TP cases in the spotlight: Apple state aid case

Written by Lawrence Nkomo and edited by Yandisa Xakata

This article examines the Court of Justice of the European Union (CJEU) judgment in Case C 465/20 P concerning state aid allegations against Ireland’s tax rulings granted to Apple Sales International (ASI) and Apple Operations Europe (AOE). The CJEU set aside the General Court’s annulment of the European Commission’s decision, finding errors in the General Court’s assessment of the arm’s length principle and the definition of advantage. The judgment emphasizes the importance of a functional analysis when assessing the taxable profits of a non-resident company’s branch, particularly considering intra-group transactions and the allocation of assets, functions, and risks.

Introduction

The Apple state aid case revolves around tax rulings issued by Ireland to ASI and AOE, both Irish branches of Apple Inc., a US-based multinational. The European Commission investigated these rulings, concluding they provided Apple with a selective advantage by improperly allocating profits from intellectual property (IP) licenses, thereby lowering Apple’s tax burden in Ireland. This, the Commission argued, constituted illegal state aid under Article 107(1) TFEU.
Parties’ arguments

• The Commission argued that the arm’s length principle necessitates a functional analysis to determine the taxable profits of a non-resident company’s branch. It contended that the Irish tax rulings failed to correctly allocate profits generated by the exploitation of Apple Group’s IP licenses to the Irish branches.
• Ireland, ASI, and AOE contested the Commission’s findings, asserting that the rulings merely applied Irish tax law, specifically section 25 of the Taxes Consolidation Act 1997 (TCA 97), to the facts of the case. They argued the Commission’s approach mischaracterized the activities of the Irish branches and disregarded the separate legal entity principle.

Court findings and reasons

The General Court initially annulled the Commission’s decision, accepting Ireland’s and Apple’s arguments that the Commission failed to demonstrate the existence of a selective advantage. However, the CJEU overturned this judgment, finding several errors in the General Court’s reasoning:

• The CJEU found the General Court incorrectly characterized the Commission’s approach as an “exclusion” approach, failing to recognize that the Commission had indeed undertaken a functional analysis.
• The CJEU held that the General Court wrongly considered the functions of Apple Inc., the parent company, when assessing the taxable profits of ASI and AOE’s Irish branches, contradicting the separate entity principle and the arm’s length principle.
• The CJEU concluded that the General Court placed an excessively high burden of proof on the Commission by requiring it to demonstrate that specific decisions relating to IP management were not made by the head offices, when the absence of evidence in the minutes was sufficient to cast doubt on the head offices’ role.

Based on these errors, the CJEU set aside the General Court’s judgment, finding that the Commission had indeed demonstrated a selective advantage. The Court upheld the Commission’s approach of analysing the allocation of assets, functions, and risks between the Irish branches and the head offices, while excluding the role of separate entities like Apple Inc.

Importance of the judgment in respect of transfer pricing

The CJEU’s judgment holds significant implications for transfer pricing within the EU:

• The judgment reinforces the importance of a robust functional analysis under the arm’s length principle, focusing on the actual activities performed by the branch rather than relying solely on formal arrangements or the lack of activities elsewhere.
• The case highlights the scrutiny applied to intra-group transactions, particularly those involving IP licenses, and the need for proper allocation of profits based on the economic reality of the arrangement.
• The judgment confirms the Commission’s power to challenge tax rulings that confer selective advantages, even if they ostensibly apply national tax law. This has implications for Member States’ fiscal autonomy and the design of tax systems.
• The case provides valuable guidance for multinational corporations operating within the EU, underscoring the need for transparency and substance in transfer pricing arrangements to comply with EU state aid rules.

The Apple state aid case serves as an important ruling, providing clarity and guidance on the application of transfer pricing rules and state aid principles within the EU, especially concerning IP-intensive businesses. The judgment’s emphasis on a fact-based functional analysis is crucial for ensuring fair taxation and preventing distortion of competition within the single market.