Another take on the (bad) Apple Ruling: is a misapplication of domestic law enough for a finding of State Aid?

17 September 2024

Stephen Daly, King’s College London

“Fidarsi è bene, non fidarsi è meglio” – this is an Italian saying which roughly translates to “it's good to trust others, but not to do so is better”. This phrase encapsulates the thinking of the European Commission (Commission) when it began litigating its cases against Ireland, Luxembourg and the Netherlands in respect of rulings given by their tax authorities to Apple, Amazon, Engie, FIAT and Starbucks. Sure, the principle of sincere cooperation (Article 4, TEU) is good, meaning that Member States are expected to ensure they comply with their obligations under the EU Treaties, but it’s better if the Commission can check to ensure that this has indeed been done. And by check, in the case of the tax rulings, the Commission wanted to see for itself that the Member States had correctly enforced their domestic tax rules.

The premise of the Commission’s cases against Ireland, Luxembourg and the Netherlands thus was that a misapplication of domestic law can give rise to State aid and breach of Article 107 TFEU. Let us pause on that – a misapplication alone. This is the Commission’s stated position¹ and it is what the European Court of Justice (ECJ) understood the Commission as saying in the Apple judgment which was handed down on Tuesday 10 September 2024.²

Richard Collier, on this site, has written a blog criticizing the ECJ’s judgment in Apple in respect of its interpretation and application of the branch profit allocation rules. In this blog, I wish to criticise another aspect of the decision, namely the ECJ’s acceptance of the premise that a misapplication of domestic law amounts to State aid.

If we look at the ECJ’s judgment, we see various points at which the ECJ could have distanced itself from this premise. The Commission asserted that “an error in the interpretation or application of national law constitutes an error in the interpretation and application of Article 107(1) TFEU” (para 163) and that the General Court’s erroneous analysis gave “rise to a misapplication of national law and an infringement of Article 107(1) TFEU” (para 170). Ireland and Apple in response argued that the Commission’s reasoning “that any error in the interpretation and application of national law constitutes an error in the interpretation and application of Article 107(1) TFEU” (para 171) was based on a misreading of the precedent. “This line of argument” from Ireland, the ECJ found, “cannot be accepted” (para 172).

Why is this a problem? 

For years now I have argued that it is wrong to suggest that a misapplication of domestic law alone can generate State aid. That would ultimately result in the Commission acting as a supranational tax authority (second marking the domestic tax authority’s work) and the Courts of Justice of the European Union (CJEU) becoming supranational tax courts (determining the correctness of the domestic tax authority’s assessment as against the Commission’s assessment). In my 2021 article “The Power to Get it Wrong”, I wrote as follows:

“Rulings it should be stressed are simply one species of the myriad activities undertaken by tax authorities in managing compliance which could all potentially be caught by the State aid rules. Difficulty lies then in disaggregating what the Commission might perceive to be problematic rulings from other activities undertaken by tax authorities in managing compliance. Unknowingly, the Commission could end up adopting a supervisory role far more general than that which would operate simply in relation to a handful of problematic rulings… [Further,] taxpayers [could] first seek assistance from tax authorities and then urge those authorities to thereafter seek approval from the Commission under art. 108(3) TFEU. Presumably the Commission has little intention of becoming a supranational tax authority in this sense.”⁴ 

In her opinion in Engie, Advocate General (AG) Kokott echoed these concerns: 

“If every simple error in the setting of tax suffices to be considered an infringement of State aid law, the Commission would consequently become a de facto supreme inspector of taxes and the Courts of the European Union, by dint of reviewing the Commission’s decisions, would become de facto supreme tax courts.”⁵  

AG Kokott in turn suggested that the CJEU should only intervene where the domestic tax authorities had made “manifestly” erroneous assessments.⁶  The ECJ in Engie declined to follow AG Kokott’s suggestion, and instead adopted a different approach. When interpreting domestic law, the Commission should accept the Member State’s evidence as to how the law should be interpreted unless it has reliable and consistent evidence to the contrary.⁷  This would mean that the Commission could only prove a misapplication if this were either conceded by the Member State or where there was caselaw, or administrative practice, which suggested there was such a misapplication. As such, although the ECJ did not adopt a deferential standard as a matter of law as suggested by AG Kokott, it essentially arrived at the same outcome as AG Kokott as a matter of practice. The only way to show a misapplication of domestic law, using the ECJ’s formulation in Engie, is where such a misapplication is indeed “manifest”.

My criticism of the ECJ’s judgment in Apple should not be taken to mean I see no role for the EU Commission, or the CJEU, in overseeing the administration of domestic tax rules. Misapplications of domestic law through tax rulings, guidance, settlements, indeed, any aspect of the assessment process can be a vector for subsidizing businesses. This is a very real risk and in no way do I suggest that tax administration be immune from State aid review. Indeed, my analysis of the Engie decision was that the ECJ went too far in protecting tax authorities from the glare of intrusive State aid investigations.⁸  

I proposed a different approach in my 2021 article is that a misapplication of domestic law would need to be accompanied by an administrative law (or, in continental language, procedural law) error in order to amount to State aid. That would mean, for instance, that unreasonably generous interpretations of the tax rules (you could call this “manifestly” erroneous assessments à-la AG Kokott), or reasonable but deliberate misapplications would amount to State aid. My proposal would ensure that the provision of aid through tax administration is regulated but without being overly intrusive. The beauty of using domestic administrative law is that it already seeks to balance the need to respect the competence of public authorities in any system of governance with the need to ensure that they are carrying out their functions appropriately. It provides the evidence as to whether to trust or not to trust. As such, administrative law strikes at the heart of what truly underpinned the Commission’s investigations – namely a distrust of certain tax authorities, tax authorities from Member States that the Commission has long suspected of misusing their tax systems at the expense of the internal market.⁹  Granted, using domestic administrative law means that there could be different administrative laws across Member States, although one should not overstate these differences, and so if this is deemed too much to tolerate, it would also be possible to generate EU administrative law standards for these purposes, building upon minimum standards common to all Member States.

Instead, we now have a total lack of clarity on the law (on account of the inconsistency between the ECJ’s judgments in Engie and Apple), but if Apple is followed tax authorities will have to look over their shoulders as the Commission might find a reasonable and bona fide interpretation of domestic law unlawful, with all the uncertainty that may create.

References

¹ See for instance Commission Notice on the notion of State aid as referred to in Article 107(1) TFEU [2016] OJ C 262/1 at para 174.
² See Case C 465/20 P Commission v Ireland and Others ECLI:EU:C:2024:724, paras 163 and 170-172.
³ The term “Courts of Justice of the European Union” refers to both the General Court and Court of Justice.
⁴ Stephen Daly, “The Power to Get it Wrong” (2021) Law Quarterly Review 280, 287-288.
⁵ Opinion of AG Kokott in Case C-451/21 P Commission v Luxembourg and Engie (4 May 2023), para 96.
⁶ Opinion of AG Kokott in Case C-451/21 P Commission v Luxembourg and Engie (4 May 2023), paras 92 and 101.
⁷ C-451/21 P and C-454/21 P Grand Duchy of Luxembourg and Engie v European Commission ECLI:EU:C:2023:948, paras 121-123.
⁸ Stephen Daly, “Commission v Luxembourg and Engie – (another?) mortal wound in the Commission’s campaign” [2024] 1 British Tax Review 91; Stephen Daly, “Debate: The Advocate General’s opinion in Commission v Ireland and Apple” (2024) 52(6/7) Intertax 493.
⁹See the decisions against those countries in what Kyriazis terms the “first” fiscal State aid wave. See Dimitrios Kyriazis, Harmful Tax Competition (OUP: 2023) Ch 4.