Apple launched a legal challenge against Brussels in an EU top court on Tuesday (17 September), saying the European Union’s 2016 order for the company to pay 13 billion euros in back taxes to Ireland “defies reality and common sense”.
The iPhone maker also accused the European Commission of using its powers to combat state aid “to retrofit changes to national law,” in effect trying to change the international tax system and in the process creating legal uncertainty for businesses.
Apple’s arguments at the Luxembourg-based General Court, Europe’s second-highest, came after the EU executive said in 2016 the tech giant had benefited from illegal state aid due to two Irish tax rulings which artificially reduced its tax burden for over two decades.
Apple’s CEO Tim Cook slammed the EU’s decision at the time as “total political crap” with no basis in law.
The case is key to European Competition Commissioner Margrethe Vestager’s crackdown on sweetheart deals for multinationals, a campaign which has also led to action against Starbucks, Fiat, Engie, Amazon and others.
Apple’s Chief Financial Officer Luca Maestri led a six-strong delegation to the court where a panel of five judges will hear arguments from both sides, as well as Ireland, Luxembourg, Poland and the EFTA Surveillance Authority, over two days.
“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 told the court.
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 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.”
Beard dismissed criticism of the 0.005% tax rate paid by Apple’s main Irish unit in 2014, which the Commission cited in its decision, saying the regulator was just seeking “headlines by quoting tiny numbers”.
Paying an average global tax rate of 26%, Apple has said it is the largest taxpayer worldwide and is now paying around 20 billion euros in U.S. taxes on the same profits that the Commission said should have been taxed in Ireland.
In its current financial quarter, Apple expects revenue of $61-64 billion and a gross margin of 37.5-38.5%.
Ireland, whose economy has benefited from investment by multinational companies attracted by low tax rates, is also challenging the Commission’s decision.
“As Ireland has already emphasised, it undermines legal certainty if state aid measures are used to retrofit changes to national law … and legal certainty is a key principle of EU law; one upon which businesses depend,” Beard said.
“Some may want to change the international tax system, but that is a tax law issue – not state aid,” he said.
Ireland 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,” Paul Gallagher, a lawyer for Ireland, told the court, while another representative for Ireland, Maurice Collins, told the judges the Commission “simply ignores Irish laws”.
Lawyers for the Commission will also make their case on Tuesday. The court is expected to rule in the coming months, with the losing party likely to appeal to the EU Court of Justice and a final judgment could take several years.
The two days of hearings are taking place in a tense trade context between the EU and the United States.
President Donald Trump accuses Europeans of deliberately attacking American technology giants. He has accused Vestager, in particular, of “hating” the US and slammed her as the “tax lady” because of the investigations and heavy fines imposed on US tech firms such as Google.
Pending the conclusion of the case, Apple has blocked the funds in an escrow account: a total of 14.3 billion euros after interest.