Apple Tax Case: A Look Back at the Decade of Dispute

| Picture: "Apple Mini Retail Store - Stanford Shopping Center" by ping ping is licensed under CC BY-SA 2.0.

On September 10, 2024, the European Court of Justice (ECJ) issued a landmark ruling confirming the European Commission’s 2016 decision regarding Apple’s tax arrangements in Ireland. The court upheld the Commission’s conclusion that Ireland had granted Apple illegal state aid, allowing the tech giant to avoid paying up to €13 billion in taxes between 2003 and 2014.

THE BACKGROUND OF THE CASE

The investigation, launched by the European Commission in 2014, with an initial information request in year 2013, focused on two tax rulings issued by Ireland in 1991 and 2007. These rulings allowed Apple’s Irish subsidiaries—Apple Sales International and Apple Operations Europe—to channel most of their profits to “head offices” that, as per European Commission´s assessment, existed only “on paper”. As a result, the bulk of Apple’s profits were not subject to taxation in Ireland or elsewhere.

Apple Operations Europe, under these rulings, manufactured computers for Apple. However, a significant portion of its profits was allocated to its paper “head office,” which did not have any physical presence or employees.

THE ROLE OF APPLE SALES INTERNATIONAL

Apple Sales International, the entity responsible for distributing Apple products in Europe, the Middle East, Africa, and India, was at the center of the Commission’s findings. By structuring its sales in a way that recorded all sales through Ireland, Apple avoided taxation in countries where the products were sold. The tax rulings enabled Apple to allocate most of its profits to the "head office" of Apple Sales International, where they went untaxed.

For example, in 2011, Apple Sales International recorded profits of €16 billion but only paid taxes on €50 million, leaving the vast majority of profits untaxed. The Commission found this arrangement to be artificial, as the "head office" had no operational role in generating the profits. It merely facilitated board meetings and other minor administrative tasks.

This structure allowed Apple Sales International and Apple Operations Europe to escape tax obligations.

Illustration from the European Commission´s website ec.europa.eu/commission

| Illustration: "EU State Aid Case Ireland Apple" by EU Commission https://europa.eu/european-union/abouteuropa/legal_notices_en#copyright_notice is marked with CC0 1.0.

EU COMMISSION DECISION (2016): ILLEGAL STATE AID AND THE IMPACT ON FAIR COMPETITION

The Commission’s investigation assessed whether these tax rulings gave Apple an undue advantage, which would be illegal under EU state aid rules. It found that the rulings endorsed an artificial allocation of profits within Apple’s Irish subsidiaries that had no economic or factual basis. Only the Irish branches of these entities had the capacity to generate income, yet most of the profits were assigned to the untaxed "head offices."

In 2016, the European Commission concluded that Ireland’s selective tax treatment of Apple was illegal under EU state aid rules. Apple benefitted from an effective corporate tax rate of as low as 0.005% in 2014, compared to Ireland's statutory 12.5% corporate tax rate.

The decision mandated Ireland to recover unpaid taxes from Apple for the period of 2003-2014, amounting to up to €13 billion plus interest. This recovery was essential to level the playing field and eliminate the distortion of competition caused by the selective tax benefits Apple received.

The Commission could only mandate the recovery of illegal state aid for a ten-year period preceding its initial information request in 2013. Consequently, Ireland is required to reclaim up to €13 billion in unpaid taxes from Apple, dating back to 2003, along with accrued interest. Approximately €50 million of this amount pertains to the improper allocation of profits to the "head office" of Apple Operations Europe, while the remainder is associated with similar practices concerning Apple Sales International. The recovery period concluded in 2014, as Apple restructured its operations in Ireland starting in 2015, rendering the 2007 ruling obsolete.

The Commission explained that tax rulings, while legal, must be grounded in economic reality. Under EU state aid rules, profits must be allocated between different parts of a company according to the “arm’s length principle,” meaning they should reflect the commercial conditions agreed upon between independent businesses. The investigation demonstrated that Apple’s internal allocation of profits violated this principle, giving the company a massive tax break that was unavailable to other businesses operating under the same rules.

APPLE AND IRELAND'S APPEAL

Apple and the Irish government both contested the Commission's 2016 decision, leading to a legal battle that spanned several years. In 2020, the General Court of the European Union annulled the Commission’s decision, stating that the evidence provided was insufficient to prove that Apple had received a selective tax advantage. However, the European Commission appealed this ruling, taking the case to the European Court of Justice.

THE EUROPEAN COURT OF JUSTICE'S FINAL RULING IN 2024

In its ruling on September 10, 2024, the European Court of Justice overturned the General Court’s decision and reaffirmed the European Commission’s original findings. The ECJ concluded that Ireland’s tax rulings had indeed allowed Apple to benefit from an illegal tax advantage by artificially shifting profits to the untaxed "head offices." The court ruled that Apple should have been taxed on its profits in Ireland, where the economic activities generating those profits were based.

RECOVERY PROCESS AND BROADER IMPACT

The recovery of unpaid taxes aims only to restore fair competition. The Commission’s decision was clear: recovery does not penalize the company but ensures that Apple and other companies operate under the same tax rules.

Ireland has been instructed to collect the unpaid taxes, but the final amount could be reduced if other countries where Apple operates also claim a share of the taxes owed. If profits from Apple’s operations are reallocated to countries where sales took place, Ireland’s recovery amount could decrease. The same applies if the US requires Apple to pay additional amounts for its research and development costs.

The ECJ’s 2024 ruling marks the end of a decade-long battle over Apple’s tax practices in Ireland. The decision reaffirms the European Commission’s stance that Member States cannot selectively offer tax benefits to multinational corporations. This case has had far-reaching implications for corporate taxation within the EU and beyond, setting a precedent for future cases involving state aid and multinational companies.