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Apple’s odds in tax case of the century may sway in court test

Judges also to rule this week on similar cases involving Starbucks and Fiat Chrysler.

Apple may only need to wait until Tuesday to get early clues about its chances of success in the biggest tax case in recent history.

The iPhone maker has been arguing its case at the European Union’s General Court to topple a record 13 billion-euro ($14.3 billion) EU tax order. This week the same panel of judges will deliver a ruling on two smaller but related challenges by Starbucks and a Fiat Chrysler Automobiles unit.

They’re the first in a series of cases to come to a decision as companies rail against EU Competition chief Margrethe Vestager’s five-year crackdown on allegedly unfair tax deals.

While the facts of the various appeals differ significantly, Tuesday’s decisions “should have a far-reaching impact, both on the other pending cases and going forward,” said Howard Liebman, a tax partner at law firm Jones Day in Brussels, who isn’t involved in the disputes.

The judges’ stance will “presumably establish some precedent as to how far the court is willing to allow the commission to extend its approach of judging tax regimes -– and individual tax rulings –- in the context of a state-aids analysis,” he said.

Vestager’s probes

Appeals have been piling up at the EU courts since state-aid investigators started work in 2013 to unearth what they deem to be the most problematic examples of otherwise legal individual tax agreements doled out to companies by countries. The judges’ verdicts could empower or halt Vestager’s probes, which are now centering on fiscal deals done by Amazon.com and Alphabet.

Starbucks and Fiat were targeted on the same day in 2015 by a similar EU order to pay back about 30 million euros each over their tax arrangements in the Netherlands and Luxembourg respectively.

The commission decisions accused Luxembourg and the Netherlands of granting so-called tax rulings to the companies that backed “artificial and complex methods” to calculate their taxable profits but that didn’t reflect “economic reality.”

The EU said at the time the companies did this by setting prices for products and services sold between units — called transfer prices — that didn’t reflect market conditions. “As a result, most of the profits of Starbucks’ coffee roasting company are shifted abroad, where they are also not taxed, and Fiat’s financing company only paid taxes on underestimated profits.”

Back taxes

Luxembourg has since also been ordered to recoup 250 million euros from Amazon.com and 120 million euros in back taxes from energy utility Engie, France’s former natural-gas monopoly, previously known as GDF Suez.

In the Apple case, the EU said Ireland illegally slashed the iPhone maker’s tax bill between 2003-2014, a finding the company and Irish officials don’t accept.

The EU alleged that “Apple paid essentially no tax on earnings in Europe” and “sought headlines by quoting tiny numbers, but this public campaign ignores the taxes Apple pays all across the world,” Apple attorney Daniel Beard said at last week’s hearing.

The Dutch finance ministry said it had nothing to add to previous statements criticising the EU’s approach. Fiat Chrysler, Apple and the commission declined to comment, as did the Luxembourg and Irish finance ministries. Starbucks didn’t immediately return requests for comment.

EU nations ordered to claw back the allegedly illegal tax aid have accused the commission of overreaching itself by using state aid law to attack individual fiscal arrangements that dated back many years. A key question for the commission in the cases is whether its argument that these tax rulings were selective and unfair stands up in court.

“The commission did not identify a single instance where a taxpayer was treated less favorably than Apple,” Paul Gallagher, a lawyer for Ireland, told the judges in the court hearings last week.

Luxembourg, which has so far faced the brunt of the EU’s decisions, has attacked the “arbitrary nature” of the commission’s approach which creates “complete legal uncertainty,” their lawyer Denis Waelbroeck said in a court hearing about Fiat’s case last year. Ireland and Luxembourg have supported each other in their respective appeals.

© 2019 Bloomberg L.P.

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