Apple loses landmark tax case with the EU

Apple has lost a €13 billion battle over unpaid taxes in a landmark legal defeat in the European Union over “sweetheart” tax deals.

The European Court of Justice overturned an earlier ruling in the technology group’s favour and concluded that the Republic of Ireland had “granted Apple unlawful aid”, which the country was required to recover.

The long-awaited ruling could have significant consequences for the way in which multinationals treat their profits, experts said.

The judgment concerns a 2016 case in which Margrethe Vestager, the European competition commissioner, claimed that Apple had received “illegal” state aid from Ireland. It centres on the exclusion from Ireland for tax purposes of profits generated by Apple’s activities outside the United States and routed via two Irish subsidiaries using intellectual property licences.

Ireland struck so-called sweetheart deals with the technology company to base two of its subsidiaries in the country, terms that were not available to others, the European Commission ruled, giving “illegal” tax benefits worth €13 billion to Apple. In 2020 a lower court upheld Apple’s appeal against the ruling, but the European Court of Justice has now overturned that decision.

The Irish government said the ruling was “now of historical relevance only”, but added that it would begin the process of releasing assets from an escrow fund estimated to hold €13.8 billion at the end of last year.

Dan Neidle, a tax lawyer and the founder of Tax Policy Associates, said the ruling was “a massive victory” for the commission: “Their strategy of using competition law and state aid [rules] to override domestic tax rules has succeeded. I and most observers thought it wouldn’t. We were wrong.”

He said there would be “significant implications” and that EU member states and multinationals would have to reconsider the use of “transfer pricing” to allocate profits between different countries.

Alex Haffner, a competition partner at Fladgate, a law firm, called the decision “dramatic” and said that it showed “the EU authorities and courts are prepared to flex their collective muscles to bring Big Tech to heel where necessary”.

Farhan Azeem, head of transfer pricing at PKF Littlejohn, an auditing and accounting firm, said: “Multinationals that have profited from setting up a European hub in Ireland can expect to face further scrutiny. The days of so-called sweetheart deals appear to be over.”

In a second victory for Vestager, Europe’s top court also backed her crackdown on Google’s anti-competitive practices. The court threw out an appeal by Alphabet, Google’s parent company, against a €2.4 billion fine levied by the commission seven years ago.

Vestager, 56, who is due to step down this year, has tried to take on other multinationals over their taxes, but with mixed results. She said the Apple ruling was a “huge win for European citizens and tax justice”. She said the commission would continue its work against harmful tax competition and aggressive tax planning by EU countries and multinationals via legislative proposals and enforcement.

“Our investigations have decisively contributed to a mind-shift, a change of attitude among member states. They have helped to trigger and accelerate regulatory and legislative reform,” Vestager said.

Apple said it had paid $577 million in tax, 12.5 per cent of the profit generated in Ireland, in line with the country’s tax laws in the period covered in the European investigation. It accused the commission of “trying to retroactively change the rules and ignore that, as required by international tax law, our income was already subject to taxes in the United States.

“This case has never been about how much tax we pay, but which government we are required to pay it to. We always pay all the taxes we owe wherever we operate and there has never been a special deal.”

Tim Cook, Apple’s chief executive, previously had dismissed the commission’s position as “total political crap”.

Ireland, whose low tax rates helped it to attract technology companies to set up their European headquarters, had also challenged the earlier ruling, saying that its tax treatment of intellectual property transactions was in line with other countries in the Organisation for Economic Co-operation and Development. “Ireland does not give preferential tax treatment to any companies or taxpayers,” it said. “Ireland will, of course, respect the findings of the court regarding the tax due in this case.”

The ruling comes against a backdrop of a changing tax environment for multinationals, with more than 140 counties having signed up to a global minimum tax that aims to impose a minimum rate of 15 per cent on the profits of global companies. The agreement is intended to remove the incentive for nations that operate as tax havens for corporate powerhouses.

Paul Monaghan, chief executive of the Fair Tax Foundation, a social enterprise that promotes responsible tax conduct, said: “The commission is to be congratulated for persevering with its challenge to Ireland and the unfair state aid they were giving to Apple via enormous tax breaks.

“Apple’s tax-dodging has been hard-wired for many years. Unfortunately, it is still the case today that Apple mops up income and profit from the UK and around Europe and funnels it to Ireland, which, as a full-blown tax haven, then levies little or no corporation tax. The new global minimum tax may impact this somewhat, but Ireland is already creating fresh loopholes in and around intellectual property.”