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Tax and legal

Ireland and Apple win their appeal against the tax ruling by the EU Commission

Peter Vale Peter Vale

In what for many was a major surprise today in the EU General Court, Ireland and Apple won their appeal against the €13.1bn tax ruling by the EU Commission.

The Court found in favour of Ireland and Apple on almost all counts in what at first glance looks like a comprehensive defeat for the Commission.  However it is still expected that the verdict will be appealed to the ECJ for final determination.

Regardless of the determination today, a spotlight will again be cast on Ireland’s tax regime.  However the positive ruling today by the Court should lessen some of that negative exposure.


Technical perspective

From a technical perspective, today’s verdict looks robust. 

It was initially hard to fathom the EU Commission’s view, which was essentially based on the fact that significant profits were generated in two Irish registered companies and, for the most part, were not taxed in any jurisdiction.  As a result, it determined that these profits should be taxed in their entirety in Ireland, notwithstanding that the two companies were not tax resident in Ireland.  Today, the EU General Court found against the Commission on this point.

The global tax landscape has changed considerably since the historic Apple structure was established in the early 1990s. With the OECD driving change, tax laws have been amended in many jurisdictions, with Ireland having made significant changes in 2013, with the elimination of stateless companies and in 2014 through the abolition of the “Double Irish” structure.  It is also worth noting that Ireland had limited transfer pricing legislation for many of the years within the scope of the Court’s ruling. 

Broadly, a non-Irish tax resident company is taxed in Ireland on the basis of its operations in Ireland only. Ireland does not tax other profits of a non-resident company, something that is still the case today with the significant difference that many previously considered non tax resident companies now come under the scope of Irish tax residency.

It would appear that Apple was taxed in Ireland in line with the substance of its Irish operations, prior to the Commission intervention. From a distance, it seems that the Commission originally attempted to rewrite historic tax rules based on current laws and mood. 

The global tax mindset has changed remarkably in recent years, with immoral tax planning and potential reputational damage emerging as new thematic concepts in the tax world.

It is no longer possible to shelter profits in a jurisdiction with minimal substance. There is now a much closer alignment of taxable profits and substance (something which has benefitted Ireland in recent years given the considerable presence many multinational corporations (MNCs) have here).

The key point however is that tax laws were very different throughout the periods in question in the Apple case. It was thus difficult to reconcile the original EU Commission findings with the tax laws in place at that time. 

The verdict today in the General Court is that the Commission did not adequately prove that all of the profits of the non Irish tax resident companies should be allocated to its Irish branches.  This verdict appears consistent with the correct tax technical treatment of non Irish tax resident companies operating in Ireland, which are subject to tax in Ireland based on the profits of their Irish operations. The Court also found Ireland had not granted any favourable tax treatment to Apple. 

In summary, the ruling appears to be a comprehensive victory for Ireland and Apple.


Appeal process

With the verdict in the General Court very likely to be appealed, a final decision is still a couple of years away. 

However historically the ECJ has seldom overturned the decision of the General Court.  Hence today’s decision is significant.


Impact on Ireland (and EU)

Given how much has changed since the Commission’s initial finding, it could be argued that today’s finding is a legacy of a previous era and no longer relevant. However we think this would be naive and the reality is that the finding is positive for Ireland and ironically indeed the EU as a whole.

With US tax reform encouraging US groups to do more in the US and less elsewhere, a negative finding in the EU General Court would only have fuelled this narrative further, with much of the detail lost.  The General Court ruling comes at a time when the US has left the table in the middle of the OECD’s attempt to drive its digital tax reform proposals forward.

A negative verdict could have driven a further wedge between the EU and the US.  It could also have reared its head in the US presidential election, with Ireland’s name dragged into the debate around the role of tax policies in taking jobs from the US. Again, the detail would have been lost in an emotive political battle.  The positive verdict today lessens the impact, although it would be naïve to think that tax will not be used in the election run-in.

In terms of impact on future FDI into Ireland, today’s finding should be seen as a positive for the EU as much as Ireland.  A negative finding would have created uncertainty for investors regarding their tax position, which is never good.  While the tax environment has changed considerably in the intervening years, it is a constantly evolving world and uncertainty over current and future tax positions would not help the case for investment into Europe.  The positive ruling today removes some of that uncertainty.

There is an argument that the reputational damage has already been done and that the best result now for Ireland would have been a defeat in the ECJ and a cheque for €14bn.  However I believe that in the long term such a verdict would have been damaging for both Ireland and the EU.  

If today’s decision is appealed, my personal view is that the ECJ will uphold today’s decision.