Tim Cook appeared to be in ebullient form when he arrived on stage in the Steve Jobs Theatre in Cupertino, California on Monday to kick off Apple’s latest product unveiling.
“We’re introducing some breakthrough technologies in truly meaningful innovations, innovations that we think will make a real difference to people’s lives,” the casually-dressed Apple chief executive of 13 years told a room of analysts, press, social media stars from more than 30 countries – and millions of others who had tuned in online to watch a live-stream of the event.
He was facing a friendly audience as Apple’s new line-up spanned an Apple Watch that will soon include the ability to detect sleep apnoea to the iPhone 16 and 16 Pro smartphones, designed for use with Apple Intelligence, the company’s answer to the march of generative AI.
Afterwards, the 63-year-old mingled among the attendees in the demonstration area, posing for selfies and listening to feedback as the throng jostled for a first look at Apple’s latest wares.
The decision to hold the event on a Monday, rather than Apple’s usual Tuesday and occasional Wednesday product launches, allowed it to get out before the presidential debate between Kamala Harris and Donald Trump the next day. But it also avoided it being overshadowed by another Apple event on Tuesday.
Shortly after 12.30am the next day, Californian time, the EU’s highest court, in Luxembourg some 9,100km to the east, released its ruling on Apple’s long-running alleged Irish sweetheart tax case that can trace its roots back to the year – 2007 – the US tech giant sold its first iPhone.
A European Court of Justice (ECJ) ruling, a dense 80-page tome, confirmed the European Commission had been correct in 2016 in deciding Apple had received illegal state aid from Ireland and that it must pay the State €13 billion of back taxes, plus interest.
EU competition commissioner Margrethe Vestager, the liberal Danish politician who persisted with the case through legal wranglings over the past eight years, would tell reporters hours after the final ruling that she had broken down in tears when she learned the outcome.
Privately, confidants cautioned her beforehand to expect the worst. And she admitted she was preparing her best “stiff upper lip” in the face of another expected embarrassing defeat in the courts – after similar state-aid tax cases she pursued against European units of Amazon, Fiat and Starbucks had each unravelled before the Luxembourg courts.
“I was ready to face the loss, but it was the win that made me cry,” she said. “It’s very important to show European taxpayers that once in a while tax justice can be done.”
Fallout
The shock final ruling on the world’s biggest ever antitrust case has left the Government scrambling to contain fresh pillorying from Opposition parties in the lead-up to a general election on how it fought the commission – and expectations about how the windfall should be spent.
The reputational fallout has also restoked concerns about the effect on foreign direct investment (FDI), as emboldened officials in Brussels might keep Ireland’s tax regime in their sights – and raised fresh questions about whether other multinationals in the State could now be in the firing line.
“The ramifications of the determination on Ireland’s status as an attractive location for FDI will only be judged in the longer term, but the decision is undoubtedly a victory for Vestager,” said Ronan Dunne, a partner and head of competition, regulated markets and EU law at law firm Philip Lee. “The judgment bucks a run of [commission] defeats relating to the tax rulings.”
Vestager may be ending her time as the EU’s top competition enforcer in November. But she signalled Ireland and others, including the Netherlands, Belgium and Luxembourg, remain very much in Brussels’ sights as she namechecked the four EU countries during her press conference as remaining “central” to facilitating “profit shifting” by multinational corporations.
Speaking to The Irish Times afterwards, she said it was “very difficult” to say what implications the ruling had for the tax payments of other groups in Ireland that may have availed of similar arrangements in the past.
The spotlight Vestager has shone on “aggressive” tax planning by large companies has helped drive rule changes in Ireland and globally in the past decade that have since turbocharged Irish corporate tax receipts. Irish corporate tax receipts are expected by economists at stockbrokers Davy and Goodbody to hit a record of as much as €30 billion this year – a multiple of the €7.35 billion out-turn for 2016.
Apple, which moved valuable intellectual property (IP) to the Republic in 2015, is now among the main contributors.
Origins
The entire Apple case stems from when Cook appeared before a US Senate subcommittee in May 2013 and spoke of “a tax incentive arrangement” the group had in Ireland since it set up a base in Cork in 1980.
It triggered immediate denials from the Government that Revenue had cut special deals with Apple – or any company. Within a week, Cook had backtracked, saying the company did not use “tax gimmicks”. It was too late.
The testimony set off alarm bells in Brussels and prompted the commission to ask EU members for details of about 1,000 other tax “rulings”, which would end up dragging Fiat and Amazon subsidiaries in Luxembourg and a Starbucks unit in the Netherlands into the quagmire.
The Apple investigation turned formal in June 2014, when the commission claimed its Irish tax arrangements were improperly designed to give it a financial boost in exchange for jobs. Its final decision in August 2016 highlighting that Apple had paid 0.0005 per cent corporation tax on its European profits two years earlier.
The commission’s case was based around two tax opinions – or “rulings” – handed out by Revenue to the US group in 1991 and 2007. These gave Apple a “selective advantage” over other companies and allowed it to channel most European sales through employee-less “head office” parts of two subsidiaries in Cork, Apple Sales International (ASI) and Apple Operations Europe (AOE), which weren’t resident in Ireland – or anywhere – for tax purposes. In other words, they were stateless.
Only the activities of Irish “branches” within the same units – which the commission struggled to distinguish from the head offices – were subject to tax in the State.
ASI was responsible for the sales and distribution of iPhones and other products outside of the US, while AOE had a role in manufacturing and assembly.
The commission’s view was that valuable intellectual property (IP) behind Apple products lay inside the Irish branches of ASI and AOE, meaning most of the profits were taxable by Revenue. Apple, on the other hand, argued it was held outside the branches – and ultimately controlled from Cupertino.
The commission’s second line of argument was that Ireland didn’t use the arm’s-length principle in assessing the taxable profits of the Irish branches. This basically means that if two arms of the same group are carrying out a transaction, they should price the deal at open-market rates, as if they were not related.
The Government response was that arm’s-length transfer pricing principles did not exist in Ireland at the times of the 1991 and 2007 Apple tax rulings. It has repeatedly claimed that the commission sought to retrofit guidelines issued in 2010 by the Organisation for Economic Co-operation and Development (OECD) on the matter.
Shockwaves
The legal twists and turns of the case have sent periodic shock waves across the Atlantic in recent years.
An appeal by Apple and Ireland against the commission decision saw it overturned in July 2020 by the General Court in Luxembourg, the EU’s second-highest court. It said Vestager’s team had not proven the IP licences should have been allocated to the Irish branches when determining taxable profits of ASI and AOE.
The commission appealed the judgment to the ECJ. Last November, a key adviser to that court, or advocate general, said the General Court had made a “series of errors of law”. He said the 2020 judgment should be set aside and the case sent back down to the lower court for a new ruling on its merits.
The ECJ went beyond the advocate general’s opinion on Tuesday by issuing a final decision on the case. It said the lower court had erred in its ruling and that the commission had established its case “to the requisite legal standard”.
“I’m shocked. I didn’t see that ruling coming,” said Stephen Daly, a reader in tax law at Kings College London. “I though the path to victory for the commission was incredibly narrow, because it had lost a number of other cases, looking at similar issues, over the last few years.”
The Government said this week the Apple case involved issues that were “now of historical relevance” due to rule changes since then. It also continued to insist Revenue does not give preferential tax treatment to any companies or taxpayers.
Within months of the US Senate hearings, then minister for finance Michael Noonan moved to phase out by 2020 the loopholes allowing companies to be incorporated in the Republic but be “stateless” for tax purposes – and use another notorious tax strategy, the so-called double Irish.
Apple would relocate intellectual property (IP) to the Republic in 2015 by way of an intragroup acquisition carried out by an Irish-resident subsidiary of AOI. Capital allowances – or deferred tax assets – generated by the estimated $240 billion (€217.4 billion) purchase have been almost entirely used up by then, resulting in Apple’s Irish tax payments soaring in recent years, according to an analysis by Seamus Coffey, an economics lecturer at University College Cork.
A host of other US multinationals also moved IP to the State around five years ago on foot of changes to OECD transfer pricing guidelines and the US tax regime.
Daly said that other multinationals that used similar tax structures to Apple as they were grandfathered out “should be looking over their shoulders right now”.
Others disagree, notably as Apple had used a particular and unusual structure in having a “branch” and overseas controlled “head office” in its Irish units. “The judgment is very much a product of the particular facts of the Apple case,” said Marco Hickey, SC, head of EU competition and regulated markets at LK Shields Solicitors. “I do not think that it could be said that this judgment will automatically call into question the past tax treatment by Ireland of other corporate groups active here.”
Kevin Mangan, co-head of law firm Mason Hayes & Curran’s tax team, highlighted that the “selective advantage” treatment of Apple was found by the commission to have come from the 1991 and 2007 Revenue letters, not any general principle of Irish tax law.
“So, for companies who adopted functions asset and risk-based allocations to their Irish and offshore operations as part of historic structures and self-assessed on that basis, there shouldn’t be a significant concern,” he said.
Despite the reputational headache for Ireland from the Apple case, Hickey said the country “has a strong culture of State aid compliance”, having only been the subject of four state-aid recovery decisions from the commission over the past 25 years. Germany has been the subject of 70 such decisions, Spain 40, Italy 48, France 18 and Greece 22, he noted, citing official commission statistics. Apple was the only Irish case among 80 active against member EU states at the start of this week.
Still, Peter Vale, a tax partner at Grant Thornton Ireland, said that the ECJ ruling “will further fuel those that continue to accuse Ireland of having tax haven status” – even if it was nuances of the US tax system that facilitated structures that the likes of Apple used in the Republic.
“While both Apple and Ireland vigorously defended the European Commission assessments from the outset, there is no question that Ireland’s reputation suffered as a result of the ongoing case,” he said.
Apple said this week that the case has never been about how much tax it pays, but which government it is required to pay it to. The group said it has handed over $20 billion in tax to the US on the very same profits the commission claimed should have been taxed in Ireland.
It disclosed on Tuesday that it will take a $10 billion one-off charge this year to reconcile issues that have arisen as a result of the ECJ ruling.
The Government was forced by the commission in 2018 to collect the disputed taxes, plus interest, from Apple and put it into an escrow account. The value of the account, which is mainly made up of European government bonds, currently stands at over €14 billion, according to the Department of Finance. That is even after €455 million was paid out between 2019 and 2021 to other unnamed countries that had a tax claim on the same profits, as allowed under the rules of the account.
Minister for Finance Jack Chambers said the “current working assumption” is that the majority of the €14 billion will be available to Ireland, though there may still be “other third country adjustments”. His department subsequently clarified it was not aware of any further claims from other countries.
The Government has insisted the funds, which will start to be transferred in the coming months, will not be used for the upcoming pre-election budget – or for day-to-day spending. Plans for the unexpected pot are expected to feature heavily in manifestos of all political parties before the election, which must take place by the middle of next March.
Options include paying down national debt, which currently stands at about €220 billion, putting the money into two new sovereign wealth funds designed to capture windfall taxes, or spending it on “clear infrastructural deficits” in housing, transport and energy in Ireland, according to Goodbody economist Dermot O’Leary.
The Irish Times reported on Thursday that Apple executives warned Minister for Enterprise Peter Burke in a meeting in June, as the final outcome of the tax case was awaited, of “aggressive competition” from other countries to lure multinationals away from Ireland. Notes from the meeting, released under freedom of information laws, show that Apple also highlighted public infrastructure concerns in Cork that are hindering its growth plans there.
Apple declined to comment on the meeting. But its representatives noted its more than four decades in Cork, the more than 6,000 people it employs there and the construction of a new facility for 1,300 employees due to open next year.
Back in the US, Apple saw its shares fall by just 0.5 per cent on Tuesday as Wall Street investors digested the ruling – leaving its position as the world’s current largest company by value secure, at $3.39 trillion.
Its value at the time of the original commission decision eight years ago? Just under $590 million.
- Sign up for the Business Today newsletter and get the latest business news and commentary in your inbox every weekday morning
- Opt in to Business push alerts and have the best news, analysis and comment delivered directly to your phone
- Join The Irish Times on WhatsApp and stay up to date
- Our Inside Business podcast is published weekly – Find the latest episode here
