The Apple (...Of Discord?) Judgement of the CJEU

Table of Contents

1. The Apple Case: The Commission Won . . . But did the EU Lose?

Adolfo Martín Jiménez

2. The poisoned Apple: is the Court of Justice seeking Justice through legal Misinterpretation? Romero J.S. Tavares

3. The Apple case: ‘Wrong‘ Questions, misguided Answers, regulatory Distortion? Scott Wilkie

4. Harvest Time or Apple Grand Finale

Svitlana Buriak

5. Is the Apple Case of Historical Relevance Only?

Juan Jorge Piernas López

6. Cases C-555/22 P, C-556/22 P and C-564/22 P UK and ITV v Commission: just like Apple, except completely different?

Stephen Daly

The Apple Case: The Commission Won . . . But did the EU Lose?

Adolfo Martín Jiménez

The Apple judgment, C-465/20 P, is the end (the ‘Grand Finale’, as S. Buriak puts it) of a story that started in the US Senate, with the recognition by Apple’s CEO before a US Senate Committee in May 2013 that the company had received a ‘tax incentive arrangement’ in Ireland or that the taxes paid for sales outside the US were at a very low rate.1 Unsurprisingly, state aid investigations by the EU Commission against Apple were initiated shortly after, on 12 June 2013 (see Commission Decision 2017/1283 of 30 August 2016, para. 1).

These were the years of the OECD’s BEPS Plan in the post 2008 financial crisis period, where the fight against aggressive tax planning was the main goal of the G-7, G-20, the OECD, and, even more intensively, the EU. In this period, despite the complaint that the unanimity rule (Article 115 TFEU) was a ‘blocker’ to the harmonisation of direct taxes in the EU, the EU legislator was surprisingly efficient in quickly passing all kinds of Directives (e.g. the different reforms of the Directive on Administrative Cooperation (‘DAC’)2, the Anti-Tax Avoidance Directive 1 (‘ATAD 1’) and the ATAD 2, or the P2 Directive) that tried to fight against aggressive tax planning (whatever this non-legal concept means), tax avoidance and fraud or tax competition.3 Article 107(1) TFEU was also used by the Commission to pursue such a goal, in particular, to fight the so-called ‘sweetheart tax deals’ (tax rulings) granted by different EU Member States to MNEs.

The overall strategy has led to some not always justified and disproportionate burdens for EU (and third country) MNEs. It was hoped that, at some point, the CJEU would stop the most controversial actions by the EU legislator or the Commission in their fight against aggressive tax planning in the past years. This was, in particular, the case with the Commission’s use of Article 107(1) TFEU. Such an article is especially apt to deal with distortions to competition and trade (discrimination in favour of some taxpayers) ‘within’ the European Union, but trying to use it to fight tax incentives given in third countries (i.e. the US), even if their effect is the non-taxation of MNEs’ profits, entails a reinterpretation for which Article 107(1) TFEU was not

1. See Testimony of T. Cook Offshore Profit Shifting and the U.S tax code—part 2 (Apple inc.), Hearing before the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs United States Senate one Hundred Thirteenth Congress, May 21, 2013, p. 35 ff. especially at p. 46. The Testimony was echoed on the press, see, for instance, ‘Apple issue goes to the core of tax matters in Ireland’, Irish Independent 15 June 2014 (available here) or ‘Disarming Senators, Apple Chief Eases Tax Tensions’, New York Times, 21 May 2013 (available here).

2. As known, this Directive has gone through a number of amendments through the years to incorporate OECD standards but also to define new ones (the so called ‘DACs’ until number DAC 8, with a proposal already for DAC 9).

3. See on the paradoxical effect of the unanimity rule A. Martín Jiménez, ‘The EU (Direct) Tax Policy: Reflections on Current Trends’ in E.Kemmeren, C.Peters and C. Di Pietro, A Journey Through European and International Taxation: Liber Amicorum in Honour of Peter Essers, Kluwer Law International, 2024.

The Apple (...Of Discord?) Judgement of the CJEU

designed,4 with the (unforeseen) consequence of attracting to the EU profits from non-EU States granting tax incentives (as Wilkie argues, no subsidy directly granted by the US could be regarded as contrary to Article 107(1) TFEU, but it seemed that equivalent tax incentives could fall within the Commission’s theory). Such a stretch in the application of Article 107(1) TFEU flies in the face of fundamental EU principles such as the rule of law, legality or legal certainty.

The Apple judgment of the General Court, probably with some flaws which are not really material in the overall picture considered in such a decision,5 gave some hope that the EU Courts would control the Commission in its use of Article 107(1) TFEU (see A. Martín and J. Piernas, ‘The Apple Case: Who Wins? What’s Next?’). Some further judgments of the Court of Justice reinforced that impression (e.g. FIAT, C-885/19 P and C-898/19 P; Engie, C-451/21 P and C-454/21 P; Amazon, C-457/21 P), with the curious anecdote that it was probably Ireland’s pleas in FIAT that permitted Luxembourg and FIAT to win their case (and, as Ireland and Apple probably hoped, eventually also the Apple case). After those judgments, Article 107(1) TFEU seemed to be redirected to the meaning it should probably have: any selective tax advantage should be linked with a derogation from the tax system of a Member State, as interpreted and applied by that State, not with an ideal hypothesis of the arm’s-length standard that indirectly permitted the EU Commission to attract to the Member States profits that simply do not belong there (with the excuse that they are not taxed in the state that should do it). The message of the Court of Justice after FIAT, Engie and Amazon was clear: tax rulings (or any other selective advantage derived from administrative decisions) could be attacked when they entailed derogations of the tax system of an EU Member State, but the benchmark (the tax system) and the exception (derogation) could not be defined with creative or theoretical interpretations beyond what national law regulates and how it is regularly interpreted. In this respect, the burden of proof for the Commission was set very high by the Court of Justice.

All of a sudden, everything changed with the Court of Justice’s final judgment in Apple. Not only were the precedents in FIAT, Engie or Amazon not valid in Apple, although they were re-activated one week later in UK and ITV v. Commission, C-555/22 P, C-556/22 P and C-564/22 P (see S. Daly), but, with some controversial conclusions on the impossibility to review the assumptions made by the General Court (‘res iudicata’) on the system of reference to determine whether there is state aid, the Court of Justice built its own (wrongful) interpretation of the arm’s-length / allocation of profits rules to permanent establishments (‘PEs’) to conclude that all the untaxed ‘Ocean profits’ of Apple belong to Ireland. Despite all the apparently ‘sophisticated reasoning’ of the Court of Justice, one does not need to be a transfer pricing expert to conclude that the allocation of the around 13 billion euros (plus interest) to Ireland was not the correct interpretation of the transfer pricing / allocation of profits to PEs rules in Ireland or

4. Precisely for this reason the Foreign Subsidies Regulation was approved, see Regulation (EU) 2022/2560.

5. The General Court’s analogy between Irish law and the OECD’s AOA was not ideal to define the benchmark against which to assess the selectivity of the ruling. Later judgments of the Court of Justice like FIAT, Engie, Amazon showed it was wrong to hypothesize the benchmark and that the Commission should have really understood first the national standard and its interpretation. Since this was regarded as res iudicata by the Court of Justice, there was no opportunity to review this assumption. For the final decision of the General Court, this assumption was not however relevant in view of the mistakes the Commission made in its analysis of the facts and domestic law.

The Apple (...Of Discord?) Judgement of the

internationally, neither for those in force in the 1990s, where the first tax ruling was granted to Apple, nor those after that time, with the current rules as they have evolved in the international scene (the AOA of the OECD of 2010, or the OECD TP rules) (see the analysis of Buriak , from a strict technical transfer pricing perspective, and Tavares or Wilkie).

True, the initial Irish rulings probably gave Apple some ‘special treatment’ in Ireland until 20146 and this could have been corrected with Article 107(1) TFEU, but most of the ‘sweetheart dealing’ has its origins and roots in the US tax system (see Tavares and Wilkie). In essence, the main consequence of the Apple decision is that profits are being subject to tax where they do not really belong (leaving aside the multiple problems in executing the Court of Justice’s decision, due to the potential double taxation in the US after changes in its legislation, or the appeals the recovery may bring). This effect is achieved not only with a controversial interpretation of the arm’s-length standard and the rules of attribution of profits to PEs in Ireland, but, in addition, with equally questionable procedural decisions: why is it that the Court of Justice cannot review the determination of the system of reference by the General Court with the ‘res iudicata’ excuse when this can effectively lead to a blatantly unfair result (or given that the Court of Justice has done that before without further ado)? Why did the Court of Justice have to take a final decision (rather than remanding the case to the General Court) when it knew that the rejection of some evidence or refusal to re-examine the right benchmark would lead to an unfounded result (certainly not one in line with the arm’slength standard)? Why did the Court of Justice depart from its precedents (FIAT, Amazon, Engie) only to go back to them one week later in UK and ITV v. Commission? (see, for instance, J. Piernas and S.Daly).

The Commission certainly won the case, but at what cost? A use of Article 107(1) TFEU that distorts its functioning and its role, legal uncertainty for so many years (2013-2024),7 not only for Apple or Ireland, but also for tax authorities and taxpayers in the EU (or third States considering investments in the EU), as well as dubious results in terms of compliance with and respect of EU fundamental legal principles. All this with the blessing of the Court of Justice, in a highly controversial judgment that is either wrong or in breach of EU law itself (see also Tavares or Wilkie). It is true that the crusade of the EU Commission to fight sweetheart tax rulings in the Member States may have had practical effects to limit this practice in the past 10-15 years, and may have also helped in the adoption of some of the Directives fighting against aggressive tax planning. It is also possible that the Apple judgement, as such, may have limited legal effects for the future (historical relevance only, as the Irish Government or J. Piernas put it), only for some cases still not decided, and, even then, the Court of Justice can use its ‘other precedents’ (FIAT, Engie, Amazon, UK v. Commission). Moreover, the Commission does not seem to have any willingness to pursue new tax ruling investigations and it appears that its main priorities in this new period are to declutter the EU tax rules and foster EU competitiveness. But the Apple and tax ruling saga, however, casts doubt on the role the EU can assume with regard to, inter alia, transfer pricing (which, indirectly, probably may also affect the fate of the controversial proposed draft directive on transfer pricing ). More importantly, the damage to fundamental legal principles, and to the Court of Justice’s prestige (see Tavares), may be a heavier burden to bear in a new era that tries to look ahead for a more competitive EU.

6. The legislation was changed after that year in Ireland and Apple’s new structure after 2015 is not affected by the disputes before the EU courts.

7. Providing legal certainty was one of the goals, importantly affected by the Apple judgment, of the Commission Notice on the notion of State aid as referred to in Article 107(1) TFEU.

The Apple (...Of Discord?) Judgement of the CJEU

The author thanks J. Piernas, University of Murcia (Spain), for his comments on a previous draft. The usual disclaimer applies.

Adolfo Martín Jiménez is a Professor of Tax Law at the University of Cádiz (Spain).

SUGGESTED CITATION: Martín Jiménez, A.; “The Apple Case: The Commission Won . . . But did the EU Lose?”, EU Law Live, 13/11/2024, https://eulawlive.com/op-ed-the-apple-case-the-commission-won-but-did-the-eu-lose/

The poisoned Apple: is the Court of Justice seeking Justice through legal Misinterpretation?

Romero J.S. Tavares

The recent final ruling on the Apple State-Aid case surprised many commentators, including this author, who trusted the Court of Justice of the European Union (‘the Court’) would be a competent technical interpreter of international tax law. The proper interpretation of Articles 7 and 9 of the OECD Model Convention (‘MC’) is what must underlie the proper understanding of these infamous cases where the EU Commission found Member States granted illegal state aid primarily via an alleged misapplication of transfer pricing rules in convoluted international structures involving U.S. multinationals. Trust in the technical competence of the Court means trust in the rule of law within Europe, in the quality of EU institutions that ought to reflect the low sovereign-political risk implied in the assurance of fundamental freedoms inherent to the functioning of the internal EU market.

If the final decision of the Court of Justice reflects legal misinterpretation, whether purposeful, in a quest for broader justice under tax or competition laws, or whether accidental, as a showing of the technical inability of the Court to address and interpret very complex transfer pricing notions, both, that would signal an incremental degree of political (sovereign) risk in Europe. And in that sense, increased political risk signals not only a potential increase to the cost of capital for Europe, but, most worryingly, a potential erosion of the quality of EU legal institutions and of the rule of law within Europe.

In the Amazon, Starbucks and Apple cases, as this author has demonstrated in 2016, the main tax effect of the intricate legal structures that were put in place was the deferral of residual U.S. taxation on profits that, under the arm’s length principle (ALP) as interpreted by OECD Transfer Pricing Guidelines, and the Authorized OECD Approach (AOA) for the Attribution of Profits to Permanent Establishments (APPE), were not and should not be attributable to any other country. Prior to the U.S. Tax Reform of 2017 (Tax Cut and Jobs Act (TCJA)), that is, prior to the U.S. reduction of its federal corporate tax rate from 35% to 21%, and prior to the U.S. adoption of its own version of an ‘innovation box’ (Foreign Derived Intangibles Income or FDII) at par with multiple EU regimes, U.S. multinationals that did not adopt complex international structures seeking deferral of the residual U.S. tax burden would be under a competitive disadvantage vis-à-vis their non-US competitors which operated at lower corporate tax rates (and/or benefiting from incentives that are more potent than those explicitly available under U.S. law) and under participation exemption (rather than deferral) regimes.

On the other hand, the structures implemented by U.S. multinationals were so efficient in preventing the triggers of U.S. taxes on residual profits whilst not attributing incremental profits to market countries (for instance, here and here), that such structures could hypothetically have been perceived as distortionary from a competition law or international trade law perspective (perhaps or allegedly income tax subsidies favoring U.S. exports), albeit never materialising any state-aid granted by any non-U.S. jurisdiction. Perhaps U.S. transfer pricing rules and jurisprudence, by not incorporating the AOA/APPE among other features

of the OECD Guidelines, would be viewed as too laxed or too formalistic; or perhaps U.S. controlled foreign company (CFC) and entity classification (‘check-the-box’) rules would have too many loopholes. Perhaps not.

Tackling that hypothetical distortion and seeking competitive or trade justice may have been a motivator for the Court of Justice to find against Ireland and Apple. However, the route of illegal state-aid findings is grounded on an apparent misinterpretation of transfer pricing rules which may itself be a poisoned tree – from which the Euro 13 billion (plus) fruits might also be poisoned, infecting the European Internal Market via increased political risk.

Crucially, the lingering mistake and misinterpretation that started with the EU Commission, that was momentarily corrected by the General Court, and that ultimately tainted the Court of Justice’s final decision concerns a gross misunderstanding of the facts underlying the Cost Sharing Agreement (CSA) between the non-resident Irish entities (that have Irish branches) and Apple, Inc., and the relevance of those facts in the interpretation of Articles 7 and 9 of the OECD MC as the governing international legal standards under the arm’s length principle, in the application of the ALP and AOA/APPE. The Court of Justice recites

‘ The Commission recognises in its decision that key functions in relation to the Apple Group’s IP were performed by Apple Inc., either as parent company of the Apple Group or under the cost-sharing agreement, but it explains that that is not relevant for the purposes of the allocation of ASI’s and AOE’s profits among their respective head offices and branches, and relevant only in the light of the reference framework applicable (recitals 308 to 318 of that decision)’ (para. 90).

And it summarises the General Court finding, noting that:

‘More specifically, the Court held: that, in finding that the Apple Group’s IP licences had to be allocated to the branches by default because ASI and AOE had neither employees nor any physical presence outside the Irish branches, the Commission had allocated profits using an ‘exclusion’ approach, that it had not correctly assessed the activities of those companies in Ireland and that it had based its reasoning on an incorrect assessment of normal taxation under Irish law (paragraphs 166 to 249 of the judgment under appeal); that ASI’s and AOE’s branches in Ireland did not control the Apple Group’s IP licences and did not generate the profits which the Commission claimed they achieved (paragraphs 251 to 295 of the judgment under appeal); and that the agreements and activities of ASI and AOE outside Ireland showed that those companies were in a position to develop and manage the Apple Group’s IP and to generate profits outside Ireland and that those profits were, consequently, not subject to tax in Ireland (paragraphs 296 to 311 of the judgment under appeal)’ (para. 92).

Furthermore, the CJEU recalls that

‘ (…) the Court made detailed factual findings, in paragraphs 251 to 310 of the judgment under appeal, about the branches and ASI’s and AOE’s decision-making in the United States and found that the Commission’s claims about the actual activities of the Irish branches and the head offices of those companies were inaccurate’ (para. 100).

However, the Court of Justice delved into a procedural argument and technicality to sustain that the additional evidence concerning Apple Inc.’s functions and activities performed within the U.S. and

The Apple (...Of Discord?) Judgement of the CJEU

affecting the intangibles licensed to the Irish non-resident entities was inadmissible in the proceeding (Apple judgment at pars. 142, 146, 147, 180-182, 186, 234, 257) and, embarking in the same (very material) factual and legal error incurred by the EU Commission in its arguments (Apple judgment at pars. 159, 185, 220222, 235, 236, 254-256, 258), to rule that the U.S. functions and activities were irrelevant for the case. Note, that evidence was supplementary, and thus presented in addition to and reaffirming the CSA itself.

From a transfer pricing perspective, under Articles 7 and 9 of the OECD MC, and in conformity with the OECD Guidelines and AOA/APPE, the CSA should serve to evidence that U.S. employees located in Cupertino performed significant people functions (SPFs) and managed economically significant risks pertaining to the operation of the Apple global value chain (including its global outsourcing of hardware manufacturing to Foxconn) which yields residual profits that should not be attributable to the Irish branches, as it should serve to demonstrate that U.S. employees managed all critical functions, activities and risks pertaining to the intangibles that benefit the entire group and each entity in the value-chain, including those intangibles licensed to the Irish non-resident entities and not managed or controlled by their (taxable) Irish branches which merely performed routine functions. By excluding (or not properly regarding) the functions and activities performed by Apple Inc. through its U.S.-based employees from the transfer pricing analysis, especially where a CSA involving Apple Ind and the Irish entities is in place and in evidence, and therefore by ignoring the Apple value chain within which the Irish entities and branches are inserted, the Court of Justice made a grave error in its interpretation of Articles 7 and 9 of the OECD MC, without which no illegal state aid could have been found as being granted by Ireland.

Oddly, the rulings on Amazon and Starbucks were contrary to the EU Commission, and as such were not surprising at all. What might have been so different about the Apple case, that would have prompted the Court of Justice to embark on what should be perceived as a misinterpretation of the ALP as per the OECD Guidelines and the AOA/APPE?

Is it because it is Apple, the Apple fact pattern and structure? Is it because of Apple’s perceived monopolistic profile (perhaps enabled by the U.S. tax system) and unique combination of hardware sales to consumers and digital services revenues? Is it there where the Court of Justice is drawing the line on what it perceives as unlawful international tax competition or avoidance fueled by the U.S. tax system and perpetrated by U.S. multinationals? Or is it because it is Ireland, and its overall attraction of Foreign Direct Investment (FDI), international trade, foreign reserves, and economic growth, allegedly through tax competition within the EU? Most likely, it is both, Apple and Ireland, while the EU Commission and the Court would have jurisdiction over ‘Ireland, the enabler’. If any of this is hinted in the Court’s ruling, then the State aid rules may not have been the most adequate and legitimate approach to pursue justice under EU competition laws or international trade law. If none of it is there, the only hypothesis left would be the simple misunderstanding of the intricacies of transfer pricing norms. Either way, this judgment is not a testament to the quality of institutions and of the rule of law within Europe.

Any shortcomings, digressions and leaps of thought inevitably present in this Op-Ed remain the responsibility of the author. Note that the viewpoints in this article are not necessarily the viewpoint of the author’s firm.

The Apple (...Of Discord?) Judgement of the CJEU

Romero J.S.

Tavares

, PhD (Wirtschaftsuniversität Wien) is a Partner at an international Firm and a Professor of International Tax Law.

SUGGESTED CITATION: Tavares, R.; “The poisoned Apple: is the Court of Justice seeking Justice through legal Misinterpretation?”, EU Law Live, 07/10/2024, https://eulawlive.com/op-ed-the-poisoned-apple-is-the-court-of-justice-seeking-justice-through-legalmisinterpretation/

The Apple case: ‘Wrong‘ Questions, misguided Answers, regulatory Distortion?

Scott Wilkie

The Apple Decision Simpliciter – A Blinkered Approach?

There is an adage: ‘You get answers to the questions you ask’. If the questions miss the mark, the ensuing analysis and resulting answers are likely to be misguided.

The Court of Justice’s Apple decision follows this unfortunate course. The result, abetted by the Court’s narrow construction of the affected events as exclusively European, is the antithesis of the objectives of both ‘State aid’ regulation according to Article107(1) of the Treaty on the Functioning of the European Union (TFEU), and tax law’s transfer pricing notions that exist to discipline where multinational enterprises (MNEs) should account for their income in spite of their and their transactions’ legal formalities. The Court adopted transfer pricing analytics to measure the impugned ‘State aid’ as Irish tax Apple’s two nonresident Irish subsidiaries should have paid on income attributed by the Court in default of anywhere else to their Irish operations. Allowing a transfer pricing mindset to control what is fundamentally a trade and competition analysis has unfortunate trade and competition law and tax law implications.

The Court proceeded on the basis that the incomes in question, particularly associated with the exploitation of Appe’s valuable intellectual property, arose only in the ‘closed system’ comprising the two Irish subsidiaries and Ireland. Accordingly, that income had to be, indeed could only be, accounted for only by them as they were legally constituted, within the parameters of European regulation. Justified by a strangely parochial and indeed perverse perception of transfer pricing’s arm’s length standard, which exists to correct distortions of the allocation MNEs’ international income using legal constructions of various kinds, the Court of Justice proceeded to orchestrate and validate just such a distortion of Apple’s international income and consequently interested countries’ taxing rights. The Court decided that the target income could only have arisen, that is, been earned in Ireland, the only place where observable activities of those subsidiaries took place. Ireland must have ‘aided’ Apple by not levying tax on these incomes.

What Is ‘Wrong’ With the Court of Justice’s Analysis?

The Court of Justice’s configuration of the case reflects a failure to understand that tax is only ever an enabler of a country’s distinctive self-interested fiscal policy sensitive as it may be to equally distinctive and self-interest but likely different fiscal policy of other countries. Tax does not exist in a silo for its own sake. The Court concluded that there was impermissible ‘aid’ without seizing critically on an invitation offered by the General Court to consider whether the United States, not Ireland, provided it. The Court applied transfer pricing’s arm’s length standard and, though disputed but in my view correct to say, its consonant manifestation in the OECD’s Authorised OECD Approach to allocate profits to permanent establishments (PE), i.e., source country business presences, without considering critically why these tax notions exist.

Relying on a correspondingly faulty ‘functional analysis’ of where property and people engaged in the business of the Irish subsidiaries were observed (and consequently effectively it was presumed intangible property originated and its value was monetised), the income of the subsidiaries could only have been taxable by Ireland. Ireland’s decision not to tax that income, which the Irish tax authorities considered to arise elsewhere, constituted impermissible ‘aid’ in the amount of the tax not collected – this even though, as Ireland effectively asserted, without an entitlement to collect the tax under applicable law properly applied according to well-established international conventions for taxing MNE income, it could hardly be said that Ireland spent it, i.e., gave it up to favour Apple or Ireland’s own global competitive interests.

Regrettably, the tax law and lore animating the Court’s analysis, namely transfer pricing’s seemingly limitless search for ‘value creation’ within an MNE, is opaque, essentially without enforceable standards and malleable by taxpayers and countries ‘competing’ to identify and justify where tax is or is not due. The ‘standards’ are as much impressionistic as objectively analytical or legal despite transfer pricing’s contrary pretension captured by voluminous methodology in the OECD’s Transfer Pricing Guidelines to overcome the legal fragmentation by MNEs of their economic unities, as also, more recently, the OECD’s Pillar One and Two initiatives also seek to do.

It is titillating, perhaps, to cast MNEs as presumptive threats to vulnerable fiscs. But MNEs are not the real focus; simply, they are the media by which countries engage with each other via their taxpayers, almost like silent partners, in a world that understandably resists the lure of, though may be prepared to politely discuss, universal standards and rules. A penetrating and coherent tax and trade analysis of countries’ interactions with each other in their own interests requires more than a preoccupation with allegedly colourable corporate tax planning.

The fundamental questions for which the Apple decision provides no satisfactory insight or regulatory guidance are: Who’s fiscal and tax policy funded the ‘aid’, and accordingly what is the proper interest of European regulators and the Court of Justice?

How would an analysis of Apple’s relevant circumstances proceed free of substantively unsound implicit assumptions that the context was exclusively European and the affected manifestations of Apple’s business only the two Irish subsidiaries? Ask and answer these questions: Was there public intervention, i.e., an expenditure of public resources, in Apple’s favour? If so, why, that is, as a gratuity or to serve a public objective?

Knowledgeable tax analysts sensitive to the strictures of trade law would realize that the ‘aid’ or more broadly ‘subsidy’ here arose from how, quite deliberately in its own interest, the United States taxed international business income of its MNEs and income of non-resident enterprises (including foreign subsidiaries of its MNEs) from conducting US business. The tax ultimately payable on US MNEs’ foreign business income could be deferred indefinitely, and non-residents’ business income had to be connected in specific ways to a US taxable presence. Changes in US and Irish tax law were meant to deter the kind of tax planning Apple employed; Pillar Two is similarly but more broadly directed.

Why might the US (and other countries) adopt this course? The reasons are not hard to understand by stepping back from the didactic kind of analysis pursued by the Court of Justice to explain an outcome almost foreordained by the Court’s perception of the case. Is it in US’s interest that its taxpayers pay foreign tax when the US effectively pays that tax via a reduction in the US tax base through foreign tax credit?

Is it the interest of the US to invest in its economic development to fulfil its fiscal choices by enlisting the efforts and expertise of its taxpayers, by providing interest-free financing of indefinite duration, i.e., deferred tax? Taking the General Court’s cue, the Court of Justice should have considered more carefully where the impugned ‘aid’ arose and asked why the US’s ‘subsidy’ of its MNEs in the US’s national interest is a proper object of European regulation and adjudication even if the Court might have found the planning colourable. It might have recognised that the World Trade Organisation (WTO) exists for trade related controversies even if engendered by direct taxation notably when non-EU axes of interest, i.e., third countries to the EU, are involved. An adverse view on the WTO’s effectiveness is not a reason or an excuse to absorb its jurisdiction.

What Is Really at Stake – And Why Does It Matter?

Why and to what extent should countries judge and control each other’s fiscal policy enabled by their tax systems? Countries are different, economically, socially, culturally, and using a transactional metaphor in relation to their needs and opportunities pursued in relation to each other (Wilkie, Pillar 2 – ‘What’s It All About?’, Tax Notes International, 2023). Adjusting the parameters of taxation is just one of various interchangeable and economically equivalent ways to fund public consumption and direct economic development. Why should countries’ fiscal decisions be expected to be the same, let alone controlled by the expectations and circumstances of others? Why should the effectiveness and independence of fiscal choices depend on the modality of their delivery, by tax systems or otherwise? In the Apple situation, would the Court of Justice have been able to exercise judicial oversight if the US had taxed the Apple subsidiaries’ incomes but outside the tax system provided financial assistance in other ways to cultivate national wealth creation through its MNE proxies, not unlike what could happen by recycling Pillar Twoinspired minimum taxes with similar financial effects to reduced taxation? Is that a useful question to ask as a kind of ‘sanity check’ on an otherwise untempered exercise of regulatory and judicial intervention that has the effect of appropriating elements of another country’s fiscal policy?

Yes, excesses arising from corporate tax planning – really, from the strategic design and reach of countries’ tax systems – are possible. It is reasonable to be concerned about, but not reasonable to presume, countries deliberate ‘beggaring’ each other through so-called ‘tax competition’. Professor Wolfgang Schön’s examinations of the relationships between taxation and democracy (Schön, Taxation and Democracy, 2019) and between tax scholarship and activism (Schön, International Tax Scholarship and International Tax Activism, 2024) are instructive. However, we still live in a heterogeneous legal and tax world despite the effects of ‘globalisation’. Same-ness of regulatory objects and methods is not to be expected even as an aspirational ideal; possibly the most to be hoped for are shared ‘best practices’ countries should be expected to consider as they pursue their own interests, realizing that like situations of others may be important to the achievement of their own interests. What one country may perceive as illegitimate tax avoidance may fairly be seen by another as the extrapolation of benign fiscal and concomitant tax policy. Who is to say which perception should dominate and even so how it would be administrable and enforceable?

The Apple decision should inspire more attention to the implications sovereignty and democratic decision making in the context of international trade, not as platitudes but as practical drivers of business, trade, and legitimate and effective regulation. Professor Dani Rodrik’s ‘trilemma of globalization’ (Rodrik, The Globalization Paradox, 2011) highlights the trade-offs among sovereignty, democracy, and global trade, only

The Apple (...Of Discord?) Judgement of the

two of which at any time are, according to Rodrik, possible. The notions addressed by Rodrik, Schön, and Wilkie (noted earlier in relation to Pillar Two), which are undercurrents in the Apple decision, are not merely theoretical.

Perhaps unwittingly, in Apple the Court of Justice essentially rendered a political judgment by (mis)using tools with more limited and nuanced features that the Court notices. The result is a distortion of the connotation of ‘state aid’ according to the TFEU and a perverse misapplication of international guidance and law on international income allocation of MNEs which fails to recognise the real ‘home’, the US, of the disputed income even though for its own reasons the US may have chosen not to tax it or, twisting the tax kaleidoscope only slightly the US systemically taxed and rebated simultaneously.

Yes, indeed: ‘You get answers to the questions you ask’.

Scott Wilkie is a Research Fellow of the Amsterdam Centre for Transfer Pricing and Income Allocation, part of the Amsterdam Center for Tax Law of the University of Amsterdam, a recently retired Distinguished Professor of Practice at Osgoode Hall Law School, York University, and a retired partner of and senior counsel to Blake, Cassels & Graydon LLP. Widely published, he speaks and writes broadly about taxation, notably international taxation and tax policy. He is a former vice-chair of the Permanent Scientific Committee of the International Fiscal Association, served as president of the Canadian branch of the International Fiscal Association, and is a past chair of the Canadian Tax Foundation.

SUGGESTED CITATION: Wilkie, S.; “`Wrong´ Questions, misguided Answers, regulatory Distortion?”, EU Law Live, 08/10/2024, https://eulawlive.com/op-ed-wrong-questions-misguided-answers-regulatory-distortion/

Harvest Time or Apple Grand Finale

Svitlana Buriak

The decision of the Court of Justice of the European Union (‘the Court of Justice’ or the ‘Court’) in the Apple State aid case caught international tax experts by surprise. While the Opinion of Advocate General (‘AG’) Pitruzzella in November 2023 seemed to be ‘somewhat unexpected’ after ‘an 8-year laborious effort of the Commission…to employ State aid rules against the advance transfer pricing agreements’ hardly anyone still envisaged the Court’s decision to favor the Commission’s ruling that illegal state aid had been granted by Ireland to Apple.

A question, however, is whether these sentiments of surprise were indeed triggered by the obviousness of the ‘right’ outcome in the Apple case or, rather, by the saga of the Commission’s courtroom losses in similar State aid investigations. What went wrong for Apple in this case, and why does the grand finale appear to be opposite of the outcomes in other state aid investigations like Fiat, Starbucks, or Amazon?

This contribution aims to evaluate the transfer pricing aspects of the case and determine whether the Court’s decision aligns with what could be expected under arm’s length conditions. The author does not intend to draw conclusions regarding the existence of state aid, as such an assessment necessitates a comprehensive analysis of various elements, including selectivity, economic advantage, and the significance of any alleged erroneous application of Irish law by the Irish tax authorities that could amount to state aid. In addition, the author is not an expert in Irish tax law and hence this contribution relies primarily on the OECD AOA and OECD Guidelines. It is also important to highlight that while transfer pricing regulations may dictate certain outcomes of the functional analysis, some factual aspects might be viewed differently from a competition law perspective (see, for example, para. 285 concerning the own decision of Apple Group to allocate the IP to Ireland).

Facts

There are several key elements in the Apple case. Apple Operations Europe (‘AOE’) and Apple Sales International (‘ASI’), subsidiaries of Apple Inc., incorporated in Ireland, but are not tax residents in Ireland. From 1991 to 2014, they participated in a cost-sharing agreement (‘CSA’) with Apple Inc., sharing R&D costs and risks for Apple’s products. Under this CSA, ASI and AOE, retaining intangible assets like intellectual property (‘IP’) rights, were licensed to sell Apple products outside North and South America. These entities operated in Ireland through branches considered Irish permanent establishments (‘Irish branches’). The core issue in the case was determining the profits attributable to these Irish branches, which ultimately depended on one question: whether the IP licenses of AOE and ASI under the CSA were to be attributed to the Irish branches.

Following the Advanced Pricing Agreements (‘APAs’) with the Irish tax authority, the licenses were not attributed to the Irish branches and consequently also the profits attributed to these licenses were not subject to corporate taxation in Ireland.

Irish Domestic Tax Law and the relevance of the OECD AOA

The most crucial difference between the Apple case and the other State aid cases is the reference framework. So far, there has not been much opportunity to assess what the Court had to say about the substance and transfer pricing technicalities in the Commission’s State aid investigations. Most cases were resolved and fell apart for the Commission on EU law grounds. In the Amazon case, for example, the CJEU concluded that the reference framework was wrongly identified: ‘the arm’s length principle cannot be applied for the purposes of examining tax measures in the context of Article 107(1) TFEU unless it is recognized by the national law concerned and in accordance with the rules defined by the latter.’ The Court further noted that the OECD Guidelines could only be relevant if they were incorporated into domestic law. In the cases of Fiat and Engie, which also concerned Luxembourg domestic legislation, the Court similarly did not endorse the idea that the arm’s length principle (‘ALP’) is inherent in Article 107 TFEU and may stem from outside the domestic reference framework.

In contrast, in Apple, the General Court (‘GC’) first found and then the Court of Justice subsequently endorsed that Section 25 of the Irish Taxes Consolidation Act 1997 (‘TCA’) was comparable to the OECD Guidance on the functional approach for the attribution of profits to a permanent establishment (the so-called ‘OECD AOA’). After all, both Section 25 TCA and the OECD AOA required a functional attribution of income to the Irish branches as PEs of ASI and AOE.

The Court’s reference to the AOA has been seen by some commentators as a contradiction to earlier judgments, in which the Court repeatedly concluded that ‘the analysis in the state aid cases should be restricted to the domestic law system of the state concerned’ (Collier, R. (2024, September 19), A bad Apple ruling , TaxJournal).Yet, it seems that in the present case, the reliance on the OECD AOA, or at the very least on the functional (functions, assets, risks) approach to the allocation of profits to a PE, was not challenged in a cross-appeal by Apple and Ireland after the General Court’s conclusion that Section 25 TCA and the OECD AOA were effectively similar. Hence, in the absence of a cross-appeal, the judgment of the General Court had the force of res judicata, with no further assessment by the Court of Justice (para. 279, C-465/20 P).

Act 1. Who is Allowed to the Garden to Collect the Apples?

The Commission on one side and Ireland and Apple on the other had differing views regarding the application of the identified reference framework for the attribution of income to a permanent establishment (‘PE’). The seed of discord lay in the question of (i) whether only the functions of the Irish branches mattered for income allocation, (ii) whether the functions of the Irish branches should be considered in the context of the functions of their head offices, AOE and ASI, or (iii) whether, as argued by Apple and Ireland, the functions should be viewed through the prism of the entire Apple Group, with Apple Inc. as the key decision-making and IP-holding company.

The Court of Justice concluded that the GC applied the Irish domestic law test for the attribution of income to the PE, according to which the functions performed by the Irish branches of ASI and AOE should have been assessed relative to the functions performed by their head offices in relation to the Apple Group’s IP licenses held by those companies (paras. 198-200, 256) Yet, the GC, according to the Court, did not follow its own identification of the reference framework by failing to consider the functions

of Apple Inc. The Irish law, according to the decision, ‘precludes the role of separate entities, such as a parent company of the non-resident company, from being taken into consideration’ (para. 256, C-465/20 P).

The Commission raised several arguments to justify this limited scope, namely the so-called separate entity approach and the ALP, which both focus on specific transactions. However, the Court did not provide much clarification on whether these arguments were decisive or relevant to the ultimate identification of the reference framework. In any case, this conclusion of the Court endorsed a comparative view on the attribution of profits to a PE but limited the scope of comparison only to the functional profiles of the PE and its respective head office, leaving the rest of the functions performed in the group value chain irrelevant for the assessment.

Act 2. Who Takes Care of the Apple Garden?

This leads us to several points of discussion. First, if the OECD AOA should have been applicable, the question is whether it is indeed the case that the ALP and OECD AOA require placing the focus on one specific transaction, leaving out the functions performed by any other entity in the group. Second, whether the functional comparison between the head office and a branch is prescribed by the ALP and the OECD AOA.

The answer to the first question may be both ‘yes’ and ‘no’, or, as is often the favourite answer of lawyers, ‘it depends’. From a strict legal point of view, the ALP generally applies to individual transactions. For example, Article 9 of the OECD Model Tax Convention (‘MTC’) applies to controlled transactions between two associated enterprises of two contracting states, while Article 7 OECD MTC applies to intra-group dealings between the head office and its PE. Thus, the scope of assessment under the ALP is limited to a specific controlled transaction. It primarily analyses the functions performed, assets used, and risks assumed by both parties in that controlled transaction to determine the price. The OECD AOA prescribes a comparative approach for the attribution of profits to a PE, but similarly specifies:

‘Under the first step, the functional and factual analysis must identify the economically significant activities and responsibilities undertaken by the PE. This analysis should, to the extent relevant, consider the PE’s activities and responsibilities in the context of the activities and responsibilities undertaken by the enterprise as a whole, particularly those parts of the enterprise that engage in dealings with the PE’ (para. 10 OECD AOA).

In this context, ‘the enterprise as a whole’ appears to refer to the entity of which the PE is a part and not the multinational enterprise as a whole. Otherwise, requiring tax administrations to assess the functional profile of the taxpayer in relation to every other entity in a multinational group could impose a disproportionately high and unnecessary administrative burden.

At the same time, the allocation of an asset to a PE under the OECD AOA necessitates identifying ‘significant people functions,’ as pointed out by the Commission. However, not all functions are suitable for attribution of economic ownership.

For the allocation of economic ownership of intangible assets, the OECD AOA requires that a PE performs specific functions, which consist, in particular, of active decision-making (the Irish law appears to take a distinct approach by emphasizing the necessity for control over the asset in question. However, it does not provide a comprehensive definition of what constitutes “control,” leading to potential discrepancies with

The Apple (...Of Discord?) Judgement of the CJEU

the OECD AOA) in managing risks related to the development of IP (para. 85 OECD AOA) or enhancing the acquired IP (para. 94 OECD AOA). If these specific functions – active decision-making with respect to IP and associated risks – were not performed by the Irish branches, and there was sufficient evidence that these functions were performed elsewhere (as demonstrated by the taxpayer and recognised by both the General Court and the CJEU), there is no AOA-based ground to allocate the economic ownership to the Irish branches.

In this context, the demonstration by the taxpayer that Apple Inc. was the entity performing the decisionmaking and risk control functions, as considered by the General Court, could have been intended not to extend the scope of the ALP and the separate entity approach but to provide evidence that the functions relevant for attributing economic ownership of the IP did not rest with the Irish branches.

Instead, in the final decision, the Court considered the functions of Apple Inc. to be fully irrelevant for the application of Section 25 TCA. Furthermore, the Court did not appear to assess whether the specific functions identified by the Commission were sufficient for attributing economic ownership of the Apple licenses to the Irish branches. The Court only stated that ‘the Commission has therefore succeeded in showing that, in light of … the activities and functions actually performed by the Irish branches … the profits generated by the exploitation of the Apple Group’s IP licenses should have been allocated to those branches’ (para. 287, C-465/20 P).

As a separate argument in favour of considering the functions of Apple Inc., it must be noted that the entitlement of ASI and AOE to the proceeds from the Apple IP – of which Apple Inc. remained the legal owner – was based on the CSA.

If ASI and AOE needed to perform active decision-making functions with respect to this IP to be entitled to the proceeds under the CSA, as argued by the Commission, and if they did not perform these functions, then we must consider to which entity these functions were outsourced. If these functions were with another entity under the CSA, ASI and AOE would never have had ownership of the IP along with their Irish branches in the first place. Following the same separate entity approach, ASI and AOE would not be entitled to returns on the IP based on such functional approach.

Had the decision-making functions of ASI and AOE under the CSA indeed been outsourced to the Irish branches, the Commission would have to assume that the Irish branches became parties to the CSA by taking over these functions. The Commission took a similar position in the Amazon case (para. 258, GC, Case T-816/17 and T-318/18), for example. Consequently, if the Irish branches were assumed to be participants in the CSA, the attribution of profits would have not strictly been between the head office and the PE; the contributions of each participant in the CSA must have been analysed.

In conclusion, the Court did not seem to have analysed whether the functions related to the Apple IP performed by the Irish branches were sufficient for attributing economic ownership to them under the OECD AOA. By adhering to the separate entity approach, the Court overlooked the fact that these functions could have been (i) outsourced to another entity in the group, meaning that ASI and AOE, along with their Irish branches, were never entitled to this IP under the CSA; or (ii) if performed by the Irish branches, they would effectively become parties to the CSA, necessitating a comparison of their functions with those of the other CSA participants.

Act 3. Who Collects, and Who Owns the Apples?

The second question raised above is whether a functional comparison of the activities of a PE with those of the head office or any other entity in the group was necessary under the OECD AOA and OECD Guidelines. Is the allocation of the IP licenses to ASI and AOE subject to the same standards as the allocation of profits to a PE under the OECD AOA?

ASI and AOE were bound by the CSA, to which Apple Inc. was also a party. Apple and many commentators have argued that if the value of the IP could not be attributed to ASI and AOE, then Apple Inc. should have been entitled to all the proceeds, as it made all critical decisions regarding the Apple IP in its capacity as the parent entity and as a party to the CSA. This would be accurate if decision-making functions were the golden standard for allocating income also among affiliated parties, similar to the OECD AOA.

However, it is important to note that a sophisticated functional analysis for transactions involving intangibles is a relatively recent development. While the OECD AOA has required significant people functions for the attribution of income to a PE, the same standard did not apply to income allocation among affiliated entities back then. In 2010, the OECD Guidelines introduced specific guidance on the allocation of profits in CSAs. For example, paragraph 8.9 of the 2010 version stated that each participant’s contribution in a CSA could be in cash or in kind. Even back in 2010, and not to mention the 1990s, decision-making functions and active involvement in developing the IP were not prerequisites for entitlement to returns from the IP in a CSA (R. Ökten, A Comparative Study of Cost Contribution Arrangements: Is Active Involvement Required To Share in the Benefits of Jointly Developed Intangible Property?, 20 Intl. Transfer Pricing J. 1).

Moreover, paragraph 8.12 of the 2010 OECD Guidelines further clarified that in cases where all or part of the CSA activity, such as contract research and/or manufacturing, was outsourced to another company that was not a participant in the CSA, that separate company could be compensated with an arm’s length cost-plus fee for the services it provided to the CSA participants (R. Ökten, A Comparative Study of Cost Contribution Arrangements: Is Active Involvement Required To Share in the Benefits of Jointly Developed Intangible Property?, 20 Intl. Transfer Pricing J. 1, Sec. 3.2.2.3). This raises an important question: why could not the domestic Irish provision – which stated that branch income is computed based on what an independent party could have expected in a stand-alone context – rely on this OECD guidance, which allowed for cost-plus remuneration under the same factual circumstances, instead of the OECD AOA Guidance (… both not available at the time of the APAs)?

Next, the OECD AOA does not merely allocate profits; it also requires an understanding of the nature of intra-group dealings. It necessitates hypothesizing and accurately delineating the transaction. In the absence of decision-making functions regarding the development and enhancement of the IP at the level of the Irish branches, which could effectively make them parties to the CSA (see above), potentially a license transaction for the use and exploitation of the Apple IP should have been assumed between ASI, AOE, and the Irish branches. In this scenario, ASI and AOE would fund IP developments by licensing the right to use the IP to the Irish branches in exchange for a licensing fee. In a comparable transaction between two affiliated entities, as seen in the Amazon case for example, the General Court concluded that a return above the operational costs to the operating companies (‘OpCo’) would not correspond to a market outcome (para. 284, T-816/17 and T-318/18). It seems however that for Apple, a reliable approximation of a “market outcome” was determined differently…

In conclusion, at the time of the relevant transaction, there was no requirement for active involvement to allocate the economic entitlement to proceeds from the IP under the CSA. ASI and AOE would be entitled to these proceeds merely by contributing cash, even without performing any decision-making functions. The Commission could potentially challenge this allocation by arguing that the funding under the CSA came from the operations of the Irish branches, similar to the Commission’s position in the Amazon case. Yet, in that case, the GC concluded that it is ultimately the entity’s decision to license out the right to use intangibles in exchange for royalty payments, and the fact that these payments are not subject to tax due to a hybrid mismatch is insufficient to demonstrate a selective advantage (paras. 280-281, GC, T-816/17 and T-318/18).

Finale

The decision in the Apple case appears to be heavily influenced by the current emphasis on a functional approach for allocating income between affiliated parties and attributing income to a PE. It is evident that Irish domestic law lacked a clear standard for addressing all relevant elements of the case. Moreover, neither the OECD Guidelines nor the OECD AOA were consistent in prescribing the significance of people functions when assessing intra-group transactions compared to intra-group dealings.

From a transfer pricing perspective, the main shortcomings of the current decision include: (i) the failure to identify the nature of the transaction in question – specifically, whether the Irish branches were merely licensing the right to use the IP from the head office or if they possessed sufficient functionality to be considered participants in the CSA; (ii) the lack of analysis regarding whether the functions performed by the Irish branches were indeed those necessary to trigger the reallocation of economic ownership under the OECD AOA; and (iii) an undue focus on people functions for the purposes of the CSA, which was not the prevailing practice even in 2010, well after the contested APAs.

Any shortcomings, digressions and leaps of thought inevitably present in this Op-Ed remain the responsibility of the author. Note that the viewpoint in this contribution is not necessarily the viewpoint of her employer. The author would like to thank Natalie Reypens, Partner at an international lawfirm, for her valuable comments on this contribution.

Svitlana Buriak is a Tax Advisor at an international law firm and Asst. Professor at the University of Amsterdam.

SUGGESTED CITATION: Buriak, S.; “Harvest Time or Apple Grand Finale”, EU Law Live, 15/10/2024, https://eulawlive.com/op-edharvest-time-or-apple-grand-finale/

Is the Apple Case of Historical Relevance Only?

Juan Jorge Piernas López

On 10th September, the Grand Chamber of the Court of Justice of the European Union (‘the Court’) rendered its judgment in C-465/20 P Commission v Ireland and Others, annulling the judgments of the General Court in cases T-778/16 and T-892/16 Ireland v Commission (T-778/16), and Apple Sales International and Apple Operations Europe v Commission (T-892/16) (hereunder, the ‘GC judgments’), and confirming a Commission decision on State aid granted to Apple by Ireland. The outcome of the Apple case was unexpected in light of the principles established by the Court in previous case law, particularly in Fiat, Amazon and ENGIE. It is true that Advocate General Pitruzzella had concluded in his Opinion that the judgments of the General Court should be set aside. However, he considered that the cases should have been referred back to the General Court. Instead, the Court of Justice gave final judgment.

Several Op-Eds from the EU Law Live Symposium on the Apple State Aid case have analysed the judgment from a tax viewpoint, this Op-Ed will focus on the State aid law and policy perspective.

On the applicability of Article 107(1) TFEU to tax rulings

As noted by some commentators, including this author, in Fiat the Grand Chamber of the Court recognised that the European Commission may lawfully analyse tax rulings under Article 107(1) TFEU, yet it appeared to set a very high bar for the Guardian of the Treaties to carry out State aid investigations in this area. The Court seemingly limited the applicability of Article 107(1) TFEU to cases where the parameters set by national law were manifestly incompatible with the objective of non-discriminatory taxation of all resident companies, whether integrated or not, and leading systematically to an undervaluation of the transfer prices applicable to integrated companies (Fiat, paragraph 122).

However, the Apple judgment does not reproduce that language, which cannot be found either in the ENGIE and Amazon cases, or in the more recent UK CFC judgment, rendered after Apple. To my knowledge, these judgments do not cite either the above-referred paragraph 122 of the Fiat judgment. Instead, the case-law after Fiat confirms that the Commission can only take into account the national law applicable in the Member State concerned for the purposes of identifying the reference system for direct taxation and adds that such conclusion ‘is, however, without prejudice to the possibility of finding that the reference framework itself, as it results from national law, is incompatible with EU law on State aid, since the tax system at issue has been configured according to manifestly discriminatory parameters intended to circumvent that law’ (e.g., Apple, paras. 82-83).

It could thus be interpreted that the Court in Fiat was not necessarily limiting the applicability of Article 107(1) TFEU to cases where the parameters set by national law were manifestly incompatible with the objective of non-discriminatory taxation of all resident companies and leading systematically to an undervaluation of the transfer prices applicable to integrated companies, but rather confirming that such scenario is incompatible with EU State aid law in line with the previous Gibraltar case-law, to which the judgment in Fiat made reference in that paragraph (by referring to para. 70 where that judgment

The Apple (...Of Discord?) Judgement of the CJEU

was cited). This interpretation could be supported by the fact that in Engie the Court also cited Gibraltar to confirm the applicability of Article 107(1) TFEU in cases where the reference framework has been configured according to manifestly discriminatory parameters (ENGIE, para. 114).

On the application of Article 107(1) TFEU to tax rulings

The Apple judgment is not ground-breaking in substance but clarifies and develops some of the principles established by the previous case-law concerning the analysis of the criteria under Article 107(1) TFEU.

As regards the reference framework for the analysis of the criteria of advantage and selectivity under Article 107(1) TFEU, the outcome of the Apple case was surprising given that the General Court had accepted the application by the Commission of the arm’s length principle, even though ‘that principle had not been formally incorporated into Irish law ’ (GC judgments, para. 218), and the Court’s case-law since Fiat had made clear that ‘only the national law applicable in the Member State concerned must be taken into account in order to identify the reference system for direct taxation, that identification being itself an essential prerequisite for assessing not only the existence of an advantage, but also whether it is selective in nature’ (Fiat, para. 74, ENGIE, para. 113). However, Advocate General Pitruzella had found that the General Court’s judgment was in line with Fiat in this regard (Opinion, para. 24).

In Apple, the Court did not review the correctness of the General Court’s conclusions regarding the arm’s length principle, as those findings had not been challenged in a cross-appeal, and therefore they had acquired the force of res judicata. The judgment provided that ‘It follows that the Court of Justice does not need to rule on those complaint’ (Apple, 276) (emphasis added). This latter sentence is unfortunate in my opinion given that, if the the findings in question have the force of res judicata, which is an expression of the principle of legal certainty and important ‘both for the Community legal order and for the national legal systems’ (e.g., Fallimento Olimpiclub, para. 22), it would appear that the Court may not review them under the applicable Rules of Procedure, not that it was not necessary for the Court to do it. Indeed, if the Court could have actually reviewed the findings at stake, I would suggest, in line with a recent Opinion of AG Sánchez-Bordona, that despite not being necessary, the Court should have reviewed them for the benefit of legal certainty ‘as it will otherwise leave unchallenged the position of the General Court (which I consider to be incorrect)’ (paras. 21-26 of mentioned Opinion). This review would very probably have affected the outcome of the case. It could be noted in this regard that the Court in Fiat found that ‘by accepting […] that the Commission may rely on rules which were not part of [national] law […] the General Court infringed the provisions of the FEU Treaty relating to the adoption by the European Union of measures for the approximation of Member State legislation relating to direct taxation, in particular Article 114(2) TFEU and Article 115 TFE’(Fiat, para. 94).

The Court in Apple confirmed that the Commission may validly consider that the reference framework in tax ruling investigations includes all resident companies taxed in the Member State concerned, as the Commission had done in the decision at issue, and not only integrated companies. As the Court phrased it ‘the Commission has demonstrated to the requisite standard that those tax rulings have the effect that [Apple Sales International (‘ASI’)] and [Apple Operations Europe (‘AOE’)] enjoy favourable tax treatment as compared to resident companies taxed in Ireland which are not capable of benefiting from such advance rulings by the tax administration, that is, in particular, non-integrated standalone companies, integrated group companies that carry out transactions with third parties or integrated group companies that carry out

The Apple (...Of Discord?) Judgement of the CJEU

transactions with group companies with which they are linked by fixing the price of those transactions at arm’s length, even though those companies are in a comparable factual and legal situation as regards the objective of that reference system, which is to tax profits generated in Ireland’ (para. 305). The Court further added that ‘the contested tax rulings reduce the annual amount of tax which ASI and AOE are required to pay in Ireland – as compared, in particular, to non-integrated companies whose taxable profit reflects prices determined on the market and negotiated at arm’s length – those tax rulings involve different treatment that can, in essence, be classified as a derogation and as discriminatory’ (para. 306). These findings confirmed the conclusion reached by the CJEU in Fiat when it referred to ‘the objective of non-discriminatory taxation of all resident companies, whether integrated or not, pursued by the national tax system’ in the abovementioned paragraph 122.

The judgment also confirmed that the Commission may examine the criteria of selectivity and advantage under Article 107(1) TFEU together (paras. 295-296), and the presumption of selectivity that attaches to individual measures under the Commission v MOL jurisprudence. However, although the judgment was not conclusive on this point, given that the Commission had not relied only on the presumption but it had also carried out the three-step selectivity test, the judgment seems to suggest that the presumption was not applicable in the case at hand, as the contested rulings were not individual aids. In the judgment’s terms: ‘Even on the assumption that the contested tax rulings implement section 25 of the TCA 97, which is a provision that benefits all non-resident companies in a general and abstract manner, and cannot therefore be described as ‘individual aid’[and] even if the Commission had not been entitled to rely on a presumption of selectivity in the present case, that error could not have affected its finding of selectivity[…]’ (Apple, paras. 300-301).

Finally, a significant part of the Apple litigation concerned evidence issues, such as the issue of whether the strategic decisions regarding Intellectual Property were taken by the Irish branches of ASI and AOE, the head offices or Apple Inc. Indeed, one of the reasons justifying the annulment of the judgments under review was precisely that the General Court had committed a breach of procedure by taking inadmissible evidence into account, particularly some powers of attorney that had not been submitted during the administrative procedure before the European Commission but only during the litigation before the General Court. From a State aid perspective, the discussion about the imputability of a given decision under Article 107(1) TFEU to given company or to its shareholder is not entirely new. Indeed, this analysis is usually carried out under the criterion of State resources, which demands that a given measure adopted by a public, or even private, undertaking be imputable to a Member State. It is suggested that the case-law on this criterion could shed light on the evidence that might be expected to attribute certain decisions or functions to an entity or another, particularly having in mind that State aid must in principle be analysed ex ante and that public authorities and national courts must be able to discern whether a given measure constitutes State aid before it is implemented under Article 108 TFEU, and particularly national courts are entrusted with safeguarding the rights of individuals faced with a possible breach of Article 108(3) TFEU, for which they must first be able to define a given measure as State aid under Article 107(1) TFEU. This might help explain why in the context of the criterion of imputability under Article 107(1) TFEU there is no need to show the ‘smoking gun’ in order to attribute a certain conduct to the State but rather this analysis is based on a ‘set of indicators.’ For instance, as the case-law has clarified ‘any indication, in the particular case, either, on the one hand, of the involvement by the public authorities in the adoption of a measure or the unlikelihood of their not being involved, having regard also to the compass of the measure, its content or the conditions which it contains, or, on the other hand, the absence of those

authorities’ involvement in the adoption of that measure is relevant [and that] it cannot be demanded that it be demonstrated, on the basis of a precise instruction, that the public authorities specifically incited the public undertaking to take the measure in question’ (Tercas, paras. 60-61).

Conclusion

The Irish Government affirmed after the judgment of the Court that ‘the Apple case involved an issue that is now of historical relevance only ’, as the regulatory framework had changed since the adoption of the original Revenue opinions. The Apple judgment is certainly of historical relevance, if only as the highest recovery of State aid ever ordered. However, while the findings made by the Court may be relevant for future investigations, particularly concerning the importance of the evidence that may be submitted during the administrative procedure and the Court’s stance towards arguments not raised in a cross-appeal, it is less clear whether the case will have a significant impact on State aid policy.

Looking ahead, it is unlikely, in my opinion, that the Apple judgment will lead to a new wave of tax ruling investigations. On the one hand, the judgment confirms and makes reference to the previous case-law of the Court in this area since Fiat which requires, inter alia, a strict adherence to the applicable national law for the analysis of the criteria under Article 107(1) TFEU. On the other hand, the tax regulatory framework has significantly changed in many EU Member States in recent years, as often underlined by the Commission, in order to reinforce the level playing field and limit aggressive tax planning. Finally, the Commission priorities have also seemingly changed. For example, while the 2014 Mission Letter of Commissioner Vestager foresaw mobilising competition tools to cooperate with the fight against tax evasion, no such reference has been included in the Mission Letter of Commissioner Ribera, issued a week after the Apple judgment, or in the influential Draghi report, presented one day before the adoption of the Apple decision. Similarly, the Letta Report does refer to ‘fighting against aggressive tax planning, tax avoidance and tax evasion’ but suggests doing it through Article 116 TFEU (Letta Report, pages 91 and 112). In sum, it appears that the Apple judgment is mainly, if not only, of historical relevance.

Juan Jorge Piernas López is Senior Lecturer and Jean Monnet Chair, University of Murcia Law School, Spain and Consultant to The World Bank, Washington DC, USA.

SUGGESTED CITATION: Piernas López, J.J.; “Is the Apple Case of Historical Relevance Only?”, EU Law Live, 16/10/2024, https:// eulawlive.com/op-ed-is-the-apple-case-of-historical-relevance-only/

Cases C-555/22 P, C-556/22 P and C-564/22 P UK

and ITV v Commission: just like Apple, except completely different?

Stephen Daly

Introduction

That’s all folks! The UK Controlled Foreign Company (‘CFC’) judgment (C-555/22 P, C-556/22 P and C-564/22 P), handed down by the Court of Justice on 19 September 2024, was the final it would hand down concerning the UK. This Op-ed examines the case and highlights the contrast between the reasoning in this judgment and that of the Court of Justice, the previous week, in Apple ( C-465/20 P).

General Background

When triggered, the CFC rules attribute (all or some portion of) the overseas profits of a Subsidiary (the ‘CFC’) to a controlling Parent in the Parent’s home jurisdiction, for our purposes the UK. CFC rules, in principle, run counter to the territoriality principle, which broadly constrains a country’s taxing power to the activities that take place within its borders. As a result, they tend to be narrowly targeted at activities where the risk of profits being artificially shifted is high. In the absence of CFC rules, there are two very easy ways in which a Parent could shift profits to a low tax jurisdiction. The Parent could provide funds to a low taxed Subsidiary which it would then lend back to the Parent (known as an ‘upstream loan’). The interest payable to the CFC would be deducted from the Parent’s taxable profits. Or, rather than the Parent depositing those funds in a bank itself and paying tax on any interest accrued, the Parent could provide them to the Subsidiary which in turn would deposit them in a bank and generate interest (known as a ‘moneybox loan’).

The UK has had CFC rules since 1984 following an apparent increase in the use of tax haven companies after the removal of exchange controls in 1979. There have been multiple changes to the rules since. Most notably, the rules were amended in response to the Cadbury Schweppes (C-196/04) case, where it was found that the UK regime was not compatible with EU law insofar as it targeted more than just ‘wholly artificial arrangements’.

The relevant UK CFC rules

The rules were changed in 2012, with effect from January 2013 and amended again from January 2019. It was the 2012 iteration of the rules that the Commission took issue with, in particular the rules around non-trading finance profits (‘NTFP’). Putting it at its simplest, NTFP are profits which arise from the provision of loans, hence ‘finance profits’, but the entity which provides the loans is not functionally

equivalent to a bank and instead might act more like an investor, hence ‘non-trading’. Specifically, the Commission argued that the rules imposing a CFC charge on the NTFP of a CFC (found in Chapter 5 of 2010–Taxation [International and Other Provisions] Act, ‘TIOPA’) breached Article 107(1) in so far as there was an exemption (partial or full, and to be found in Chapter 9 of TIOPA 2010) to the charge in cases where these profits arise from a qualifying loan (‘QL’) relationship, namely where loans are made to other non-UK subsidiaries.

The Chapter 5 charge applied in 2 scenarios: where the profits were attributable to (1) significant people functions (‘SPFs’) carried out in the UK or (2) UK funds. As for scenario (1), analysing whether SPFs are present, and if so where, is a form of transfer pricing analysis, which is complicated and time-consuming. As for scenario (2) meanwhile, tracing whether fungible capital within a multinational group comes from the UK is also a cumbersome exercise. As such, Chapter 5 triggers serious administrative inconvenience both for the tax authority and the taxpayer concerned. That administrative inconvenience is spared by the Chapter 9 exemption.

According to the UK (and other interested parties in the litigation), Chapter 9 provided the exemption because there was a low risk of profits being artificially diverted where the CFC provides QLs. The exemption did not apply, conversely, to instances where the risk of abuse was high, such as in the case of upstream or moneybox loans. Limiting the scope of the CFC rules to those high-risk circumstances also accorded with the Cadbury Schweppes judgment insofar as they only targeted wholly artificial arrangements.

The Commission decision

In matters of tax, it is the ‘selective advantage’ criterion which is essentially determinative as to whether Article 107(1) TFEU is breached (AG Kokott opinion in Case C-66/14, para 114). The Commission’s selective advantage assessment, with which the General Court agreed (Cases T-363/19 and T-456/19), was as follows:

• the reference framework was the UK CFC rules;

• there was an advantage insofar as NTFP were exempted for CFCs with QL relationships;

• this advantage was a priori selective as it applied to UK parented groups with a CFC making QLs, but not in comparable circumstances as with upstream or moneybox loans;

• as for justification, the Commission agreed that in instances where the NTFP of the CFC arise from UK funded loans but where the CFC has no UK SPF, it would be excessively cumbersome to require a tracing exercise (scenario (2) above). But this would not be the case where the NTFP of the CFC arise from UK SPFs (scenario (1). Such SPF analysis would also have ensured that only wholly artificial arrangements (à la Cadbury Schweppes) were combatted.

The UK was ordered accordingly, in April 2019, to collect unpaid back taxes, which may have been over £1billion (though the author understands that a far lower figure was in fact due).

The Court of Justice

The UK (and interested parties) appealed to the Court of Justice, with the determination of the reference framework being key to the appeal. In line with the Advocate General’s opinion, the Court of Justice agreed with the UK’s analysis that the reference framework ought to have been the General Corporation Tax System (‘GCTS’) and the failure to apply the correct reference framework vitiated the entire analysis. The GCTS is largely territorial and the CFC rules provided an exception to the principle of territoriality only where there was a high risk of profits being artificially diverted from the UK; profits which would, but for the artificial diversion, ordinarily be taxable in the UK. As such, the logic of the CFC and GCTS rules was the same and they were inseparable (paras. 107-108). The risk-based approach to the legislation mandated that Chapter 9 should not be seen as an exemption to Chapter 5. Instead, the two should be read together as defining the scope of the charge (para. 112). In other words, the risk of artificial diversion of profits was high not where Chapter 5 applies per se, but instead only where Chapter 9 does not apply and Chapter 5 conditions are present.

In arriving at this conclusion, the Court of Justice faithfully applied the approach handed down by the Court last year in Engie (C-451/21 P and C-454/21 P). In determining the reference framework, the Commission should defer to the Member State’s interpretation of its rules, provided that it is compatible with the wording of the legislation and the Commission cannot point to consistent and reliable evidence to the contrary from case law or administrative practice. Given that the Commission could not point to such contrary evidence, the Court’s analysis hinged on the compatibility of the UK interpretation with the legislative wording, which the Court found not to be incompatible (see paras. 113-127).

Reconciling Apple?

The judgment, handed down just over a week after the Court’s controversial findings in the €13billion Apple case (C-465/20 P), jars in its use of the deferential Engie approach. Whereas in UK CFC , the Court of Justice applied Engie to the tee, in Apple, the Court of Justice very much did not. In Apple. there was a dispute about how to interpret Irish law, specifically Taxes Consolidation Act (TCA) 1997, s. 25, which taxes non-resident companies on their Irish trading profits. Was the Irish interpretation compatible with the wording of the legislation? Well, given that the legislation at the time was quite vague, it is very difficult to say the interpretation was incompatible. In that case, the Commission should have accepted the Irish interpretation unless it had evidence to the contrary. But the case law is best read as aligning with the Irish interpretation (see my discussion of Murphy v Dataproducts [1988] IR 10 in Intertax) and the Commission itself had accepted that Ireland did not have a consistent administrative practice as regards how to approach TCA 1997, s. 25 (recital 403). That the Court of Justice could so radically change its approach to the State aid rules from one week to the next is, frankly, scandalous.

The only way of reconciling the judgments is by hiding behind the principle of res judicata (paras. 144 and 303), by way of which unchallenged findings from the General Court cannot be reopened at the Court of Justice. But that is entirely unsatisfactory for myriad reasons, only two of which I raise here. First, the Engie case postdates the appeal in the Apple case, so the effect of res judicata is to bar Ireland from pursuing an argument that it never had the opportunity to make.

Secondly, in Koen Lenaerts’ own words (at p. 29), the principle of res judicata is not ‘absolute’. The Court is not barred per se from re-examining issues even where there is no cross appeal. If the Court wants to find a way of re-examining an issue, it can certainly find a way (as suggested also by Juan Jorge Piernas López). Indeed, it did just that in the context of an issue in the case which was not subject to appeal: the Court (see paras. 273-275 in particular) happily reopened the issue of the conflation of the advantage and selectivity criteria by the General Court, despite this not being subject to cross appeal. Indeed, the possibility that the Court can reopen points is reinforced by its strong pronouncements in the Engie ( para. 78), FIAT ( para. 85), and UK CFC (para. 60) cases that an error in defining the correct reference framework is an error of EU law that the Court of Justice cannot be barred from revisiting. But in Apple, the Court of Justice should bar itself from revisiting such an issue knowing that, in the process, it is making an error of EU Law?

There is a further tension between the Apple and UK CFC judgments in respect of the treatment of territoriality. Ireland had argued its interpretation of TCA 1997, s. 25 reflected the territoriality principle (recital 195), but the Court did not accept the relevance of the principle to understanding Irish law (para. 309). In the UK CFC judgment on the other hand, the Court was clearly very receptive to using the territoriality principle to understand UK law.

Conclusion

Ultimately, the UK CFC judgment is another in a growing list of State aid judgments (Amazon, Engie, FIAT and the turnover tax cases ( C 562/19 P and C 596/19 P)) where the Court of Justice has strongly upheld Member State sovereignty and pushed back against the Commission’s attempts to expand the scope of the State aid rules. When it comes to fundamental tax rules or the interpretation of domestic tax rules, the Court will respect Member State choices. Just not all the time, as the Apple decision tells us.

Stephen Daly (BCL, LLM, DPhil, CTA (Fellow)) is Reader in Tax Law at King’s College London and visiting lecturer at Imperial Business School. He sits on the editorial boards of the British Tax Review and the Journal of Tax Administration.

SUGGESTED CITATION: Daly, S.; “Cases C-555/22 P, C-556/22 P and C-564/22 P UK and ITV v Commission: just like Apple, except completely different?”, EU Law Live, 21/10/2024, https://eulawlive.com/op-ed-cases-c%e2%80%91555-22-p-c%e2%80%91556-22-p-andc%e2%80%91564-22-p-uk-and-itv-v-commission-just-like-apple-except-completely-different/