European $14 Billion Tax Demand On Apple ‘Defies Common Sense’

Apple’s delegation to the EU’s General Court in Luxembourg, the bloc’s second-highest court, has lashed out at the European Commission’s record 2016 fine.

The six-strong delegation, headed by Apple’s Chief Financial Officer Luca Maestri, are appearing before a panel of five judges hearing arguments over two days.

The Apple delegation are facing off against European Commission officials, who argue the company took 13bn euros (£11.5bn) in illegal state aid from Ireland.

Apple tax

The EC began an investigation of Apple’s Irish tax arrangements in 2014 and two years later in 2016 concluded that Apple had been able to avoid taxation on almost all profits generated in the EU single market.

In August 2016 the EC ordered the Irish government to recover up to €13 billion (£11bn) plus interest in “illegal tax benefits”.

Apple and the Irish government decided to appeal the mammoth fine by the Commission, and a ruling is expected by the end of next year.

But either side will likely appeal upon losing the case, meaning the matter is likely to go before the European Court of Justice, where it could take a further three or four years to conclude.

Essentially, the European Commission alleges that Apple and Ireland entered into an “artificial” profit arrangement that allowed it to pay a tax rate of less than 1 percent on its sales from across Europe.

Ireland meanwhile has accused the Commission of infringing upon national sovereignty and undermining the country’s low corporate tax regime.

The country argues it did not grant Apple any selective advantage, and cannot tax Apple on profits that are not taking place in the country.

Apple, for its part, has previously said it has abided by Irish and US tax laws, and that the tax rate it pays in Europe is low because key work such as design, engineering and development takes place in California.

Apple CEO Tim Cook has previously said the EC penalty has no basis in fact or in law, and that the Commission was ordering Apple to retroactively pay additional taxes to a government, that says Apple don’t owe it any more than Apple had already paid.

Court appearance

It should be noted that Apple has already paid the fine last year, but it has been placed in escrow.

And Apple’s delegation told the EU’s General Court that the EC penalty “defies reality and common sense”.

“The Commission contends that essentially all of Apple’s profits from all of its sales outside the Americas must be attributed to two branches in Ireland,” Apple’s lawyer Daniel Beard was quoted by Reuters as telling the court on Tuesday.

He said the fact the iPhone, the iPad, the App Store, other Apple products and services and key intellectual property rights were developed in the United States, and not in Ireland, showed the flaws in the Commission’s case.

“The branches’ activities did not involve creating, developing or managing those rights. Based on the facts of this case, the primary line defies reality and common sense,” Beard reportedly said.

“The activities of these two branches in Ireland simply could not be responsible for generating almost all of Apple’s profits outside the Americas,” he added.

Beard also apparently dismissed criticism of the 0.005 percent tax rate paid by Apple’s main Irish unit in 2014, which was cited by the Commission in its decision, saying the regulator was just seeking “headlines by quoting tiny numbers”.

He pointed out that Apple pays an average global tax rate of 26 percent, which makes Apple the largest taxpayer worldwide. Apple is also now paying around 20 billion euros in US taxes on the same profits that the Commission said should have been taxed in Ireland.

Irish failure?

But Apple’s arguments cut little ice with the legal team for the European Commission.

Commission lawyer Richard Lyal said Apple’s argument that all its intellectual property-related activities take place in the United States was inconsequential.

“To a large extent that is perfectly correct and perfectly irrelevant,” he said, adding that Ireland was taxing Apple’s Irish subsidiaries, not the group nor Apple Inc.

He said Ireland had failed to examine the functions performed by Apple’s Irish units, the risks assumed and the assets used by the subsidiaries.

“They simply accepted an arbitrary method proposed by the Apple Ireland subsidiaries. That in itself gives rise to a presumption of a special deal, exceptionally advantageous treatment. It is clear that the tax authorities made no assessment in 1991.”

He said the Commission has no hidden agenda.

“What is the case not about? Not about the Commission as policeman of international taxation, not about making sure tax is paid somewhere, though that would be a nice idea, not about resolving tax mismatches,” Lyal said.

Ireland meanwhile reportedly said it had been the subject of entirely unjustified criticism and that the Apple tax case was due to a mismatch between the Irish and U.S. tax systems.

“The Commission’s decision is fundamentally flawed,” its lawyer Paul Gallagher told the court.

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