Interesting argument; good luck with that

A recent article by Irish tax lawyer Aisling Donohue notes that Apple, according to the summary of its appeal of the European Commission’s EU state aid verdict against Ireland, makes the following two arguments, among others:

“3. Third plea in law, alleging that the Commission made fundamental errors relating to the applicants’ activities outside of Ireland. — The Commission made fundamental errors by failing to recognise that the applicants’ profit-driving activities, in particular the development and commercialisation of intellectual property (‘Apple IP’), were controlled and managed in the United States. The profits from those activities were attributable to the United States, not Ireland. The Commission wrongly considered only the minutes of the applicants’ board meetings and ignored all other evidence of activities.

“ 4. Fourth plea in law, alleging that the Commission made fundamental errors relating to the applicants’ activities in Ireland.

“— The Commission failed to recognise that the Irish branches carried out only routine functions and were not involved in the development and commercialisation of Apple IP which drove profits.”

This is a flat-out statement that all of the "Irish" (or nowhere) income that Apple succeeded in treating as non-U.S. source under the then-operative version of our cost-sharing rules was in fact, as an economic matter, U.S. source.

Well, duh.  But I am not aware that Apple has publicly conceded this before in so express and unvarnished a matter. One would think they would be reluctant to speak so candidly about where the income actually arose, given other elements of their global tax position.

Might the admission matter under U.S. income tax law, looking backwards? Presumably not. How about as a matter of U.S. income tax law and politics, looking forward? Not impossible.

The legal position that Apple appears to be expressing at least implicitly (although I haven't seen the full brief) is not, I think, tenable. It seems to posit two layers of source rules. First, there is "true source." A country can only tax income that truly arose there as an economic matter.  Second, there is "claimed source." A country, like the U.S. with Apple, is free to treat less than all of the income that economically arose there as domestic source for tax purposes. But it cannot treat more as domestic source. So some principle (perhaps of general international tax law?) that constrains EU tax law, at least as interpreted by the European Commission, requires applying a one-way ratchet in favor of multinational companies.

And if one thinks in terms of inter-nation comity, Apple seems to be asserting that the U.S. can combine (a) asserting that, for purposes of its source rules, income arose outside the U.S. - and evidently in Ireland, with (b) demanding that no other country, including the Irish, tax the same income. Not that this is a wholly new assertion - the U.S. Treasury appeared to be saying the same thing in its infamous White Paper concerning the EU state aid cases, which I critiqued (in Tax Notes) here.

I would agree that, just because the U.S. has decided not to tax particular "true" U.S. source income (at least, if one makes this judgment under an origin-based, rather than a destination-based, approach to source questions) does not mean that absolutely anyone at all, no matter who, must have a reasonable claim to tax it. E.g., I don't think Japan would be on strong ground if it were to claim that there was Japanese source income when U.S. employees of U.S. companies created intellectual property that they then used to sell goods in the EU. But, whatever ultimately happens in the ECJ appeal of the EC's state aid decision regarding Apple and Ireland, I would be surprised if this set of arguments ended up cutting much ice. It looks too self-servingly inconsistent, given all the formal tax planning steps that Apple took within Ireland, to be the sort of thing judges often go for. Indeed, it reminds me of the old line about the "kid who kills his parents and then asks the judge for mercy because he's an orphan."