On July 15, 2020, Apple Inc. (Apple) won its years-long court battle over a record €13 billion Irish tax bill, in the latest setback to the EU's crackdown on advantageous tax deals between large technology companies and various European governments. Though the EU General Court's (the Court's) ruling narrowly applies to Apple's tax arrangement with Ireland, the decision is expected to renew Europe's broader focus on establishing an international framework through which to tax the digital economy.
Background of the Case
In August 2016, the EU's general commission (the Commission) concluded that Ireland violated EU state aid laws by granting up to €13 billion in tax benefits to Apple on a selective basis. Specifically, the Commission asserted that the Irish government enabled Apple to pay "substantially less tax than other businesses over many years" through two tax rulings, ultimately resulting in Apple having an annual effective corporate tax rate as low as 0.005% on its European profits since 1991.
The EU General Court's Decision and Status of the Case
Apple and the Irish government appealed the Commission's decision. On July 15, 2020 the Court ruled that the Commission failed to sufficiently prove that Ireland broke state aid laws by giving Apple an unlawful tax advantage. The Commission now has two months to appeal this ruling to the EU's highest tribunal.
Why Apple's Win Matters
This case has been the centerpiece of the EU's five-year campaign against allegedly unfair tax deals between certain European governments and multinational technology companies. According to a statement released by European Union Competition Commissioner Margrethe Vestager, the EU will continue to crack down on aggressive tax planning in the wake of the Court's decision. However, coupled with another recent taxpayer-favorable judgment for Starbucks, this outcome suggests that the EU's ability to enforce state aid laws may be subject to significant limitations.
Impact on the Digital Services Tax Debate
In the midst of the COVID-19 crisis, many governments and intergovernmental organizations have turned their attention to identifying new sources of revenue. With a mixed track record of court cases related to corporate income tax assessments, the EU is expected to shift its focus to raising revenue through digital services taxes.
Digital services taxes could create significantly more uncertainty for affected companies because it is unclear whether foreign digital services tax liabilities will be creditable against U.S. federal income taxes. In addition, digital services taxes are generally imposed on gross revenues rather than net income, which means companies could have digital services tax liabilities in various countries, even when those services are unprofitable on a worldwide basis.
How Venable Can Help
Apple's tax court victory is expected to renew European taxing authorities' focus on implementing a coordinated approach to taxing the digital economy. Venable's international tax team can help clients identify how digital services taxes may apply to their businesses and provide strategic tax planning solutions to minimize their global tax liabilities.
Additional information regarding evolving digital services tax legislation can be found here.