Apple CEO Tim Cook has said he will appeal the European Commission’s ruling that his company received an unlawful 13 billion euro ($14.5 billion) subsidy when Ireland gave it preferential tax deals and that he was confident the decision would be reversed.
But over a dozen lawyers, including three advising companies on appeals, told Reuters it was impossible to predict how EU courts would rule in an area that has not been tested before.
State aid cases have up until now centered on targeted tax laws that countries introduce with an obvious aim of attracting investment and jobs by reduced tax bills.
In the Apple (AAPL) case, and several others, the Commission has been investigating whether member countries’ tax authorities were secretly giving tax breaks by being too generous in their application of accepted tax principles.
The Commission believes some member states allowed companies to shift profits into untaxed subsidiaries by approving inappropriate transfer prices — the prices subsidiaries of multinational companies charge each other for intra-group transactions.
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Most experts said the EU judges dealing with any Apple appeal to overturn the ruling would be focused on whether the European Commission has strayed too far into dictating national tax policy by rejecting Ireland’s view of transfer pricing.
“What Apple and Ireland have done sounds really outrageous but the last word has not been spoken as to whether the Commission can use transfer pricing rules to identify what a subsidy is,” said Herwig Hofmann, Professor of law at the University of Luxembourg.
“There’s a good argument to be made that if you want to do that, actually you have to harmonize tax laws and you don’t have the power to do that.”
EU law says only governments can approve a harmonization of tax systems.
The Commission has also been investigating tax transfer pricing at Fiat (FCAU), McDonald’s (MCD), Starbucks (SBUX) and Amazon (AMZN). The companies and the countries which gave the rulings all deny special treatment was given and have launched, or are considering, legal appeals.
No Special Advantage
Some lawyers say that Apple’s arrangement was legal in Ireland and theoretically available to any company and so the California-based company could not have received a advantage that was selective – key factors in most state aid cases.
“There’s nothing that I have seen in any of the cases that have been taken by the European Commission that suggests there is selective application of the rules,” Tim Wach, Global Managing Director at international tax advisors Taxand.
However, other lawyers note that Apple’s unusual tax structure — involving companies which are tax resident nowhere — means its tax rulings are unlikely to have many close comparators. And the rulings lead to a less than 1% tax rate — something most other companies don’t enjoy.
“If I had to bet my dollar on something here, I think Apple could have a hard time overturning the selectivity argument,” said Georg Berrisch, a partner at Baker Botts in Brussels.
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Last year, the European Commission published a list of six tax rulings and 59 “measures similar in nature or effect” since 1991, which it had challenged on the basis of state aid rules. It was successful in almost all cases.
Officials say these show its current actions are in line with previous precedents.
Many experts in the field disagree and last week the U.S. Treasury issued a detailed paper which assessed earlier cases and said “in none of the 65 cases involving State aid nor in any other cases examined by the U.S. Treasury Department, did the Commission challenge how a Member State tax authority applied its own transfer pricing rules in granting a specific ruling.”
Over to the Court
Europe’s highest court, the Court of Justice of the European Union (ECJ), will hear any appeal by Apple.
The court usually backs the Commission, but lawyers say it sometimes disagrees in state aid cases where it usually comes up against countries. The Irish government is still considering whether to launch its own separate appeal.
Some lawyers say ECJ judges are influenced by political considerations and that if the Commission’s rulings prompt a major spat with the United States and member states don’t support the Commission, the court may hesitate to enforce a tax demand of up to 13 billion euros plus interest.
So far, France and Germany have voiced support for the Apple ruling. The UK, which has voted to leave the bloc, filed a submission in support of the Commission’s case against Fiat, according to lawyers involved in the case. The UK declined comment.
A spokeswoman for the court said political considerations do not come into its decisions.
European Competition Commissioner Margrethe Vestager agreed. “I don’t think the courts will hear any kind of political opinions or feelings or what’s in your stomach or whatever. They want the facts of the case,” she said.
The ECJ could decide the Commission is allowed to challenge transfer pricing but knock back the Commission’s methodology for calculating Apple’s bill.
That would leave the door open to a smaller tax demand being levied.
“The amount isn’t set in stone at all, I think this figurehead of 13 billion, that is yet to be analyzed in detail,” Hofmann said.
If the court backs the Commission, the executive would theoretically be free to challenge hundreds of other complex tax arrangements used, mainly by U.S. companies, to minimize taxes on European sales.
A Reuters investigation in 2013 showed that at least 74% of the 50 biggest U.S. technology companies, including Google (GOOGL) and Facebook (FB), use practices similar to Apple’s to reduce their tax bills.
Ireland is now supposed to calculate exactly how much Apple owes, which is typically paid ahead of an appeal, using the Commission’s methodology.
However, a quirk of the Apple ruling may delay this. The Commission said other EU countries could claim some of the 13 billion euros by re-assessing the income of Apple subsidiaries on their territories.
Apple’s appeal will first be to the EU’s General Court, which will take two to three years to rule, lawyers say. A likely appeal to the ECJ could take another two years.
In meantime, lawyers will be watching more advanced cases. Denis Waelbroeck, of law firm Ashurst in Brussels, who is advising Luxembourg on its appeal in the FIAT case, said the General Court could give a ruling on that next March.
“Whatever outcome we get will influence Apple,” he said.
