​Apple, Ireland say EU's tax demands 'distorted law' and 'defied reality'

Apple's obligation to pay 13 billion euros ($14.3 billion) in Irish taxes was based on an EU "distortion" of national tax law and defied "common sense," lawyers for the iPhone maker and Ireland told judges today.

Defending its 2016 decision that the Irish tax break was an illegal subsidy, the European Commission said it wasn't acting as a "policeman of international tax" and Apple should have attributed profits to its Irish businesses.

"Ireland has been the subject of entirely unjustified criticism," Paul Gallagher for Ireland told the court. "It is the European Commission that must be criticized for ignoring the evidence."

Richard Lyal, for the commission, argued that if Ireland had "properly examined the functions" of Apple's Irish businesses, it should have concluded that profits should have been attributed.

Apple and Ireland are appearing at the EU’s lower-tier General Court at the start of a two-day hearing. The case will not only garner headlines for its 13 billion euro price tag, but will also test the legal fault-lines of tax powers and subsidy review.

In August 2016, the commission unveiled its decision ordering Apple to unwind the tax break. It said that two Apple entities — Apple Sales International (ASI) and Apple Operations Europe (AOE) — were incorporated in Ireland but only a fraction of the money funnelled to them from across Europe was taxed there.

An Irish tax arrangement, established in 1991 and refreshed in 2007, meant that the taxable profits in Ireland were minimal and most profits were instead allocated to “head offices” that weren’t subject to tax anywhere, according to the commission.

For the EU regulator, this amounted to a “selective advantage” for Apple, slashing the company’s effective corporate tax rate from 1 percent of its European profits in 2003 to 0.005 percent in 2014.

— Ireland —

In opening statements, Gallagher was highly critical of the commission's analysis, describing it as having "confused and inconsistent lines of reasoning."

He said the EU regulator was struggling to find a "coherent theory" and had instead targeted a specific outcome and worked backwards.

"The activities in Cork were the activities of a sales and distribution arrangement. There are no research and development and intellectual-property related activities in Ireland," Gallagher said.

— Apple —

Daniel Beard, representing Apple, insisted that the key activities took place outside of Ireland. The Irish entities were merely doing "routine" work.

"Did Apple design and develop the iPhone in Ireland? The iPad or the iPod? No, it did not," Beard 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 said.

ASI and AOE were not "stateless," Beard argued, but their profits were "subject to US tax rules." This was supported by a decision in 2017 to repatriate around 20 billion euros to the US.

Apple's lawyer argued that the commission's analysis was undermined by a contradiction: On the one hand, it  acknowledged "strategic decisions" for ASI and AOE happened "outside Ireland," but on the other, it said "all of the critical functions relating to the development of Apple’s IP" were carried out in Ireland.

— European Commission —

Lyal, defending the EU decision, said the case wasn’t about the commission “resolving tax mismatches” or the commission acting as “some sort of policeman of international taxation.”

“The question is simply whether the profits of ASI and AOE are attributable in whole or just in part to the Irish permanent establishment,” he said.

Lyal pointed to testimony from Apple's chief executive, Tim Cook, before US lawmakers, which revealed the company employed 4,000 people in Ireland and conducted significant activity at its Cork base.

“There were activities in Cork that went well beyond a simple contract distributor,” said the commission lawyer. “This should have led the Irish authorities to look more closely.”

“There was no basis for the conclusion that all profits stemming from the IP used in Apple products should be attributed to activities outside Ireland,” he added.

Lyal said the Irish tax authorities had accepted an “arbitrary” tax calculation by Apple and this had “given rise to the presumption of a special deal, the presumption of an advantageous decision.”

Vesna Tomljenović, the judge leading the questions, looked into discussions before the 1991 tax ruling was awarded, asking why it referenced Apple's extensive employment in the Cork region.

Ireland argued that this was "polite conversation" and there was nothing linking the tax treatment to employment.

Paul-John Lowenthal, for the commission, said the EU decision didn't rely "a great deal on this consideration," but it was notable that the discussions leading up to the tax ruling covered this topic.

The commission was backed by the Polish government and the regulator responsible for the European Free Trade Association, which oversees state aid in Iceland, Liechtenstein and Norway. They both argued that the Irish tax break was “selective” and not in line with international norms.

The hearing continues with questions by the court.

The cases references are: T-892/16 Apple Sales International and Apple Operations Europe v Commission, and T-778/16 Ireland v Commission.