Apple Case: The General Court of the European Union limits the control over state aid
Spain Tax Alert
The General Court of the European Union (GCEU) concludes in a recent judgment in the 'Apple’ case that the European Commission may assess the correct application of transfer pricing rules and therefore identify the existence of types of tax aid, although within the limits of those assessment powers.
In a decision delivered on August 30, 2016 (SA.38373 (2014/C)), the Commission had held that certain tax rulings signed with the Irish tax authorities in 1991 and 2007 implied more favorable tax treatment for Apple compared with the tax that would have been payable under a more adequate application of transfer pricing rules. The rulings and ensuing discussion focused essentially on the criteria for allocating profits to the Irish branches of certain group companies engaged in activities related to production and distribution and after-sales services.
The judgment by the GCEU delivered on July 15, 2020 (cases T‑778/16 and T‑892/16) follows the same pattern as its earlier judgments in the Fiat case (in which the GCEU confirmed the Commission's decision) and Starbucks case (in which, as happened here, the GCEU set the decision aside):
a) The GCEU generally endorses the Commission’s ability to use the prohibition on granting state aid to tackle certain types of tax planning arrangements. Moreover, assessment of the correct application by taxpayers of the arm’s length principle (explicitly or implicitly recognized in their laws) is a valid tool in this context.
b) The GCEU also acknowledges that the application of those rules is complex and subject to different though equally valid interpretations, so the Commission must be extremely diligent in providing evidence of the unlawfulness of the measure.
As had already happened in the Starbucks case, the GCEU found that the Commission had not provided sufficient evidence that the tax rulings adopted by Ireland in relation to Apple had led to a reduction in the tax liability compared with the tax that should have been payable in view of the functions and risks actually located in Ireland:
a) In the Apple case, the Commission started out from the premise that Apple’s Irish branches should have been allocated an essential part of the value created by (among other things) the group’s intangibles; and therefore lamented that its tax base in Ireland was not higher. The claimants contended, however, that, although the support functions were performed in Ireland, the decisions creating that value were made primarily in the United States. It was therefore reasonable that the profits from intangibles over which it had no control should not be allocated to Ireland. In the court’s assessment of these circumstances it underlined that the Commission should have provided sufficient evidence of the existence of an actual advantage instead of presuming that advantage prima facie (from the fact that the head offices had no staff or resources to manage these intangibles, which led to their having to be allocated, under an exclusion approach, to the branches themselves).
b) The Commission also questioned the fact of the profits of the branches being calculated as a margin of the operating costs, although the methodological errors identified in the rulings are not sufficient, in the GCEU’s opinion, to invalidate the resulting valuation, if it is not accompanied by evidence that the reported profits were too low for the functions and risks actually assumed by the Irish branches.
As we have seen, the Apple judgment is placed in a broader context encompassing competition and state aid, in which the European courts have been requiring the Commission to be more thorough and go deeper in relation to issues for which the institution has the burden of proof.
As with the previous cases, a cassation appeal against the July 15 judgment may be lodged with the Court of Justice of the European Union.