Defeat on €13B Apple tax bill delivers big blow
to EU’s Vestager
Brussels needs to go back to the drawing board in its
crackdown on multinational tax avoidance.
By SIMON
VAN DORPE AND CHRISTIAN OLIVER 7/15/20, 3:25 PM CET Updated 7/15/20, 6:22 PM
CET
Europe's
"tax lady" is in trouble.
The EU
General Court on Wednesday overturned the landmark 2016 decision by EU
competition czar Margrethe Vestager that Ireland should claw back €13 billion
in unpaid taxes plus interest from Apple.
The Apple
decision was the keystone — partly because of the eye-watering sums involved —
of an EU campaign to crack down on tax avoidance and stop countries from
offering sweetheart deals to multinationals.
Vestager's
defeat in the appeal of the case by Ireland and Apple comes at a delicate time
politically. The failure of her team to win a case that was seen as a big
European strategic priority could put her on the back foot in the face of
increasing criticism of EU competition enforcement from Paris and Berlin.
Both the
French and Germans are ramping up pressure on her to push the competition rule
book in a more geopolitical direction, hoping to forge EU champions in the face
of U.S. and Chinese rivals, but the Apple case is fast turning into a textbook study
of how hard it is to marry strategic ambitions with highly technical legal
investigations.
The run of defeats on state aid is compounded by other
problems for Vestager.
Vestager's
decision in 2016 argued that, by not taxing the bulk of Apple’s global profits
that were funneled through Ireland, Dublin was effectively granting an illegal
subsidy to the iPhone maker. That subsidy could then be tackled by using the
EU's rules on state aid.
The judges
on Wednesday did not challenge the use of the state aid tool but argued that
Brussels had not sufficiently proved its case. “The Commission did not succeed
in showing to the requisite legal standard that [Apple was granted an illegal
advantage],” the court said in a statement.
The General
Court added, "The Commission was wrong to declare that [two Apple
subsidiaries in Ireland] had been granted a selective economic advantage and,
by extension, state aid." Establishing "selective advantage" is
a key part of any state aid case, and it was necessary to show that Apple
received a tax perk that would have been unavailable to other companies.
Competition
policy is supposed to be one of the EU's strongest weapons to drive through
overarching political priorities, and it is a growing worry for the Commission
that the Apple decision forms part of a broader chain of losses, in which the
EU court is increasingly rejecting Brussels' state aid decisions over failings
in the legal argumentation. The court accepts that it is legitimate to use
state aid law to pursue tax cases, but notes failings in the Commission's
execution.
“The Apple
judgment is part of a wider trend in EU judicial review that is particularly
visible in recent state aid cases,” said Alfonso Lamadrid, a competition lawyer
at the firm Garrigues. “The courts are inclined to endorse the Commission’s
approach on points of principle, but they are demanding that the Commission
does a more thorough job in its assessment of all the relevant circumstances
when it bears the burden of proof.”
The run of
defeats on state aid is compounded by other problems for Vestager over the
legacy of her battles with Google over abuse of dominance — and whether her
remedies are really containing the search giant — and over whether her tough
approach to telecoms mergers was justified. Most recently, the General Court
also annulled her high-profile decision to block a major telecoms merger in the
U.K.
Triple
defeat
All three
lines of reasoning that the Commission used in the Apple case were annulled.
The court
did endorse the Commission's methodology of applying OECD tax principles to the
situation in Ireland, but rejected its conclusions. It regretted "the
incomplete and occasionally inconsistent nature of the contested tax rulings
[granted by Ireland to Apple]" but added that those defects were "not
in themselves sufficient to prove the existence of an advantage,"
according to the statement.
"The
judgment strikes at the heart of the Commission’s reasoning regarding the
allocation of income generated by intellectual property," said
François-Charles Laprévote, a state aid lawyer at the firm Cleary Gottlieb.
Apple said
it was "pleased" by the result.
"This
case was not about how much tax we pay, but where we are required to pay
it," a spokesperson said, adding that Apple paid more than $100 billion in
corporate income taxes around the world in the last decade.
"Changes
in how a multinational company’s income tax payments are split between
different countries require a global solution, and Apple encourages this work
to continue," the spokesperson said.
U.S. President Donald Trump called Vestager the “tax
lady” who “really hates the U.S.”
The Irish
department of finance also welcomed the judgment: "Ireland has always been
clear that there was no special treatment provided to the two Apple companies.
The correct amount of Irish tax was charged."
Vestager
said in a statement that the Commission would "carefully study the
judgment and reflect on possible next steps."
The
Commission can still appeal the case on legal questions with the European Court
of Justice, the top EU court, in which case the €14.3 billion would remain
blocked on an escrow account pending the final judgment.
Several
lawyers questioned whether the Commission would appeal the case.
"In
the light of the limited nature of the Irish activities as established by the
Court, it will be difficult for the Commission to find grounds of appeal with
the ECJ," said Raymond Luja, a tax law professor at Maastricht University.
Lamadrid
said the Commission's chances of appeal were "slim."
The
Commission did not appeal a very similar annulment on Starbucks’ tax treatment
in the Netherlands | Cindy Ord/Getty Images
Annabelle
Lepièce, a partner at law firm CMS, noted that the Commission had not appealed
a very similar annulment on Starbucks’ tax treatment in the Netherlands. But
the amount in that case (€20 million-€30 million) was much lower.
The
Commission would have better chances if it re-ran the Apple case, two lawyers
said.
Lepièce
said the Apple case posed big questions about the continued use of state aid in
tax cases.
“Apple was
the biggest state aid case ever. The General Court ruling is in line with
several recent annulments involving Starbucks and a Belgian tax scheme and
shows that state aid is probably not the way to go towards fiscal
harmonization,” she said.
But
Vestager in her reaction said that the Commission "stands fully behind the
objective that all companies should pay their fair share of tax."
She noted
that in 2011, of around €16 billion in recorded European profits of Apple's
Irish subsidiary, Ireland only considered €50 million taxable in the country.
The
Commission would "continue to look at aggressive tax planning measures
under EU state aid rules" but the enforcement would need to go "hand
in hand with a change in corporate philosophies and the right legislation to
address loopholes and ensure transparency," Vestager added.
Transatlantic
trouble
The Apple
case and the EU’s broader policy of labeling these sweetheart tax deals as
illegal subsidies has triggered tensions between the U.S. and the EU.
U.S.
President Donald Trump called Vestager the “tax lady” who “really hates the
U.S.”
The
administration of President Barack Obama weighed in with a letter from
Secretary of the Treasury Jack Lew to then-Commission President Jean-Claude
Juncker arguing the Commission’s “sweeping interpretation” of state aid system
threatened to “undermine” the progress made by the international community in
tax policy.
But the
U.S. in the meantime took a step back from the main global stage for tax
reform, the OECD.
“Most
recently, the United States have asked that the OECD-led process be put on
hold. This provides a good opportunity to rethink the way that global tax rules
are being set,” said Tove Maria Ryding, a tax justice coordinator at NGO
Eurodad.
"Today’s
court decision illustrates how difficult it is to use EU state aid rules to
collect tax," she said.
CORRECTED:
This story has been amended to correct the recovery order on Starbucks.
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