EU puts tax crusade on the line in Apple court challenge

LUXEMBOURG — European Commission lawyers fought Tuesday to salvage a €13 billion back-tax order for Apple by telling the European Union’s top court that the legal challenge was critical to the future of sweetheart tax deals to lure investment.

The EU executive is trying to reverse a 2020 court defeat that struck down competition chief Margrethe Vestager’s finding that Ireland granted illegal state aid to Apple by not taxing more of the iPhone maker’s profits.

The case “is of the utmost importance for the future of fiscal state aid” and whether some EU governments “can continue to grant multinationals substantial tax breaks in return for jobs and investment,” Commission lawyer Paul-John Loewenthal told the Court of Justice at a hearing in Luxembourg.

Vestager’s crusade against “aggressive tax planning,” mostly targeting U.S. multinationals, has so far faltered in the EU courts, potentially showing the limits of using state aid law to weigh in on tax policy. Both Ireland and Apple, supported by Luxembourg, are challenging the Commission’s decision, part of a slew of probes aimed at how both countries offered favorable tax treatment to hook the European headquarters of multinational firms.

Tuesday’s hearing got into the nitty gritty of how Irish tax law was applied and how two of Apple’s units were taxed in Ireland for handling intellectual property licenses for the company’s sales outside of North America.

Apple argues that the profits were taxable in the U.S., as that’s where the value of its products is generated. It said its Irish tax structure used the possibility of deferring U.S. tax on foreign earnings and didn’t aim to avoid taxation entirely.

“All Ireland could do was apply its tax rate and it applied the full tax rate to the profits it was entitled to tax,” Paul Gallagher, a lawyer for Ireland, told the judges. These units carried out “routine functions but not the critical functions” in developing Apple’s products.

The Commission had constructed “an imaginary world where a global giant” would hand over responsibility for its treasured technology to a separate company, he said.

Loewenthal argued that Ireland simply accepted Apple’s explanation of what the units were doing and described how Apple had previously changed its activities, apparently to benefit from lower taxation, saying it stopped holding physical board meetings in Ireland and switched to teleconferences.

The “substantial tax breaks” granted to the Irish units are similar, he cited Apple as saying, to incentives granted by U.S. states to entice investment, thus “amounting to state aid” and an unfair subsidy, illegal under EU law.

Apple said in 2017 that it had an effective tax rate of 21 percent on foreign earnings. The Commission said its effective tax rate on European profits was 1 percent in 2003 and 0.005 percent in 2014.

The court’s Advocate General Giovanni Pitruzzella, who’s tasked with drafting a formal advice on the case ahead of a final ruling, said he’d deliver his opinion on November 9.

The case is C-465/20 P Commission vs. Ireland and Others.