Apple Tax Fight Looks More Difficult After EU Court Ruling

  • EU Court of Justice ruled on Spanish tax breaks for M&A
  • Ruling could boost EU in tax disputes with Apple, AB InBev

How Quickly Can Apple Resolve Tax Dispute with EU?

Apple Inc. and Anheuser-Busch InBev SA may face a tough battle in disputes over European Union demands for back taxes after the bloc’s top court partly backed regulators’ attempt to force Spanish firms to repay millions of euros in tax breaks.

In a ruling that could ultimately add impetus to the region’s clampdown on special tax treatment for selected companies, judges at the EU Court of Justice in Luxembourg said a lower tribunal should re-examine a Spanish system that gave tax breaks to companies, including Banco Santander SA, for the acquisition of stakes in foreign firms. Those tax advantages must now be repaid, the EU said in a statement.

The EU General Court was wrong to rule that the European Commission failed to show that a group of companies was singled out by the program, which granted deductions for shareholdings in foreign firms, the top judges said Wednesday. Regulators don’t always have to show that only certain companies benefit from the aid, the court said.

“This is a landmark decision because it clarifies the rules of the game,” said Raymond H.C. Luja, a professor of comparative tax law at Maastricht University. “That will also have its effect on a number of ongoing cases.”

Crusade

Europe’s crusade against unfair tax treatment has led EU Competition Commissioner Margrethe Vestager to order Apple to pay a record 13 billion euros ($13.6 billion) in back taxes because of arrangements with Ireland that she says weren’t open to others. Belgium was also told to claw back some 700 million euros in tax advantages granted to companies, including AB InBev, the world’s biggest brewer.

"The judgment is important because it confirms that a measure may be selective, if it benefits only those companies that carry out certain transactions," the commission said in an e-mailed statement. "The fact that the conditions that a company needed to fulfill were not strict and the benefits were therefore available to many companies does not call into question the selective nature."

Action has now moved to the courts with Apple filing its legal challenge this week, joining Starbucks Corp., a Fiat SpA unit and more than a dozen Belgian-based companies calling on judges to halt the EU in its tracks. Amazon.com Inc., McDonald’s Corp. and Engie SA are also being probed by regulators over tax deals with Luxembourg.

The “facts and the approach” in the Spanish cases “are very different” from those in the Apple case, the Irish finance ministry said in a statement Wednesday. Ireland is appealing the EU’s claw-back order against Apple.

“It is a complete overstatement to say that the Irish appeal of the Apple decision is dependent on the outcome of the Santander and Autogrill decision of the European Court Justice, or that today’s judgment is crucial for the Irish case,” the ministry said in the e-mailed statement.

Standards

The ruling “reestablishes the comparability standards, meaning you have to look whether companies in the same legal and factual situation are treated differently, without proper justification,” Luja said. “That’s the argument the commission is also using in many of the tax-ruling cases.”

The court confirmed the principle that companies that are comparable, being in the same factual and legal situation, should be treated the same. But the ruling leaves a key question in the tax probes unanswered, Luja said.

“It’s not the standard that’s the issue, because the court confirmed that,” Luja said. “The question in the ongoing tax ruling cases is whether the commission’s assumption that a standalone company and a group company are comparable, is applicable, and there this decision tells us little.”

So-called selectivity -- or the notion that a tax break targets only certain companies and excludes others -- is "the key issue" that links the Santander case with the EU’s probes into the tax practices of international companies, said Edoardo Traversa, a professor who specializes in tax law at Belgium’s Universite Catholique de Louvain.

Court Support?

Apple and other companies can take solace in another ruling on Wednesday, where the EU’s top court criticized regulators in a case involving tax benefits to airlines using Germany’s Luebeck airport. That judgment said the EU was wrong to determine the tax breaks were unfair to others simply because they were granted only to airlines at that airport.

Tax breaks are a subsidy that give some companies an unfair advantage, especially if they plow back their savings into competing against others in industries with price pressures and where margins are razor-thin, the EU’s top state aid official said earlier this month. Regulators are "very much concerned that this is going on" with Amazon’s tax arrangements, he said.

Wednesday’s ruling focuses on Spanish tax breaks for home-grown firms that allowed them to go on a buying spree abroad. Santander grew from being a provincial lender to become the second-biggest by market value in the euro region with the purchase of banks in the U.K. and the Americas. It built a balance sheet that’s as big as Spain’s gross national product.

Spanish companies including Banco Bilbao Vizcaya Argentaria SA, Telefonica SA and Iberdrola SA also aggressively pursued expansion abroad.

Delay

Spain must now demand the companies repay the tax advantages they received, the EU said. Regulators had agreed to avoid "actively" pursuing back-tax demands until the ruling was delivered.

The European Commission told Spain in 2009 and 2011 to abolish the tax breaks and recoup tax advantages dating back to December 2007. But that order hit a road block two years ago when the EU General Court, the bloc’s second-highest tribunal, ruled that the Spanish regime at issue was not selective and doesn’t exclude any “company from taking advantage of it.”

Wednesday’s ruling says regulators "properly established the selectivity" of the tax program because it was restricted to certain companies, undermining one of the key planks of the Spanish firms’ arguments against the EU decision. While the case may take years to reach a conclusion, the judgment emboldens the EU in the midst of its war against tax subsidies.

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