The European Union is seeking to overturn Apple Inc’s victory in a 13 billion-euro ($15.7 billion) tax dispute, saying judges used “contradictory reasoning” when they found that the company’s Irish units weren’t liable for huge payments.
A summary of the appeal published Monday shows the EU’s determination to challenge the critical July court judgment. The decision was a dramatic setback to Commissioner Margrethe Vestager’s probes of national tax rulings that she says were an illegal subsidy for some large multinational firms.
Slapping Apple with a multi-billion order in 2016 was a landmark case for Vestager, showing she had no fear of upsetting the world’s most valuable tech company or the US Treasury. The move helped fuel an EU push to close tax loopholes that allowed some multinational companies to legally pay less tax in Europe.
The EU said that the lower court improperly conflated Apple’s lack of employees at two Irish units and the company’s level of responsibility for intellectual property on iPhone and iPad sales across Europe. Judges failed to properly weigh the EU’s analysis of the Irish branches and showed “contradictory reasoning” in a separate part of their findings.
The EU court “categorically annulled the commission’s case in July and the facts have not changed since then,” Apple said in a statement. “After a thorough review of the facts and the commission’s claims,” the judges were “clear in their determination that Apple has always abided by the law in Ireland, as we do everywhere we operate.”
At the heart of the legal arguments are simple questions on where value is created and where it should be taxed. Apple argued that all important decisions on Apple products are made at the company’s Cupertino headquarters and that profits should be taxed in the US Apple had delayed returning international profits to the US for years, citing high costs, until changes to the tax code saw it start repatriating foreign earnings in 2018.
July’s surprise judgment backing that view caused “far-reaching consequences,” Vestager said last year. Apple’s Irish units recorded almost all profits from sales outside the Americas, she said, and treating parent and group companies separately allows businesses to “have their cake and eat it” by reducing tax payments.
Nicole Robins, a partner at economics consultancy Oxera in Brussels, said that while losing the appeal “would be a major setback” for the commission, it wouldn’t necessarily stop it from pursuing other investigations of multinationals’ tax arrangements.
But she said a defeat would force investigators “to adopt a far higher standard of evidence in order to demonstrate that such tax rulings confer an economic advantage to the multinational in question and therefore constitute illegal state aid.” It would also raise the bar on the level of economic and financial evidence needed from the commission, she said.
European governments are increasingly unsympathetic to how companies have been using rules on intellectual property licensing to avoid high tax rates on corporate income. Vestager investigated a slew of technology and branded merchandise firms, from Amazon.com Inc to Starbucks Corp, that based units in EU countries with favorable tax policies, such as Ireland, Luxembourg and the Netherlands.
The EU is now weighing a tax to target revenue, and not profits, generated by digital companies if global efforts to overhaul corporate taxation don’t make progress. Tax is only one part of an EU crackdown against technology companies that face potential regulation to curb their services and bear more responsibility for the content on their platforms.