School of Law

LL.M. Assignment Submission Form

Student Name: Tamas Zalan Nemeth

Student ID Number: 19334301

LL.M Course Title: International Business Law

Module Title: International Business Tax Law

Assignment Title: "Charting a Course: Predictive Analysis of the Apple Case and
Direct Taxation under EU State Aid Laws"

Lecturer(s): Professor Sara-Jane O'Brien

Date Submitted: 27th April 2024

Word Count/Page Count: 2,996

I have read and I understand the plagiarism provisions in the General Regulations of the
University Calendar for the current year, found at http://www.tcd.ie/calendar

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Signed: Zalan Nemeth Date: 27th April 2024

"Charting a Course: Predictive Analysis of the Apple Case
and Direct Taxation under EU State Aid Laws"
Table of Contents

Chapter I. – Introduction..........................................................................................................4
Chapter II. - Background and Context....................................................................................5
Chapter II.I - APAs and Tax Rulings..................................................................................5
Chapter II.II - The Commission & Article 107(1).............................................................5
Chapter II.III. - Background & The Relevant Test.........................................................6
Chapter III. - The Apple Case and General Court's Decision................................................7
Chapter III.I The Primary Line of Reasoning..................................................................7
Chapter III.II The Subsidiary Line of Reasoning.............................................................8
Chapter III.III The Alternative Line of Reasoning...........................................................8
Chapter IV. - A Critical Analysis of Article 107(1) TFEU Application in Direct Taxation....9
Chapter V. - Prospective Analysis of the European Court of Justice’s Potential Decision on
Appeal in the Apple Case based on the Advocate General’s Opinion...................................10
Chapter VI. – Conclusion.......................................................................................................11
Chapter I. – Introduction

The jurisprudential landscape of State aid within the European Union is dominated by the
prescriptive mandate of Article 107(1) of the Treaty on the Functioning of the European
Union (TFEU). This critical provision articulates, "any aid granted by a Member State or
through State resources in any form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the production of certain goods shall, in so
far as it affects trade between Member States, be incompatible with the internal market." 1
Such a directive is fundamental in precluding the indiscriminate distribution of fiscal
privileges that could otherwise skew competitive equilibriums and undermine the integrity of
the internal market.

The General Court's deliberations in the Apple case, formally referred to as Ireland v
Commission,2 have precipitated profound legal and economic analyses concerning the scope
and application of State aid rules vis-à-vis direct taxation. In this seminal adjudication, the
European Commission posited that Apple should discharge €13 billion in arrears to Ireland,
alleging that the preferential tax treatments extended to Apple through a number of tax
rulings by the Irish Revenue constituted illegal State aid.3

This exposition seeks to meticulously dissect and critically evaluate the application of Article
107(1) TFEU in the sphere of direct taxation, with a particular lens on the doctrinal
underpinnings and jurisprudential outcomes of the Apple case. It will interrogate the General
Court's rationale, assess the broader implications of these judicial interpretations, and
prognosticate on the likely disposition of the European Court of Justice (ECJ) upon appeal.
Through a rigorous analysis of the legal arguments and a review of pertinent precedents, this
essay aspires to illuminate the intricate interplay between State aid law and fiscal policy,
while forecasting the evolutionary trajectories of ECJ jurisprudence in the case of Ireland v
Commission.

Chapter II. - Background and Context

1
Article 107(1) of the Treaty on the Functioning of the European Union, O.J. (C 262) 1.
2
European Commission, 'State aid SA.38373 (2014/C) (ex 2014/NN) implemented by Ireland to Apple'
(Commission Decision (EU) 2016/2326 of 30 August 2016, OJ L 369/38).
3
European Commission - Press release - State aid: Commission refers Ireland to Court for failure to recover
illegal tax benefits from Apple worth up to €13 billion, 4 October 2017, available online at
http://europa.eu/rapid/press-release_IP-17-3702_en.htm http://europa.eu/rapid/press-release_IP-17-
3702_en.html
Chapter II.I - APAs and Tax Rulings

One fundamental commonality that can be found in every Article 107(1) proceeding related
to direct taxation, is that a state entered into some form of ‘advance pricing agreement’ (APA)
with a corporation or an individual. Such an agreement is defined by the OECD guidelines as
“an arrangement that determines, in advance of the controlled transactions, an appropriate set
of criteria for the determination of the TP (transfer pricing) for those transactions, over a
fixed period of time”.4 A study by DLA Piper found that over 39 countries have been
operating some form of APA system as of 2018. 5 In practice such agreements appear most
commonly in the form of tax rulings which fundamentally serve to create clarity and
consistency in the application of tax law to organisations and individuals operating within a
state by predicting future tax liabilities and removing uncertainty (although these are
technically not classified by the OECD as APAs per se, for the purposes of our analysis I
shall regard them as the same). 6 However, such rulings when incompatible with the national
tax law system, as pointed out in a study by R. Willems in effect serve to establish ‘safe
harbour’ tax regimes that attract multinational companies.7

Chapter II.II - The Commission & Article 107(1)

Notably whilst the Commission and the European Court of Justice pay significant reverence
to national legislature in areas of law where there is an absence of substantial Community
harmonisation such as direct taxation.8 Article 107(1) is designed to prevent Member States
from using fiscal measures to grant undue advantages to certain enterprises, at the detriment
of competition within the bloc. The way direct taxes are calculated and levied can
significantly impact market competition by in some cases providing unduly favour to certain
undertakings thereby providing a selective advantage to particular companies. Thus it is not
necessary for there to be a positive exchange of resources between the state and a company,

4
OECD, 'Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' (2017 edn, OECD
Publishing 2017) 214.
5
DLAPiper, APA and MAP Country Guide 2017, Managing Uncertainty in the New Tax Environment
https://www.dlapiper.com/en/uk/insights/publications/2017/05/apa-map-country-guide-2017/ accessed
21 April 2024.
6
C Waerzeggers and C Hillier, 'Introducing an Advance Tax Ruling (ATR) Regime—Design Considerations for
Achieving Certainty and Transparency' (IMF Technical Note, vol 1, IMF Legal Department 2016).
7
R. Willems, “Guide to Tax Rulings in Belgium”, IBFD, 2012, p. 63
8
Advocate General Kokott, Opinion of 13 June 2019, Case C-75/18, Vodafone Magyarország Mobil Távközlési
Zrt v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága.
as long as it can be established that the company is better off as a result of the tax agreement,
it may be viewed as a form of illegal State aid. 9 As a reduction in tax liabilities causes
significant distortions in the competitive landscape, effectively reducing the operational costs
for these entities compared to their competitors throughout other markets in which they
compete. Thus tax advantages can attract scrutiny under Article 107(1) if they are seen to
distort competition within the EU's internal market as was seen in the seminal case which
recognised direct taxation as a potential method of providing unlawful state aid in
Steenkolenmijnen.10

Chapter II.III. - Background & The Relevant Test

Finally, as highlighted by the LuxLeaks11 and Panama Papers12 scandals, despite substantial
measures like the BEPS initiative, 13 the European Union14 and the OECD's objectives15 to
mitigate tax avoidance remain largely unfulfilled. Provided that Member States continue to
engage in preferential tax agreements with multinational corporations, achieving targets
pertaining to fair competition within the bloc will continue to be elusive. Thus in a series of
well-documented landmark cases adjudicated by the European Commission and the European
Courts such as Fiat v Commission16 and Starbucks v Commission17, the Commission has been
focused on developing a robust and reliable method of identifying state aid in tax rulings
which have either permitted or ignored transfer pricing arrangements deemed incompatible

9
C-143/99, Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke [2001] ECR I-08365.

10
Case 30/59 De Gezamenlijke Steenkolenmijnen Limburg v. High Authority [1961] ECR , para. 19.

11
International Consortium of Investigative Journalists, 'Luxembourg Leaks: Global Companies' Secrets Exposed'
(ICIJ, 5 November 2014) https://www.icij.org/investigations/luxembourg-leaks/ accessed 24 October 2023.
12
International Consortium of Investigative Journalists, 'The Panama Papers: Exposing the Rogue Offshore
Finance Industry' (ICIJ, 3 April 2016) https://www.icij.org/investigations/panama-papers/ accessed 24 October
2023.
13
Organisation for Economic Co-operation and Development, 'Base Erosion and Profit Shifting (BEPS)'
https://www.oecd.org/tax/beps/ accessed 24 October 2023.
14
European Commission, 'Tax Avoidance and Evasion' https://ec.europa.eu/taxation_customs/general-
information-taxation/combating-tax-fraud-tax-evasion/tax-avoidance_en accessed 24 October 2023.
15
Organisation for Economic Co-operation and Development, 'About the OECD' https://www.oecd.org/about/
accessed 24 October 2023.

16
Court of Justice of the European Union, 'Judgment of the Court (Grand Chamber) of 8 November 2022 in
Joined Cases C-885/19 P and C-898/19 P, Luxembourg and Fiat Chrysler Finance Europe v European
Commission' (Judgment, Court of Justice of the European Union, 8 November 2022).
17
European Commission, 'Commission Decision of 21 October 2015 on State Aid SA.38374 (2014/C ex
2014/NN) implemented by the Netherlands to Starbucks' (2015) OJ L 83.
with the internal market, culminating in the development of the following four criteria for a
tax ruling or APA to be considered contra Art 107(1):

1. An intervention of the State or a use of State resources

2. Which affects trade between Member States
3. Conferring a selective advantage on TP
4. Resulting in the distortion of competition

Chapter III. - The Apple Case and General Court's Decision

In Ireland v Commission,18 the European Commission's claim that Ireland had granted Apple
illegal State aid through preferential tax treatments was based on two tax rulings issued by
the Irish Revenue in 1991 and 2007 that were considered to have met all of the above
conditions. The General Court however, annulled this decision, criticizing the Commission
for not proving the selective advantage required under Article 107(1) TFEU. It was therefore
posited that whilst the Commission established with relevant ease, how the special tax
treatment of Apple Inc. may meet the first, third and fourth criteria of the test outlined in
Chapter II.III, the Commission was unable to prove a differentiated treatment of Apple as
compared to resident companies, thus selective advantage under Irish tax law could not be
proved. We shall therefore introduce the Commission’s primary, subsidiary and alternative
lines of reasoning for the existence of selective advantage and the basis on which each were
rejected (objections to and further analysis of these points will be the subject of Chapter V of
this essay).

Chapter III.I The Primary Line of Reasoning

Most notably, the Commission’s primary line of reasoning contested that the tax rulings
applied to Apple Inc. erroneously excluded Apple’s IP licenses in their annual profit
calculation. This contention was found void by the General Court on the basis, that all such IP
licenses were developed and allegedly managed at the head offices of Apple in California,
and therefore subject to an exception under Section 25 of the Taxes Consolidation Act 1997.19

18
General Court, 'Judgment of 15 July 2020, Case T-778/16, Apple Sales International and Apple Operations
Europe v European Commission' (ECLI:EU:T:2020:338).
19
Taxes Consolidation Act 1997 (Ireland) s 25.
Chapter III.II The Subsidiary Line of Reasoning

Secondly, the Commission’s subsidiary line of reasoning assumed that even if the IP licenses
were correctly allocated by Ireland, the profit allocation methods used to approximate the two
subsidiaries profits based on transactions in their profit sharing agreements were unreliable
and at odds with the arm’s length principle. Namely the Commission found that ‘the
transaction net margin method’ which according to OECD guidelines is considered inferior to
traditional transaction methods, as “it does not seek to establish the price of goods sold, but
estimates the profit independent companies could be expected to make on an activity, such as
the activity of selling goods” was found to be an unreliable method of assessment of the
profits shared between ASI & AOE in this particular case because the profit level indicator
was the operating cost of these two companies and not their aggregate sales as would be usual
for companies of this size. Furthermore, because the level of return appeared to have been
reached on a negotiation basis dependent upon employment considerations as was
demonstrated by the Irish Revenue taking into account the need ‘not to prohibit the Irish
operations’ the objectivity of the figure reached in these negotiations was called into
question.20 These three findings were rejected by the General Court, who stated that whilst
competent authorities may be swayed to make improper rulings based upon employment
considerations, mere allusions to the possibility of such events without substantiating
evidence should not be considered a valid line of reasoning. 21 Furthermore, as the threshold in
question was not actually reached and therefore did not have an effect on the taxable revenue
of Apple during the contested period due to their decreased sales, even if the Commission’s
economic arguments are valid, no selective advantage was actually taken advantage of.

Chapter III.III The Alternative Line of Reasoning

In an alternate argument presented between paragraphs 369 to 403 of the decision, the
Commission maintained that even under the assumption that Section 25 of the TCA 97 was
the sole reference framework, the tax rulings in question still provided ASI and AOE with a
selective advantage by reducing their tax base in Ireland. Initially, the Commission held that
Section 25's application inherently involved the arm’s length principle. Despite this, the
Commission demonstrated that the specific tax rulings strayed from what would typically be
expected of a market-based outcome aligned with this principle, thus benefiting ASI and AOE

20
Ibid at para 93 and 430.
21
judgment of 18 July 2013, P, C-6/12, EU:C:2013:525, paragraph 27.
economically. Furthermore, the Commission posited that irrespective of whether Section 25
was intended to reflect the arm’s length principle, the tax rulings were still issued at the
discretion of the Irish tax authorities without any objective criteria from the Irish tax system.
The General Courts rebuttal of this line of reasoning essentially, referred to their judgement
on the subsidiary line of reasoning, stating that even if it was held that Irish Revenue granted
the figure in question on a discretionary basis, discretion alone does not necessarily prove
inequitable treatment.

Chapter IV. - Analysis of Article 107(1) TFEU Realities

The application of Article 107(1) of the Treaty on the Functioning of the European Union
(TFEU) to direct taxation raises intricate legal challenges as can be seen from the previous
Chapter. The principal issue however revolves around the definition of "selective advantage,"
which appears to be in the practice the central and most difficult hurdle to establishing the
presence of State aid through direct taxation. This concept has been confirmed specifically in
cases that involve tax law by Justice Gromsen who identified the necessitation of a tax
measure conferring an advantage selectively to certain undertakings or the production of
certain goods, distinguishing them from others in comparable legal and factual situations as
the essential criterion in this area.22 This is all however, despite not explicit reference nor
definition of “selectivity” being apparent from Article 107(1). Thus As previously stated in
Chapter II.III whilst the four prongs tested in Article 107(1) proceedings, are clearly laid out
in the Apple judgement amongst others. Notably prongs 2 and 4 have a tendency for being
considered together by the Court in their judgement as was the case in Ireland v
Commission. However, it has been argued by certain academics, that in order to deliver
more clarity, the Courts would be advised to consider not only these prongs separately, but
additionally the selective advantage prong as two separate elements, a granted advantage and
its selective application to a company. In light of the General Courts rather convoluted line of
reasoning in the Apple case I would concur that this certainly would be a welcome change. 23

22
L L Gormsen, 'Has the Commission Taken Too Big a Bite of the Apple?' (2016) 1(3) European Papers 1139.

23
R Mason, 'Tax Rulings as State Aid FAQ' (University of Virginia School of Law, Law and Economics Research
Paper Series, 2017) 452.
Chapter V. - Prospective Analysis of the European Court of Justice’s
Potential Decision on Appeal in the Apple Case based on the Advocate
General’s Opinion

In delving into the Advocate General's meticulously articulated opinion concerning the
European Commission's appeal against the General Court's judgment favouring Apple, it
becomes evident that the crux of the contention hinges upon the fact that the General Court's
analysis suffered from a fundamental misapprehension of the Commission's methodological
approach, particularly critiquing it for adopting what was perceived as an 'exclusion' stance.
This stance, according to the Advocate General, erroneously neglected the substantial
interplay of functions between Apple’s Irish branches and its head offices.

On the matter of contradictory and inadequate reasoning, the Advocate General concurs with
the Commission, highlighting inconsistencies within the General Court's reasoning,
particularly in its failure to coherently synthesize the roles and functions attributed to Apple’s
Irish operations within the broader corporate structure.

Based on the thorough analysis provided by the Advocate General, one might prognosticate
that the Court of Justice could be swayed to overturn or at least critically reassess parts of the
General Court's judgment. The persuasive critique of the General Court's interpretative errors
and the highlighted contradictions in its reasoning provide a compelling basis for such a
judicial pivot. Should the Court of Justice align with the Advocate General’s assessments, it
would not only underscore the dynamic interpretative challenges within EU state aid law but
also significantly influence the jurisprudential trajectory concerning the intersection of
national tax practices and EU law. In sum, the nuanced complexities laid bare by the
Advocate General point towards a potential judicial re-evaluation that might realign the case
with a more stringent scrutiny of the methodologies employed by national tax authorities
under the auspices of EU state aid regulations.

Chapter VI. – Conclusion

In conclusion, this essay has traversed the complex terrain of EU State aid law through the
lens of Article 107(1) TFEU, particularly in its application to direct taxation, as highlighted
by the Apple case. Revealing a nuanced interplay between national tax regimes and the
overarching principles of the EU's internal market, emphasizing the delicate balance the EU
must maintain in its oversight of State aid. The Apple case serves as a pivotal study in the
interpretation of "selective advantage" and the integration of the arm's length principle within
the fabric of EU State aid jurisprudence. Therefore it is posited, that while the European
Commission's efforts to enforce State aid rules reflect a commitment to maintaining a level
playing field, the challenges of adapting these rules to complex corporate tax structures are
significant. The divergences in judicial interpretations, as observed between the General
Court and the Advocate General's opinion, underscore the ongoing debates within EU
jurisprudence about the scope and application of these rules. As the legal saga continues with
the anticipated decision of the European Court of Justice, the outcomes will significantly
shape the landscape of State aid law and its intersection with direct taxation.