Apple, tax and State aid: were the Brexiteers right?

A recurring theme of the arguments for UK withdrawal from the EU was that the Union’s institutions – especially the Commission and the Court of Justice – have never contented themselves with the powers given to them by the Treaties. Rather, through their decisions they launch constant land-grabs on territory supposedly within the exclusive competence of Member States.

Exhibit A in the “we told you so” case book is the Commission’s decision of 30 August finding that tax rulings by the Irish government in favour of two Apple subsidiaries amounted to unlawful State aid to the tune of some €13Bn Euros over 10 years, which had to be recovered. The Treaties make clear that direct taxation is a matter of Member State, not Union competence – unlike indirect taxes and customs duties, which attach to goods and services and so bear directly on the single market. In principle, Member States are free to tax lightly or heavily, progressively or regressively, and their choices lie entirely outside the Commission’s purview. As the European Parliament’s online fact-sheet puts it: “The power to levy taxes is central to the sovereignty of EU Member States, which have assigned only limited competences to the EU in this area.” No surprise then that Apple Chief Executive Tim Cook condemned the decision as a “devastating blow to the sovereignty” of Member States that has “upended the international tax system”, while Ryanair CEO Michael O’Leary offered a more, ahem, colourful critique…

So: by treating favourable direct taxation treatment as unlawful State aid, has the Commission overstepped the Union’s competence?

Just take another look at those innocuous words in the previous paragraph: “in principle”. Member States do – in principle – have freedom of action in areas outside EU competence. But where a Member State takes action that has material effects in an area within EU competence, it is no answer to say that the action itself lay within an area of activity outside that competence. Otherwise Member States could all too easily sidestep the binding effect of EU law within areas of Union competence. Hence where the implementation of national tax policy affects the operation of the single market – in particular its free movement and competition rules - the line between Member State and Union competence begins to blur.

Therefore for the Commission, charged with implementing the Treaty rules on competition, if an act of a Member State amounts to unlawful State aid – and so is by definition capable of distorting competition within the single market – the fact that the act concerns direct taxation within that State cannot, in itself, detract from the Commission’s competence to investigate and take action. The tax rulings that led the Commission to take action in Apple’s case enabled its Irish subsidiaries to pay an effective corporation tax rate of between 0.005% and 1% on total European sales profits between 2003 and 2014 – “substantially less tax than other companies”, as the Commission’s press release put it. In other words the crux of the problem was the discriminatory, and thus anti-competitive, effect of the rulings. The Commission was at pains to stress that its decision “does not call into question Ireland’s general tax system or its corporate tax rate”.

The Commission’s explanation is undoubtedly a correct statement of the legal position. But it is important to remember that it is the Member States themselves – not any EU institution – who have given the Commission political cover for its increasingly confident approach in relation to national tax arrangements. In October 2015 all 28 States – including, of course, the UK and Ireland - concluded a mutual agreement on tax transparency proposals designed to deter aggressive tax planning by large multinationals able to structure their affairs across national frontiers in a way not open to smaller businesses. As Commission President Jean-Claude Juncker put it at the time, “This unfair competition is anathema to the principles of fair competition within our Internal Market." The principles were subsequently incorporated into Council Directive (EU) 2015/2376 on mandatory exchange of corporate taxation information.

Apple is by no means the first large multinational to attract the unwelcome attentions of the Commission in relation to direct taxation of revenues. Significantly, though, the series of high-profile Commission decisions on State aid – beginning with its rulings against The Netherlands’ arrangements with Starbucks and Luxembourg’s with Fiat Chrysler – were all adopted after the October 2015 transparency agreement. In other words the idea that Member State tax sovereignty should be limited where its deployment conflicts with fair competition for businesses operating in the single market is one that originates with Member States themselves, whose cue the Commission has taken.

Ireland and Apple have signalled that they are likely to appeal against the Commission’s decision. The question of fiscal selectivity has been considered at General Court level (in Autogrill/World Duty Free Group, case T-219/10) but not, so far, by the Court of Justice. On the basis of some of the CJEU’s earlier, comparable jurisprudence – and the recent opinion of A-G Wathelet in the World Duty Free Group appeal (Case C-21/15P) – that Court is more likely than not to accept that tax rulings like Apple’s can infringe the State aid rules. Its attention can be expected to focus on the Commission’s analysis of the economic effects of the tax rulings and the amount Ireland is required to recover. But – to bring us back to Brexit - that likely acceptance of the Commission's power has nothing to do with “competence creep” at EU level: it is simply the application of ordinary principles on the effectiveness of EU law, corresponding to the Member States’ own recognition, on the political plane, of the role of national taxation in influencing the competitiveness of the cross-border environment.

Perhaps the bigger question for the UK, as it heads out of the EU, is how it wants to position itself as a trading nation. If – as the noises currently emerging from government might suggest – continued membership of the single market is no longer a prime goal, then we may shortly find ourselves beyond the reach of the State aid rules and the Commission. But does that mean we wish to make our way in the world by granting multinationals “beggar thy neighbour” tax breaks? Or do we continue to pay more than lip service to the importance of a level playing field? In the difficult boundary region between tax and competition policy, it is that fundamentally political choice that will shape the new rules businesses and their lawyers have to work with.

This opinion piece was first published on 1 September 2016 as a bulletin on the 20 Essex Street website.  You can find the PDF version here: https://www.20essexst.com/news/apple%2C-state-aid-and-eu-competence-were-brexiteers-right