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Jaume Barbany Arias (i6200970)

European Competition Law

Maastricht University, Faculty of Law


Although the European Commission’s (hereinafter, the Commission) information requests to Ireland’s tax
authorities (hereinafter, the Irish Revenue) materially commenced one year before1, formal investigation
procedure2 was initiated by the Commission on 11 June 20143. Despite not being explicitly stated in the
Decision, it is inferable that such inquiries were triggered due to the low tax burden the companies Apple
Sales Ireland and Apple Operations Europe4 (hereinafter, ASI and AOE) had been bearing during more
than a decade in such country.

ASI and AOE are two Irish incorporated companies fully-owned by the Apple group —ultimately controlled
by the US parent, Apple Inc.— which hold Apple’s intellectual property exploitation rights to manufacture
and commercialize the brand’s products outside North and South America. Despite the previous, they
were non-resident for tax purposes in Ireland —and, indeed, also in the rest of jurisdictions5—.
Consequently, and since each of the referred subsidiaries had a branch operating in Ireland, they were
subject to a national tax special regime.

Thus, for ASI and AOE to pay the due Corporation Tax, it was firstly necessary to settle the taxable base in
the light of the chargeable profits obtained by and connected with the branches. For these purposes,
Apple proposed in 1991 a method for determining the net profit of both Irish branches, which was finally
endorsed by Irish Revenue in a tax ruling. Some years later, in 2007, that method was substituted by
another one through a new tax ruling6.


The Commission, after three years of an in-depth investigation, concluded that the referred tax rulings
constituted illegal state aids, insofar as they endorsed an artificial internal allocation of profits within ASI
and AOE which had not factual nor economic justification, granting a ‘selective advantage’ to Apple.

Selective advantage assessment

To reach that conclusion, the Commission analyses the requirements of EU State aids7. According to the
settled case-law, an advantage is given “whenever the financial situation of an undertaking is improved

1 They commenced on 12 June 2013, through a letter by the Commission by which it was requested to Ireland to
provide information on its tax ruling practice.
2 In accordance with Article 108(2) of the Treaty.
3 One of the key grounds for initiating such formal investigation is stated in paragraph 147 of the Decision: “The

Commission noted, in particular, that the taxable basis in the 1991 ruling appeared to be negotiated rather than
substantiated by reference to comparable transactions and that Irish Revenue did not seem to have had the intention
of establishing a profit allocation based on transfer pricing”.
4 See Annex I for the graphic representing the corporate structure of Apple in Ireland until 2014.
5 Paragraph 52 of the Decision: “[…] since their activities in other jurisdictions and in particular the activities of their

head offices, which lacked any physical presence and employees, did not give rise to a taxable presence in the US or
any other jurisdiction under the applicable taxation rules”.
6 Paragraphs 59-62 of the Decision.
7 Namely, i) Intervention by State or through State resources, ii) selective advantage, iii) competition has been or

may be distorted and iv) intervention likely to affect trade between MS.

as a result of a State intervention”8. As regards tax measures, it may be granted through different types
of tax burden lowering, such as taxable base reductions —which is the Commission’s approach on the
case—. Even though the Commission affirms that, in case of individual aid measures, the mere existence
of an advantage is sufficient to support that it is selective, it states that selectivity is to be (separately)
analysed as well9.
Despite the above, the Commission does not finally evaluate the existence of an advantage10, but instead
it decides to assess jointly the presence of a selective advantage, given the nature of the contested acts11.
The Commission argues that “where a tax measure results in an unjustified reduction of the tax liability of
a beneficiary that would otherwise be subject to a higher level of tax under the ordinary rules of taxation,
that reduction constitutes both the advantage granted by the tax measure and the derogation from the
reference system”12. Personally, such ‘merger’ may be the most adequate step when dealing with tax
rulings, since the assessment of the ‘advantage’ is indissolubly linked with ‘selectivity’: if there is an
economic advantage, it will automatically lead to be “discriminatory”, since it constitutes an individual aid
measure which by nature is selective. Nevertheless, in order to determine whether there is an advantage,
some of the “selectivity-stage” steps have to be taken into account, such as the identification of the
reference system and the potential deviation from it. On the contrary, it does not occur the same as with
“tax reductions as such”, where the ‘advantage’ requirement is fulfilled, but it still may be non-selective.

Identification of the reference system

For those purposes, the Commission identifies the reference system as the “ordinary rules of taxation of
corporate profit under the Irish corporate tax system”; in other words, it considers that, in order to
determine if they have been granted with a selective advantage, both ASI and AOE’s situations may —and
shall— be compared with (a) resident companies (b) not belonging to a corporate group, not being
therefore necessary to differentiate between integrated and non-integrated companies nor between
resident and non-resident. In fact, in the paragraph 320, the Commission addresses the referred issue by
stating that even though the taxable profit of non-integrated and integrated companies is determined in
a different manner, that does not alter the conclusion, since this “difference is merely the means by which
to achieve the ultimate goal of determining the taxable base of both types of companies in a manner that
ensures that integrated companies are taxed on an equal footing to non-integrated companies under the
ordinary rules of taxation of corporate profit”. The Commission argues that since the ALP is —and was—

8 Paragraph 223 of the Decision.

9 In accordance with the three-step analysis developed by the Court of Justice for fiscal State aid schemes.
10 It says that it will demonstrate in Section 8.2.2 that an advantage has been given, but it just assesses it in the light

of the selectivity test.

11 Recital 224 of the Decision: “the assessment of whether the contested measures constitute a derogation from the

reference system (the second step of the selectivity analysis) will coincide with its assessment of whether those
measures confer an advantage on ASI and AOE”
12 In the 135th footnote of the Decision and in order to refute Apple’s and Ireland’s argument of the necessity of

analysing separately the ‘advantage’ and ‘selective’ elements, the Commission argues that “in light of the fact that
the present decision deals with an individual aid measure and since separating those conditions would lead to
unnecessary duplication, the Commission has decided to assess the presence of an advantage alongside the second
step of the selectivity analysis”.

applicable to all European Member states —independently of their internal regulations—, all companies
are to be treated equally as regards the determination of profit, so the reference system shall be the
ordinary regime of corporate taxation, including all kind of undertakings.

From my perspective, when identifying the reference system, before analysing the applicable principles
within a given legal regime —which the Commission, instead, use as the basis for identifying it—, it is
necessary to establish which are the proper legal provisions and interpretations by which the undertakings
at stake should be compared in the light of the specific controversy. However, in this case the Commission
does only take into account the referred principle, disregarding the potential domestic transfer pricing
provisions and/or related administrative practices. In this way, the Commission is basically ignoring part
of the legal framework applicable within a Member State and it is in fact obliging it to infringe the principle
of legality by disapplying its own legal provisions. But even if principles were key to identify the reference
system, in this case it is doubtful that (i) a common EU ALP derived from Article 107(1) TFEU existed at
that time13 and that (ii) Ireland had incorporated OECD guidelines on transfer pricing into its tax system 14.

Then, if the tax system as a whole was analysed, the conclusion would be probably different. Since we are
dealing with a profit allocation method among the different parts of several non-resident integrated
companies, the legally and factually comparable undertakings would not be “all kind of companies”, but
probably “all non-resident integrated companies”15. While resident companies are taxed on their
worldwide income, non-resident companies are only subject to tax on their locally-sourced income —
connected to an Irish agency or branch—. And, in the same way, while integrated companies may enter
into intragroup transactions, non-integrated companies may not, therefore being required to have a
separate set of rules dealing with such situations. In conclusion, although the objective is taxation of
profits, the method and way to determine them is both factually and legally different —and relevant— as
compared with resident stand-alone companies, therefore being the previous sufficient to affirm that
they are in non-comparable situations. If afterwards the chosen method is not compatible with EU law,
there are other (judicial) procedures which could be initiated to void such national regulations, but not
State aid procedure.

Despite the above and although Apple and Ireland rebate the Commission’s argument and supports it
with the Groepsrentebox judgment16, its conclusion on the reference system does not take it fully into

13 Suggested by Han Verhagen in ‘State Aid and Tax Rulings – An Assessment of the Selectivity Criterion of Article
107(1) of the TFEU in Relation to Recent Commission Transfer Pricing Decisions’, at page 7: In Belgium, OECD
Transfer Pricing Guidelines was explicitly part of its tax system. That is the reason why the ECJ stated that ordinary
rules were the ordinary in that case, and not because of an intention to create an own ALP.
14 Ibid.
15 Aidan James O’Conell, ‘Tax Rulings and State Aid’: “Transfer pricing exists because transactions between two

related enterprises are fundamentally different to those between two independent enterprises where profits are
determined by market forces. By turning this reality on its head and framing it within the objective of determining
corporate tax liability, the Commission manages to escape a discussion of whether a comparison should be limited
to companies which make use of transfer pricing methods in deriving their taxable profits”.
16 In that judgment, the ECJ indicated that, “with regard to financing activities with debt, standalone companies are

not in a factually and legally comparable situation with companies that form part of a group of companies”.

account, since it affirms that it should be Section 25 of the Taxes Consolidation Act 1997 17 —which is the
regime applicable to non-resident companies operating in Ireland through branches18—, and not “the
transfer pricing set of rules (and/or administrative interpretative practices) applicable to (a) non-resident
companies operating through a branch [and (b) belonging to a group of companies]”, as regards internal
allocation of profits. At the end, assuming we are to respect fiscal autonomy of Member States and in
order to establish whether the measure is selective or discriminatory, we should ask ourselves whether
the treatment given by Ireland to Apple was in accordance with the legal regime or, at least, equal to the
rest of companies which, in an integrated structure where costs and rights related to the development
and exploitation of intangible property may be distributed among the different companies (through
APAs19) [i.e. integrated], internally allocate profits among their Irish branches and their other parts of the
company [i.e. non-resident].

Nonetheless, it would also be rational to accept Apple and Ireland’s election of Section 25 as reference
system, since the present controversy is (more) around the fact of being non-resident —and then, being
able to allocate the profits of a company to a branch or to another part of the company outside Ireland’s
jurisdiction— than the fact of being integrated —since the key conflict is the internal profit allocation and
not the distribution of costs and rights among companies—. However, in order to sustain the main thesis,
it is also true that, without being ASI and AOE integrated companies, the APA20 —which in this case is that
related to the exploitation of Apple IP rights— could not have taken place, which is the previous step of
the subsequent internal allocation of profits, so it should be a relevant fact to bear in mind as well.

Deviation from the reference system

Once established the reference system, the Commission affirms that the contested tax rulings deviated
from it, being therefore discriminatory. According to the Commission, the profit allocation method within
and between integrated companies shall “result in a reliable approximation of a market-based
outcome”21, as it occurs with non-integrated companies, which operate under natural market conditions.
In the present case, it concludes that the method applied for allocating both ASI and AOE’s profits —
mainly those relating to the exploitation of Apple IP licenses held by these companies—, by which most
of them were assigned to the so-called ‘head offices’ —i.e. outside of Ireland’s jurisdiction—, did infringe
the aforementioned principle —which is the basis of the ordinary legal regime of taxation—, constituting
a derogation from the reference system, and thus, since Irish Revenue’s endorsed and applied it, those
tax measures are illegal.

17 Possibly because it is more difficult to prove a coherent administrative practice among (non-resident) integrated
companies that the existence and application of Section 25 to non-resident companies.
18 It subjects to corporation tax all non-resident companies which carry on a trade in the State through a branch or

agency on all its chargeable profits, which are: (i) any trading income arising directly or indirectly through or from
the branch or agency; (ii) any income from property or rights used by, or held by or for, the branch or agency; and
(iii) chargeable gains attributable to the branch or agency.
19 APA meaning Advanced Pricing Agreements.
20 For more details, see Section 2.5.4. of the Decision.
21 Paragraph 272 of the Decision.

The Decision justifies the previous assertions on the basis of (i) the lack of physical presence and
employees of those ‘head offices’ and (ii) the absence of strategic decision-making from them relating to
the management of the referred IP rights, blaming the Irish tax authorities for not examining “the assets
used, the functions performed and the risks assumed by those companies through their Irish branches and
through the other parts of those companies”22 for the purposes of determining a correct taxable profit. As
a result, the Commission concludes that those incomes only could have been generated by ASI and AOE’s
Irish branches. Here —the factual key controversy—, both Apple and Ireland maintain that the effective
management of IP rights was carried out by the so-called ‘head offices’ and that the Irish branches had
only routine functions.

In a subsidiary way to the previous considerations, the Commission affirms that the methodological
choices for calculating the amount of profits were inappropriate, resulting in an undervaluation of ASI and
AOE’s taxable profit and thus, in a lowering of ASI's and AOE's corporation tax liability under the reference
system as compared to non-integrated companies.

Finally, and as an alternative line of reasoning, the Commission maintains that, even assuming that the
reference system was Section 25 TCA 97 —which is what alleged both Apple and Ireland—, the previous
conclusions would not change. Firstly, because even within Section 25 the arm’s length principle still
applies, and secondly, because even assuming that the referred principle is not applicable to nor inferable
from the applicable provisions, “the tax rulings would have been result of discretion exercised by Irish
Revenue in the absence of objective criteria related to the tax system”23. It is likely that the key controversy
finally lies in that last point. The Court would have to set out whether lacking from certain provisions, but
having a “coherent administrative practice” —which is also a fact that has still to be proven— implies
arbitrariness and therefore, a deviation from the system of reference.

In order to sustain the previous asseverations, the Commission reminds that (i) Ireland “acknowledges
that Section 25 TCA 97 does not provide guidance on how to determine the chargeable profit of a
branch”24, it states that (ii) it did not identify “any other objective standard besides the arm's length
principle that ensures Section 25 TCA 97 is applied in a consistent manner ensuring that all integrated non-
resident companies are treated equally under that provision” and finally, it declares (iii) the existence of
tax rulings relating to other non-resident companies in which the Irish Revenue’s does not applied the
regime conceded to Apple —i.e. in fact, it applied the ALP, according to the Commission—.

22 Paragraph 273 of the Decision.

23 Paragraph 379 of the Decision.
24 Paragraph 371 of the Decision.


Currently pending before the General Court, this case could be of great significance in the field of fiscal
State aid, since no precedent judgment dealing with tax rulings still exists. In particular, there are three
issues which should be clarified by the Court:

― Firstly: is the applicability of the ALP essential to identify the correct reference system? If the answer
is ‘yes’, Commission would be right if that principle was indeed applicable; if it is ‘no’, probably Section
25 would be the reference system.
― Secondly: would it not go against fiscal autonomy that the Commission —in a State aid procedure—
was entitled to set out which is the applicable legal regime to a set of undertakings and, more
specifically, which are the means and criteria that a Member State shall adopt in order to determine
the tax base of an undertaking operating therein? In other words: should not the Commission limit
only to determine whether the treatment given by the Irish Revenue was in accordance with the
applicable tax regime, including the interpretations and administrative practices concerning its legal
― And thirdly: (assuming that the reference system is the transfer pricing regime or Section 25) would it
exist State aid if, although Ireland did not have an explicit set of provisions to deal with the internal
allocation of profits, it was proved that Irish Revenue had a coherent and uniform administrative
practice and interpretative criteria regarding that profit allocation? Or differently stated: could be
inferred that, assuming the existence of such regular administrative practice, the criteria used for
similar tax rulings and companies were ‘part’ of the applicable provisions —i.e. Section 25— to those
companies —in the same way as case-law—? Or rather would it be so arbitrary that it would
constitute a deviation from the reference system?

Although Ireland and Apple are not in an easy position to win, the General Court —and afterwards the
CJEU— should establish a rational, coherent and structured answer to those legal complexities —among
others—, which is not incompatible with fairly punishing such actors provided that what the Commission
mentions in the statement of facts is accurately true.


Annex I