Explainer: why is the Apple tax case hearing important?

Apple, the European Commission and Ireland face off once again on Tuesday in what will be the final court of appeal in a case that has rumbled on now for a decade.

At stake is a sum of €13.1 billion which, with interest, has now grown to €14.3 billion, which the European Commission says Apple owes Ireland in taxes that should have been paid over the years.

Its view centres on two tax rulings dating back to 1991 and 2007 determining what portion of the profits of the US tech giant’s Apple Sales International and Apple Operations Europe units, based in Cork, are taxable in Ireland.

After a two-year formal investigation, the Commission decided in August 2016 that the maker of the iPhone and Mac computers owed the State €13.1 billion of alleged back taxes as a result of illegal state aid. Apple and successive Irish governments have consistently said that the tax was not due.

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Politically, for Ireland, the Apple case is an irritant. Being seen to actively oppose efforts to bring an additional €13.1 billion into the exchequer is not a look that any government would be comfortable with. It’s a significant sum of money at any time, never mind during an ongoing housing crisis and concerns over the rising cost of living.

Ireland’s finances are not as fragile now, however, as they were back in 2016 when the Commission first ruled on the issue. Recent reports that the State can expect up to €65 billion in budget surpluses in the years up to 2026 puts the money at stake in the Apple judgment in a slightly different light.

More importantly, for Ireland Inc, it is considered important that it can stand over the integrity of the tax rules it applies to company profits, particularly in relation to foreign direct investment. Apple is an important business in Ireland, one of the 10 companies behind the massive surge in “windfall” corporation tax revenues over recent years.

At the heart of the case before the Court of Justice of the European Union (ECJ) is a conviction by the Irish authorities that there was no “sweetheart” deal and that it has applied taxes on Apple’s Irish operations appropriately.

The General Court, the second highest court of the European Union, agreed, quashing the commission’s decision in July 2020 after an appeal by Apple and Ireland on the basis that Brussels “did not succeed in showing to the requisite legal standard” that Apple received tax advantages from the Republic.

From the Commission’s point of view, another defeat in this final court of appeal would deliver a potentially fatal blow to the Commission’s policy of pursuing what it considers aggressive corporate tax planning though State aid rules.

The Commission, under competition commissioner Margrethe Vestager, has used competition rules as a tool to get around the requirement for unanimous support across EU member states for any reform of tax rules.

“Simply put, aggressive tax planning is still with us, and insofar as selective tax subsidies constitute a distortion to the single market, it falls within the scope of state aid policy,” she told a conference earlier this year.

However, the Commission has failed to persuade EU courts of the merits of its policy in a number of high profile cases before the courts over recent years, including a €30 million claim against Starbucks, a €250 million demand on Amazon and the €30 billion pursuit of back taxes from Fiat Chrysler. And, of course, there is the previous appeal in the Apple case to Europe’s second-highest court.

The danger for Vestager and the wider Commission is that defeat before the ECJ would embolden member states in the use of special tax arrangements to encourage foreign direct investment.

“One of the elements for a valid finding of state aid is that a state body must be shown to have granted a selective advantage to one or more companies – in other words, that Apple was singled out for preferential treatment,” said Marco Hickey, a partner with law firm LK Shields, where he heads up the practice’s EU, competition and regulated markets team. “The General Court held that selective advantage had not been established.”

The question now is whether, despite some scepticism in legal circles, the Commission can persuade can get the ECJ that the lower court was mistaken in its ruling, reinforcing the potency of its main policy weapon in its battle against what it considers illegal state aid.