Apple Fights ‘Phantom’ Units Claim in $14 Billion EU Court Clash

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(Bloomberg) — Apple Inc. and Ireland’s court room clash with the European Commission finally lived up to its billing as the world’s biggest tax case.A two-day hearing into their appeal of the EU’s record 13 billion-euro ($14.4 billion) tax bill heated up on Wednesday as Apple rebutted claims that Irish units at the center of its fight are just “phantoms” and Ireland hit back at regulators for saying the country would willingly forgo one-fifth of its corporate tax takings.Ireland is the victim of “wholly unjustified criticism of its tax system and its approach” from the EU in “the biggest state aid case ever,” said Paul Gallagher, the government’s lawyer, in closing arguments of an EU General Court hearing in Luxembourg.EU officials “have not produced to this court a single example of Apple being preferred to anyone else” and Irish tax law didn’t require Apple to pay any more.Apple and Ireland are battling the European Commission’s 2016 order that ruled illegal a tax deal that saw the company channel sales through two Irish units. The iPhone maker is the biggest target of EU Competition Commissioner Margrethe Vestager’s crusade against corporate tax deals that allow big firms to reduce their fiscal burden.Irish BranchesThe five-judge panel homed in on the exact functioning of the Irish branches that allowed Apple revenues to be covered by a national tax deal labeled as illegal by regulators.The EU asserts the units received selective tax treatment that allowed Apple to allocate all sales profits to two companies that “existed only on paper.” Apple attempted to show that each business wasn’t a ghost while saying strategic decisions over products and sales were made elsewhere and profits should also be taxed elsewhere.“This wasn’t some kind of shell company, this was a company doing things in the U.S.,” Apple’s lawyer Daniel Beard responded, citing one of the firms. He said that no critical decisions on intellectual property were made in Ireland.Marc van der Woude, a Dutch judge and the court’s vice-president, had quizzed the EU’s lawyer late Tuesday on what evidence the European Commission had to show whether the Apple units determined strategy or drew up business plans.The business “looks like a phantom company,” he said at one point. Other judges dug into details of how the branches were run and how the Irish government determined that the revenue should be taxed there.The EU’s lawyer Richard Lyal sought to dismiss Apple’s arguments that the revenue at stake should have been taxed in the U.S. where its products are developed.”Apple should not now pretend” that its Irish units “make all that money but that only a tiny proportion of it should be attributed to Ireland,” he told the court. “All arguments as to tax being paid in the U.S. are completely irrelevant.”Amazon, AlphabetA court ruling, likely to take months, could empower or halt Vestager’s tax probes into complicated corporate structures used by many American technology firms. The EU has also scrutinized fiscal deals done by Amazon.com Inc. and Alphabet Inc. and may draft new rules to net digital companies’ revenue.The first hints of how the Apple case may turn out will come from a pair of rulings scheduled for Sept. 24.The General Court will rule on whether the EU was right to demand unpaid taxes from Starbucks Corp. and a Fiat Chrysler Automobiles NV unit. Those judgments could set an important precedent on how far the EU can question tax decisions national governments make on how companies should be treated.To contact the reporters on this story: Aoife White in Luxembourg at awhite62@bloomberg.net;Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.netTo contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Peter Chapman, Molly SchuetzFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.