This is the second Op-Ed of a Symposium on the Apple State Aid case (C‑465/20 P). A previous Op-Ed has been authored by Romero J. S. Tavares. More Op-Eds will follow soon in EU Law Live.
The Apple Decision Simpliciter – A Blinkered Approach?
There is an adage: ‘You get answers to the questions you ask’. If the questions miss the mark, the ensuing analysis and resulting answers are likely to be misguided.
The Court of Justice’s Apple decision follows this unfortunate course. The result, abetted by the Court’s narrow construction of the affected events as exclusively European, is the antithesis of the objectives of both ‘State aid’ regulation according to Article107(1) of the Treaty on the Functioning of the European Union (TFEU), and tax law’s transfer pricing notions that exist to discipline where multinational enterprises (MNEs) should account for their income in spite of their and their transactions’ legal formalities. The Court adopted transfer pricing analytics to measure the impugned ‘State aid’ as Irish tax Apple’s two non-resident Irish subsidiaries should have paid on income attributed by the Court in default of anywhere else to their Irish operations. Allowing a transfer pricing mindset to control what is fundamentally a trade and competition analysis has unfortunate trade and competition law and tax law implications.
The Court proceeded on the basis that the incomes in question, particularly associated with the exploitation of Appe’s valuable intellectual property, arose only in the ‘closed system’ comprising the two Irish subsidiaries and Ireland. Accordingly, that income had to be, indeed could only be, accounted for only by them as they were legally constituted, within the parameters of European regulation. Justified by a strangely parochial and indeed perverse perception of transfer pricing’s arm’s length standard, which exists to correct distortions of the allocation MNEs’ international income using legal constructions of various kinds, the Court of Justice proceeded to orchestrate and validate just such a distortion of Apple’s international income and consequently interested countries’ taxing rights. The Court decided that the target income could only have arisen, that is, been earned in Ireland, the only place where observable activities of those subsidiaries took place. Ireland must have ‘aided’ Apple by not levying tax on these incomes.
What Is ‘Wrong’ With the Court of Justice’s Analysis?
The Court of Justice’s configuration of the case reflects a failure to understand that tax is only ever an enabler of a country’s distinctive self-interested fiscal policy sensitive as it may be to equally distinctive and self-interest but likely different fiscal policy of other countries. Tax does not exist in a silo for its own sake. The Court concluded that there was impermissible ‘aid’ without seizing critically on an invitation offered by the General Court to consider whether the United States, not Ireland, provided it. The Court applied transfer pricing’s arm’s length standard and, though disputed but in my view correct to say, its consonant manifestation in the OECD’s Authorised OECD Approach to allocate profits to permanent establishments (PE), i.e., source country business presences, without considering critically why these tax notions exist. Relying on a correspondingly faulty ‘functional analysis’ of where property and people engaged in the business of the Irish subsidiaries were observed (and consequently effectively it was presumed intangible property originated and its value was monetised), the income of the subsidiaries could only have been taxable by Ireland. Ireland’s decision not to tax that income, which the Irish tax authorities considered to arise elsewhere, constituted impermissible ‘aid’ in the amount of the tax not collected – this even though, as Ireland effectively asserted, without an entitlement to collect the tax under applicable law properly applied according to well-established international conventions for taxing MNE income, it could hardly be said that Ireland spent it, i.e., gave it up to favour Apple or Ireland’s own global competitive interests.
Regrettably, the tax law and lore animating the Court’s analysis, namely transfer pricing’s seemingly limitless search for ‘value creation’ within an MNE, is opaque, essentially without enforceable standards and malleable by taxpayers and countries ‘competing’ to identify and justify where tax is or is not due. The ‘standards’ are as much impressionistic as objectively analytical or legal despite transfer pricing’s contrary pretension captured by voluminous methodology in the OECD’s Transfer Pricing Guidelines to overcome the legal fragmentation by MNEs of their economic unities, as also, more recently, the OECD’s Pillar One and Two initiatives also seek to do.
It is titillating, perhaps, to cast MNEs as presumptive threats to vulnerable fiscs. But MNEs are not the real focus; simply, they are the media by which countries engage with each other via their taxpayers, almost like silent partners, in a world that understandably resists the lure of, though may be prepared to politely discuss, universal standards and rules. A penetrating and coherent tax and trade analysis of countries’ interactions with each other in their own interests requires more than a preoccupation with allegedly colourable corporate tax planning.
The fundamental questions for which the Apple decision provides no satisfactory insight or regulatory guidance are: Who’s fiscal and tax policy funded the ‘aid’, and accordingly what is the proper interest of European regulators and the Court of Justice?
How would an analysis of Apple’s relevant circumstances proceed free of substantively unsound implicit assumptions that the context was exclusively European and the affected manifestations of Apple’s business only the two Irish subsidiaries? Ask and answer these questions: Was there public intervention, i.e., an expenditure of public resources, in Apple’s favour? If so, why, that is, as a gratuity or to serve a public objective?
Knowledgeable tax analysts sensitive to the strictures of trade law would realize that the ‘aid’ or more broadly ‘subsidy’ here arose from how, quite deliberately in its own interest, the United States taxed international business income of its MNEs and income of non-resident enterprises (including foreign subsidiaries of its MNEs) from conducting US business. The tax ultimately payable on US MNEs’ foreign business income could be deferred indefinitely, and non-residents’ business income had to be connected in specific ways to a US taxable presence. Changes in US and Irish tax law were meant to deter the kind of tax planning Apple employed; Pillar Two is similarly but more broadly directed.
Why might the US (and other countries) adopt this course? The reasons are not hard to understand by stepping back from the didactic kind of analysis pursued by the Court of Justice to explain an outcome almost foreordained by the Court’s perception of the case. Is it in US’s interest that its taxpayers pay foreign tax when the US effectively pays that tax via a reduction in the US tax base through foreign tax credit? Is it the interest of the US to invest in its economic development to fulfil its fiscal choices by enlisting the efforts and expertise of its taxpayers, by providing interest-free financing of indefinite duration, i.e., deferred tax? Taking the General Court’s cue, the Court of Justice should have considered more carefully where the impugned ‘aid’ arose and asked why the US’s ‘subsidy’ of its MNEs in the US’s national interest is a proper object of European regulation and adjudication even if the Court might have found the planning colourable. It might have recognised that the World Trade Organisation (WTO) exists for trade related controversies even if engendered by direct taxation notably when non-EU axes of interest, i.e., third countries to the EU, are involved. An adverse view on the WTO’s effectiveness is not a reason or an excuse to absorb its jurisdiction.
What Is Really at Stake – And Why Does It Matter?
Why and to what extent should countries judge and control each other’s fiscal policy enabled by their tax systems? Countries are different, economically, socially, culturally, and using a transactional metaphor in relation to their needs and opportunities pursued in relation to each other (Wilkie, Pillar 2 – ‘What’s It All About?’, Tax Notes International, 2023). Adjusting the parameters of taxation is just one of various interchangeable and economically equivalent ways to fund public consumption and direct economic development. Why should countries’ fiscal decisions be expected to be the same, let alone controlled by the expectations and circumstances of others? Why should the effectiveness and independence of fiscal choices depend on the modality of their delivery, by tax systems or otherwise? In the Apple situation, would the Court of Justice have been able to exercise judicial oversight if the US had taxed the Apple subsidiaries’ incomes but outside the tax system provided financial assistance in other ways to cultivate national wealth creation through its MNE proxies, not unlike what could happen by recycling Pillar Two-inspired minimum taxes with similar financial effects to reduced taxation? Is that a useful question to ask as a kind of ‘sanity check’ on an otherwise untempered exercise of regulatory and judicial intervention that has the effect of appropriating elements of another country’s fiscal policy?
Yes, excesses arising from corporate tax planning – really, from the strategic design and reach of countries’ tax systems – are possible. It is reasonable to be concerned about, but not reasonable to presume, countries deliberate ‘beggaring’ each other through so-called ‘tax competition’. Professor Wolfgang Schön’s examinations of the relationships between taxation and democracy (Schön, Taxation and Democracy, 2019) and between tax scholarship and activism (Schön, International Tax Scholarship and International Tax Activism, 2024) are instructive. However, we still live in a heterogeneous legal and tax world despite the effects of ‘globalisation’. Same-ness of regulatory objects and methods is not to be expected even as an aspirational ideal; possibly the most to be hoped for are shared ‘best practices’ countries should be expected to consider as they pursue their own interests, realizing that like situations of others may be important to the achievement of their own interests. What one country may perceive as illegitimate tax avoidance may fairly be seen by another as the extrapolation of benign fiscal and concomitant tax policy. Who is to say which perception should dominate and even so how it would be administrable and enforceable?
The Apple decision should inspire more attention to the implications sovereignty and democratic decision making in the context of international trade, not as platitudes but as practical drivers of business, trade, and legitimate and effective regulation. Professor Dani Rodrik’s ‘trilemma of globalization’ (Rodrik, The Globalization Paradox, 2011) highlights the trade-offs among sovereignty, democracy, and global trade, only two of which at any time are, according to Rodrik, possible. The notions addressed by Rodrik, Schön, and Wilkie (noted earlier in relation to Pillar Two), which are undercurrents in the Apple decision, are not merely theoretical.
Perhaps unwittingly, in Apple the Court of Justice essentially rendered a political judgment by (mis)using tools with more limited and nuanced features that the Court notices. The result is a distortion of the connotation of ‘state aid’ according to the TFEU and a perverse misapplication of international guidance and law on international income allocation of MNEs which fails to recognise the real ‘home’, the US, of the disputed income even though for its own reasons the US may have chosen not to tax it or, twisting the tax kaleidoscope only slightly the US systemically taxed and rebated simultaneously.
Yes, indeed: ‘You get answers to the questions you ask’.
