directly comparable, the Apple case shows it is "completely acceptable" for companies to enjoy tax advantages according to jurisdiction, Olivier Van Ermengem, a tax partner at Linklaters, said. The Amazon and Engie cases involve tax base reductions in Luxembourg, while the Nike case concerns alleged aid from the Netherlands.
"All these cases are linked together in the sense that they involve the EC trying to find a way to combat these tax planning techniques," Henk Verstraete, a tax partner at Stibbe in Brussels, said, adding that it is "difficult to predict" whether any appeals against the EC's other decisions in this area will be impacted by the Apple case.
Apple's victory does not give companies carte blanche when it comes to arranging advantageous tax deals, lawyers said.
"The court's [July 15] judgment confirms what most would have thought: That this ruling was linked to a historic decision," Peter Vale, head of international tax at Ireland-based law firm Thornton Vale, said. "We no longer have the same corporate tax systems legally as we did 10 or 15 years ago and the pursuit of an aggressive tax advantage is generally viewed as immoral."
"This case showed that the creation of a business-friendly tax environment by a member state is not in itself state aid or something that should be condemned," Van Ermengem said. "But you still need to play by the rules, and it is up to the EC to prove that you did not."
Though the EC can appeal the decision, the tax lawyers believe it may have exhausted the legal route. The regulator's Executive Vice President Margrethe Vestager could look for a political solution instead, they said.
Vestager said in a statement that the EC would study the judgment and consider its next steps, adding that it "will continue to look at aggressive tax planning measures under EU state aid rules to assess whether they result in illegal state aid."
In recent years, the EU has passed two laws to ensure companies, particularly big tech firms and other multinationals, pay enough tax. Known as the Anti-Tax Avoidance Directives, the rules are aimed at closing loopholes to ensure businesses are taxed in the country where the parent company is based, even if they shift profits to offshore tax havens. The law also seeks to stop EU companies from moving new products to lower-tax regions to avoid being taxed.
The directives restrict firms from reducing the tax they have to pay by paying excessive interest charges to another company, usually one located in a different country.
These laws, which require the unanimous support of all EU member states in order to be passed, mean that the EU "has already walked the political path quite heavily," Van Ermengem said.
The Apple ruling arrived on the same day as the EC announced a new tax package to support the region's economic recovery amid the coronavirus pandemic. "Today's Package seeks to boost tax fairness, by intensifying the fight against tax abuse, curbing unfair tax competition and increasing tax transparency," the EU's executive arm said.
Countries like Ireland and Luxembourg that boast "business-friendly tax measures" may not therefore have the appetite for more directives, according to Verstraete. That leaves the EU with few options on the table, he said. "The Commission has lost its leverage as a result of this ruling," Verstraete said.
As for Apple, the EU ruling marks a huge win for the firm, which has long faced accusations of tax evasion. According to company filings, between 2015 and 2019 Apple paid a total of $16.45 billion in foreign taxes on overseas pretax earnings of $225.7 billion.
"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," an Apple spokesperson said, adding it is proud to be the "largest taxpayer in the world."