In 2016 the European Commission concluded that Ireland granted illegal State aid to two Apple group subsidiaries in two tax rulings granted in 1991 and 2007. The General Court had annulled this Decision, but the CJEU has upheld the Commission Decision in full and given final judgment on the matter with no remittance back to the General Court and no ability to appeal.

Summary

The CJEU held that the Commission applied the correct analysis and correctly applied Irish law in concluding that illegal State aid had been granted by Ireland.  This took the form of two tax rulings provided to two subsidiary companies of the Apple Group (the “Subsidiaries”). The CJEU held that Irish law provided for a comparative form of profit allocation approach (comparing the activities of the branch with those of the head office to effect an allocation) whereas the Irish case law supports an approach where one looks at the branch activities alone and allocated value accordingly, without considering the head office activities. Thus, the CJEU determined that the Irish State had derogated from the normal system of corporate taxation in Ireland which resulted in a reduction in the tax liabilities of the Subsidiaries. State aid arose as the rulings were, by definition, selective and the reduction in tax liability granted an advantage.

The main findings were that:

1. Irish law at the time (which has now been changed) required that the activities of the head office and the branch be considered in profit allocation. This was the approach taken by the Commission, so its 2016 Decision was upheld. 
2. Apple and Ireland did not substantiate from an evidential perspective that employees or directors of Apple Inc. were acting for the Subsidiaries when taking the decisions relating to the generation of the profit.  The CJEU noted that, if no such evidence was furnished or existed, the Commission could use this lack of evidence to conclude that the functions were not performed for the Subsidiaries. If this was not the case, there would be an excessively high burden of proof on the Commission.
3. Actions of Apple Inc. (including its employees and directors) were actions, roles and functions of a separate entity and could not be considered when allocating profits to the Subsidiaries as they were all separate legal entities.
4. The CJEU disagreed with the approach of the General Court on the application of the Commission of OECD Guidance that postdates transactions under examination.

Commentary

The judgment was somewhat surprising as most expected the case to be remitted to the lower General Court for a new determination.

We consider the decision to be flawed as the CJEU seemed to misunderstand the prior Irish law on branch allocations.  The CJEU asserted that Irish law required that both the activities of the head office and the branch must be compared when allocating profit to the Irish branch.  Irish case law had in fact supported that one only looks at the branch and allocate profit based on the activities carried on in Ireland alone. Unfortunately, this decision is now unappealable. 

Insufficient evidence was produced to justify Apple and Ireland’s position and much of the evidence was produced after the conclusion of the administrative phase of the process so it could not be relied upon.  The key learning from this is that all evidence must be produced early in the process. 

From an Irish tax policy perspective, the decision is historic as Irish Revenue do not generally give rulings and any historic rulings have expired.  Also, changes in the Irish tax code mean the Apple arrangements would no longer work in Ireland.  These include new branch allocation and full transfer pricing rules, implementation of the ATAD, Pillar Two, CFC rules etc.

From an FDI perspective, tax has not been used to incentivise investment into Ireland for many years.  That said, the fact that the Irish Government was willing to stand with a company that invested in Ireland supports that Ireland is a safe place to locate operations. 

From a purely fiscal perspective, the Irish Government will benefit from the repayment of the aid (€14 billion) immediately in advance of the Government setting a pre-election budget.