On 15 July the General Court (‘GC’) delivered its judgment concerning the appeals lodged by Ireland, on the one hand, and Apple Sales International (‘ASI’) and Apple Operations Europe (‘AOE’) (together, ‘Apple’), on the other, against a Commission decision finding the Irish tax rulings granted to Apple to be illegal and incompatible State aid (Cases T-778/16 and T-892/16).
According to the Commission, the advance tax rulings granted to Apple in 1991 and 2007 constituted State aid because they entailed a selective advantage that was not available to other companies. The Commission ordered recovery of unpaid tax in the amount of 13 billion euro.
The GC considered that the Commission did not succeed to show to the requisite legal standard that there was a selective advantage for the purposes of Article 107(1) TFEU and therefore annulled the Commission’s decision.
The Past
This is not the first time the GC analyses Commission’s decisions condemning tax rulings as individual aid within the meaning of the TFEU. It was not long ago (September 2019) that the same GC confirmed the Fiat decision (Cases T-755/15 and T-759/15) and annulled the Starbucks decision (Cases T-760/15 and T-636/16). In these two cases the GC validated the State aid legal approach to tax rulings. The different outcome of the judgments was dictated by the fulfilment of the Commission’s burden of proof in one case and not the other.
The Present
A word on the facts: in the Apple case, the Commission contended that the tax rulings adopted by the Irish tax authorities had endorsed a method of establishing AOE’s and ASI’s taxable profits that did not correspond to economic reality, thus reducing its taxable base and, therefore, its tax liability as determined under the ordinary rules of corporate taxation in Ireland.
The main points of the judgment: Firstly, the GC upheld the Commission’s approach that tax rulings may constitute State aid. The GC considered that the Commission may scrutinize national tax arrangements and dismissed Ireland’s and Apple’s plea that the Commission had exceeded its competences breaching the principle of Member States fiscal autonomy.
Secondly, the GC validated the Commission’s joint analysis of the advantage and selectivity requirements when analysing fiscal State aid.
Thirdly, the GC accepted the Commission’s use of the arm’s length principle as a tool to determine the existence of an advantage, as long as it is incorporated into the Member State’s national legal system. Hence, there is no freestanding obligation on the Member States, arising from Article 107 TFEU, to apply that principle in all areas of their national tax law. Likewise, the GC stood by the idea that the criteria to analyse whether there is State aid in tax rulings need to be assessed against the tax system of the Member States (the reference framework).
Fourthly, the Apple case, as the Starbucks case, sends a clear message to the Commission. In State aid cases the Commission must demonstrate, to the appropriate standard of certainty, the existence of an advantage. It is not sufficient to identify methodological errors in the reasoning of the tax authorities. Likewise, contrary to the Commission’s view that, in such seemingly arbitrary circumstances, the Commission could rely on a presumption of existence of a selective advantage, the GC considered that the Commission did not fulfil its burden of proof and that no presumption could be derived from the facts of the case.
The Future
The Commission’s decisions on tax rulings are framed in a quest against unfair tax competition between Member States in order to protect the internal market and a level playing field between the undertakings.
For many, the GC’s decision represents a blow to the Commission’s crusade against tax rulings and provides ammunition to the Member States that offer ‘sweetheart’ deals to some companies, thus contributing to inequality and unfairness in the internal market.
We would not put it that bluntly. It is a fact that the GC judgment does not make it easy for the Commission to use Article 107 TFEU as a means to try to harmonise tax laws or combat unfair tax competition between Member States.
Nevertheless, it does not prohibit the Commission to take action against tax rulings. The GC supported the Commission on the principles. While, as the law stands, direct taxation falls within the competence of the Member States, that competence must always be exercised in conformity with EU law (including State aid rules).
What this judgment is really about is rigor and fairness in the conduct of the proceedings. The Commission cannot bypass its own burden of proof and shift to the Member States and companies the burden of proving a negative fact (the inexistence of an advantage).
The GC also shows the Commission how it should have proceeded to fulfil its burden of proof, thus, hinting that had the Commission done its job properly, the result could have been different. In fact, one can read in the judgment and in the press release of the GC that ‘the General Court regrets the incomplete and occasionally inconsistent nature of the tax rulings’ (para 479). Other expressions of dislike can be found in paragraphs 348 and 500 of the judgment.
The Commission can now appeal the judgment on points of law. That may prove to be a difficult task, though, given that the Commission lost for not being able to fulfil its burden of proof, which is increasingly being emphasised in the case-law of the Court of Justice (do you remember Intel?). The Commission can also choose to redo the investigation, but that may prove to be time consuming and the outcome can be uncertain.
Voices are heard suggesting the Commission to walk a new path: the use of Article 116 TFEU. This provision allows the Commission to consult the Member States concerned where it finds that provisions laid down by law, regulation or administrative action in those Member States are distorting competition in the internal market. If such consultation does not succeed in eliminating the distortions, the European Parliament and the Council may adopt the necessary directives by qualified majority – thus overcoming the need for unanimity in tax matters.
However, this provision (or its predecessors in previous Treaties) has so far rarely been used and never led to the enactment of any directive. To implement it now for harmonisation purposes would thus imply a change in the Commission’s (and other institutions) harmonisation strategy.
Although losing this battle – and we should stress that the Commission may still appeal this decision on points of law – the judgment cannot be seen as damageable for the EU: the GC backed the Commission on the principles while standing by the rule of law. The judgment can also be seen as supportive of the recent Commission’s initiative regarding foreign subsidies that may hinder the level playing field in the internal market (White paper on levelling the playing field as regards foreign subsidies) and can be used to push forward the ideas of a corporate tax reform in the EU and of the taxation of digital business activities.
It seems unlikely that the Commission will stop looking at aggressive tax planning measures under State aid rules (as reaffirmed by Commissioner Vestager). However, it is likely that the Commission will choose more carefully the cases it will pursue and it is certain that it will avoid shortcuts, such as presumptions, in order to fulfil gaps in its evidentiary basis.