Montano Cabezas recently received an LLM in taxation from Georgetown University Law Center, where he was a Graduate Tax Scholar. He will serve as a clerk at the Tax Court of Canada during the 2016-2017 term. He wishes to thank professors Allison Christians, Lilian Faulhaber, and Jonathan Talisman for their comments and insights.
This article was selected as a winning entry in Tax Analysts' annual student writing competition.
In this article, the author examines the private meeting between Apple Inc. CEO Tim Cook and European Commissioner for Competition Margrethe Vestager regarding the ongoing state aid investigation against Ireland.
* * * * *
In January Apple Inc. CEO Tim Cook and European Commissioner for Competition Margrethe Vestager met privately to discuss the ongoing state aid investigation against Ireland.1 The meeting occurred just as the European Commission was poised to decide whether Apple's arrangement with the Irish tax authorities constituted state aid.2 The release of the decision was delayed, and Vestager refuses to give a new release date, stating that reporters shouldn't "hold their breath" waiting for a result.3
The meeting between Cook and Vestager has not been the subject of any academic analysis or commentary. The lull in public developments regarding the Apple state aid case makes it an opportune time to reflect on the potential significance of the meeting. The contact between Cook and commission representatives was a potentially inappropriate ex parte meeting that will likely damage the institutional legitimacy of the commission and its associated competition directorate.
I. The Ireland State Aid Investigation
In June 2013 the commission requested information from Ireland regarding its practice of providing corporate tax rulings with a focus on Ireland's dealings with Apple and its affiliates. The timing was curious. One month earlier, the U.S. Senate Permanent Subcommittee on Investigations, chaired by then-Sen. Carl Levin, D-Mich., held hearings on offshore profit shifting and the U.S. tax code with a focus on Apple. It made available its voluminous reports containing financial figures, corporate organizational charts, and analyses. A recurring theme in the Senate report and hearings was the benefit Apple received from Irish tax rulings. Although EU officials have denied that the U.S. Senate hearings had any effect on the timing and scope of the commission's inquiry, it seems reasonable to assume that the high-profile hearings had at least some effect in prompting the commission to take action.4 In fact, the commission has noted that its state aid investigations were partly stimulated by "media reports alleging that some companies have received significant tax reductions by way of 'tax rulings' issued by national tax authorities," and it is plausible that those reports would include coverage of the Senate investigation.5
Approximately one year later, in May 2014, the commission, taking the preliminary view that Ireland's tax rulings constituted state aid, began the information-gathering process set out in the Treaty on the Functioning of the European Union.6 An investigation was opened in June 2014. By the spring of 2015, Apple disclosed to its shareholders that it would face a material liability if the commission determined that the Irish tax rulings constituted illegal state aid, because the commission would then seek to recover up to 10 years of back taxes.7 Reports suggested that Apple could owe as much as $19 billion in back taxes.8
Despite Apple's having billions of dollars at risk, Joaquín Almunia, EU commission vice-president responsible for competition policy, said in October 2014 that "the litigant in a state aid case is the country that granted the benefit," adding that "the corporate taxpayer is not involved and has no right to be involved." That is not entirely accurate. Although the commission's state aid investigation of Ireland's tax rulings formally names only Ireland as a party, Apple has intervenor status as an interested party, which gives it the right to submit comments to the commission shortly after a formal investigation is opened. At the request of the intervenor, those comments can receive confidential treatment.9 To date, neither Apple nor the commission has revealed whether Apple has submitted comments.
One interesting effect of the state aid investigations is that the United States and the EU have engaged in a campaign of political rhetoric concerning the appropriateness of using a competition regime to collect tax from multinational enterprises. While admitting that the state aid regime is limited in its appropriateness for tax matters, Vestager has still called the ongoing state aid investigations a "very, very rare" opportunity to address abusive tax planning, which she said should be stopped.10
Part of that opportunity seems to be a reflection of the current political climate. Vestager has said the increasing popular interest in taxation generally, and the taxation of MNEs in particular, provides "fertile ground for new proposals to change how corporate taxation works in the EU."11 Professors Allison Christians and Edward Kleinbard have suggested that the use of state aid to address perceived abuses of the tax system is a reflection of larger frustrations faced by the EU -- namely, the failure of conventional tax measures to change the behavior of MNEs that pay little or no tax in the EU and the tax systems of member states that facilitate avoidance, with Ireland, Luxembourg, and the Netherlands being the principal recipients of the EU government's ire.12
The U.S. perspective, however, is that the Ireland state aid investigation involving Apple and other investigations involving Amazon.com Inc., Fiat-Chrysler Automobiles, McDonald's Corp., and Starbucks Corp. are little more than discrimination against U.S. companies while the European economy is under strain. In a February 11 letter to the European Commission, U.S. Treasury Secretary Jacob Lew said the commission's use of the state aid regime against U.S. companies "creates disturbing international tax policy precedents" and that the "legal theory underlying its investigations should apply to all multinational firms, not just those based in the United States." Practitioners have pointed out that many of the arrangements under investigation were ubiquitous, and it is thus strange to have U.S. companies singled out for what appears to be standard corporate tax planning.13
Perhaps the most worrisome consequence of a state aid decision against a U.S. company is not a decline in that company's share prices, but rather that the back taxes paid would likely be creditable. That would mean that the burden of the penalties would fall on neither the EU country that gave the illegal assistance nor the company that benefited from it, but would rather be borne by the U.S. Treasury and by extension, U.S. taxpayers. That seemingly disproportionate effect on the United States has led one academic to argue that the country should consider invoking IRC section 891, which would allow retaliatory, punitive tax sanctions to be levied on EU countries.14 Retaliatory measures like that have piqued the interest of at least four members of the U.S. Senate Finance Committee, who on January 15 asked Lew to consider the application of those measures.
II. European Commissioner for Competition
The commission is part of the EU's executive branch and has oversight of EU competition law. The commission and its associated administrative agency, the Directorate for Competition, fulfill a range of functions that in the United States are assumed by the Federal Trade Commission, the Justice Department, and now, with the commission's increased interest in the relationship between income tax and state aid, Treasury and the IRS. In general, it is expected that administrative agencies should speak with stakeholders to ensure that their policies properly reflect the executive branch's intended outcomes and to minimize any unintended deleterious consequences stemming from those policies. Although town hall meetings and notice-and-comment processes are standard ways to communicate with stakeholders, agencies often hold private meetings with the representatives of those who will be affected by the agency's actions. The EU state aid investigations, however, require the commission to take on a quasi-judicial role in addition to its standard policy-making and regulatory functions. It may therefore be appropriate to require the commission to respect judicial conventions, such as avoiding ex parte communications, when functioning in that role.
In the United States, a common thread in case law is that even when acting in a quasi-judicial role -- say, through a commission, tribunal, or board -- administrative agencies do not become a court.15 But even though U.S. administrative bodies are not technically courts, many have adopted best practices and legislation that require the memorialization of ex parte meetings through memoranda to be included in the record.16 Similarly, international organizations have prohibited ex parte communications in dispute resolution procedures.17
In the judicial context, the principal purpose of minimizing ex parte communications is to avoid having one party gain a substantive or technical advantage over the other.18 But not all quasi-judicial, administrative agency activity is adversarial in the classical sense, with the agency acting as an arbiter between two parties with competing interests. Much administrative quasi-judicial activity takes place when the agency acts as one of the opposing sides in a dispute. In that case, administrative agencies want to maintain their reputation -- hence, the widespread practice of making transparent or eliminating ex parte meetings in that context.
Both judicial bodies and administrative agencies recognize that the perception of bias or impropriety can weaken the public's confidence in the integrity and legitimacy of public institutions. For the judiciary, the U.S. code of judicial conduct states that a judge must avoid even the appearance of impropriety and act in a manner so as to promote public confidence.19 Similarly, administrative agencies, including the IRS, prohibit ex parte communications between appeals officers and other agency employees if they appear to compromise the independence of appeals officers.20 Even outside the quasi-judicial context, administrative agencies take care to ensure transparency in lobbying and advocacy, especially when increased public scrutiny is anticipated. A typical example of that kind of effort is Treasury's disclosure of Dodd-Frank legislation meetings, which notes the time of the meeting, the topics discussed, the names of the Treasury officials involved, and the names and affiliations of the visiting parties.21
Perhaps, however, the desire to have agencies limit ex parte communications and generally operate within a framework of transparency is not proof of an immutable legal principle, but is rather a consequence of Anglo-American legal culture. In contrast to the Anglo-American common law's focus on adversarial dispute resolution, the European civil law has traditionally used a judge-led, investigative approach. While the EU is technically a mixed jurisdiction, incorporating both elements of civil and common law, there can be no doubt about the prevalence of civil law culture in EU institutions. The paradigmatic example of that culture and the investigative civil law tradition is the French juge d'instruction. Generally speaking, a juge d'instruction will collect evidence, hold meetings that may or may not be private, and investigate a matter until he can decide whether a case should be tried in court.
One could therefore maintain that Vestager's meeting with Cook was not an infringement of a universal principle of justice, but rather was simply indicative of the more relaxed civil law approach to ex parte meetings present in European legal culture, which arguably has greater trust in and deference to the bodies that carry out investigations. On closer examination, however, one finds that EU legal and political institutions, despite being steeped in the investigative civil law culture, are just as concerned as U.S. institutions about transparency and propriety in private communications between an adjudicator and a party to a dispute, as well as potential conflicts of interest. It is therefore helpful to further reflect on the rules and values governing EU bodies to better understand to what degree, if any, a civil-law attitude of deference toward investigative bodies should color our perception of the meeting between Vestager and Cook.
Overall, EU institutions are permeated with aspirations of transparency. The EU website's home page notes that ethics and transparency are key.22 Although statements like that are trite, the fact that they appear as a topic point, rather than being buried in fine print, on the commission's website is remarkable. As a comparison, the webpages of the White House, the House of Representatives, the Senate, and USA.gov contain no similar declarations; nor do the DOJ and Treasury websites.
Regarding ethics, the EU commissioner's code of conduct requires that commissioners exercise independence, maintain confidentiality, and avoid conflicts of interest.23 Regarding transparency in meetings between EU agency members who may act in an adjudicative or regulatory capacity and parties affected by those proceedings, those aspirations have been codified by a commission decision that notes that all meetings involving high-level EU officials and lobbyists or other interested representatives must be published online within two weeks of their occurrence.24 There is, however, an exception for meetings on state aid procedures, which explains why the Cook-Vestager meeting was never disclosed on Vestager's agenda. Beyond a general concern about inadvertently influencing the financial markets, the rationale for that exception is unclear, and there is no explanation in the commission decision. One wonders if that kind of exception should remain valid when the press has already reported the meeting, such as in the Cook-Vestager case. Despite that notable exception and whatever conclusions one may draw from its existence, much of the legislation surrounding transparency and ethical obligations has been enacted in the past 10 years, a time when the European Union has been facing growing pains. I would argue that the principal purpose of those measures has not been to increase administrative efficiency or prevent bad practices, but rather to bolster the legitimacy and public perception of the EU.
In addition to general concerns about transparency and ethics in political institutions, the EU General Court, noting the adversarial nature of its own proceedings, has prohibited ex parte communication.25 The EU General Court is particularly relevant in the context of state aid investigations because it is the institution that judicially reviews commission decisions, which may ultimately be appealed to the Court of Justice of the European Union.26
It obviously does not follow that simply because the General Court has jurisdiction to hear a state aid appeal, its rules should also apply to the commission and the Competition Directorate during an investigation. Rather, given the aspirational and procedural similarities between U.S. and European institutions regarding ex parte meetings, it would be unconvincing to argue that meetings such as the one between Cook and Vestager are justified in the EU as a result of differing legal traditions and cultures. Further, even though the state aid investigation is nominally undertaken by executive agencies, the fact that the commission is acting in a quasi-judicial capacity means it should take greater care before meeting privately with an interested party -- particularly when that interested party is both a household name and the publicly traded company with the world's highest market capitalization.
What is the harm that could be avoided by eliminating ex parte communications between interested parties and the commission in state aid investigations? The answer is not immediately obvious. From a U.S. perspective, Apple shareholders are happy because the company's CEO is fighting to ensure that Apple's interests are represented before the commission. The U.S. government would likely be pleased if advocacy by Apple decreased the chance of the commission finding illegal state aid, which would diminish the likelihood of having creditable foreign taxes in Apple's case.
It is also plausible that the EU government views the communication between Apple and the commission as positive. Unlike the United States, the EU does not use a revolving door system for staffing executive and administrative agency positions. The result is that the officials determining whether Ireland, through its revenue rulings, provided illegal state aid to Apple might not fully appreciate the practical business reasons for entering into relationships like the ones being investigated. If Cook's meeting gives the commission the perspective of MNEs operating in Europe, it could be viewed as an essential part of obtaining the most comprehensive understanding of the situation and thus instrumental to arriving at a fair result.
But even if Apple shareholders, the American people generally, and the U.S. and EU governments view the meeting between Cook and Vestager as positive, it is possible that the European population does not. To best understand that viewpoint, it is perhaps easiest to reverse the situation and imagine how U.S. citizens would react if the press reported what was essentially a private meeting between the management of a powerful EU multinational and U.S. government officials during an ongoing U.S. investigation. I suspect most Americans would find that situation suspicious.
The main reason the meeting between Cook and Vestager arouses suspicion is because there are other, more transparent ways for Apple to share its viewpoint with the commission. The regulations governing state aid investigations provide a mechanism through which interested parties can submit comments directly to the commission.27 Further, the regulations also allow the commission to request information directly from the beneficiary of alleged state aid, so long as the member state that granted that alleged aid is informed of the request and is given an opportunity to comment on the information provided by the beneficiary.28
Taken together, those two mechanisms would seem to eliminate the need for any kind of personal communication between the beneficiary company and the commission. Indeed, it would seem that the only purpose for meeting privately would be to communicate the kind of information that cannot be put in writing out of fear of it being disclosed to the public. One can imagine Apple issuing veiled threats regarding the removal of jobs from the EU or promising future EU investment, such as the recently announced research center in Italy,29 to influence the outcome of the investigation.
Perhaps my concerns about propriety are misplaced. In the Ireland state aid investigation, norms of protocol and civility seem to have been largely discarded. As mentioned, members of both the executive and legislative branches of the U.S. government have alleged that the commission's investigation is discriminatory and politically motivated. Vestager has responded by publishing editorial articles in U.S. media.30 The commissioner frames the debate as one about companies not paying their fair share of tax, instead of discussing the thornier substantive issues of legal certainty and retroactivity that the state aid investigations present.
Given that increasing and politically motivated rancor, one could argue that the strict adherence to a protocol against ex parte meetings would be a pointless gesture unsuited to reality. I disagree with that conclusion. I do, however, acknowledge that in this case, the nonadherence to a prohibition against ex parte communications is likely more damaging for the commission than it is for U.S. interests.
Assuming the commission finds the benefits given to Apple through the Irish rulings constitute illegal state aid, it could have a legal basis for not requiring repayment from Apple. Under EU regulations, the recovery of state aid is not required if it would infringe on general principles of EU law, such as the legitimate expectations of the beneficiaries or the maintenance of legal certainty.31 Vestager has said that any penalties against Apple would not be retroactive, arguing that the application of existing EU law to past years is different than applying a changed law to past years.32
The rebuttal to her assertion is that the distinction between whether the law was actually changed is semantic. The fact remains that Apple had a legitimate expectation of certainty in its dealings with Ireland, a sovereign state. Any after-the-fact modification to the application of those laws, regardless whether the laws themselves are actually changed, accordingly has the effect of being retroactive.
Given the intense political pressure from the United States, the commission might choose to adopt the restrictions imposed by EU general legal principles to get the best of both worlds. By finding illegal state aid, the commission can send a message to Ireland and other EU member states that adopted what some consider tax regimes that were overly generous to MNEs. That message, combined with the measures put in place by the OECD's base erosion and profit-shifting project, could give member states pause when they consider whether to continue to engage in similar behavior.
Relying on the general principles of EU law will also allow the commission to defuse political tensions with the United States by not requiring Apple to repay taxes, while simultaneously permitting the commission to save face by pointing to a conceptual rationale for not enforcing its decision.
But should the commission come to that conclusion, I would expect adverse reactions from EU popular media and citizens groups because of the perception of an unfair advantage to Apple. The public outcry following the U.K.'s tax settlement with Google earlier this year provides a good example of what can happen when the public believes that an EU member state is giving U.S.-based multinationals an unfair advantage.33 In addition to general calls for transparency and disclosure, there was a focus on whether members of the Chancellor of the Exchequer's office met with representatives of Google or the U.K. tax authorities before the settlement was made public, the implication being that ex parte meetings would have had undue influence on the outcome of the settlement agreement.34 In light of that precedent, it seems reasonable to assume that, should the commission issue a decision favorable to Apple, the private meeting between Cook and Vestager would be a focal point in any attempt to characterize the decision as the manipulation of EU institutions by U.S. business interests.
Following the LuxLeaks and Panama Papers scandals, there is a general popular belief that collusion exists between government bodies and wealthy taxpayers -- whether individuals or MNEs -- and that any form of offshore planning is therefore indicative of cheating and abuse. Viewed in that context, an off-the-record meeting between the head of an international investigative body and the leader of one of the world's most powerful corporations seems severely misguided.
The commission is a sophisticated actor and should know better. It seems clear that a private meeting between Cook and Vestager would damage the public perception of the commission's legitimacy and impair the commission's political capacity to operate. Apple had a right to make written submissions to the commission, and the commission had a corresponding right to ask Apple directly for further information about its relationship and dealings with Ireland. By taking a shortcut around those formal procedures, Vestager weakened the institutions responsible for the administration of justice.
1 Stephanie Soong Johnston, "Apple CEO Meets With EU's Vestager as Ireland Defends Tax System," Tax Notes Int'l, Feb. 1, 2016, p. 410; and Christian Oliver, "Apple's Cook Lobbies EU Antitrust Chief Over Irish Back Taxes," Financial Times, Jan. 21, 2016.
2 J.P. Finet, "Commission's Apple Ruling Expected After Irish Election," Tax Notes Int'l, Jan. 11, 2016, p. 124.
3 William Hoke, "Apple, Amazon Decisions Won't Come Soon, Vestager Says," Tax Notes Int'l, Mar. 14, 2016, p. 921.
4 February 22 comments by Karl Soukup, director, EU Directorate-General for Competition. For a general review of Soukup's comments, see Ryan Finley and Alexander Lewis, "EU Official Stands Ground on State Aid Rules," Tax Notes Int'l, Feb. 29, 2016, p. 725. See also Allison Christians, "Friends With Tax Benefits: Apple's Cautionary Tale," Tax Notes Int'l, June 15, 2015, p. 1031 (noting the timing of and positing a link between the Senate hearings and the commission's Irish state aid investigation).
5 European Commission release on state aid investigation into transfer pricing arrangements on corporate taxation of Apple (Ireland), Starbucks (Netherlands), and Fiat Finance and Trade (Luxembourg) (June 11, 2014).
6 European Commission complaint to Ireland to re: state aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) -- Ireland alleged aid to Apple (June 11, 2014).
7 Apple's Form 10-Q for the Fiscal Quarter Ended March 28, 2015, at n.5.
8 Paul O'Donoghue, "Apple Could Be Liable for $19bn Says JP Morgan," Irish Independent, Sept. 5, 2015.
9 State Aid SA.38373 (2014/C) (ex 2014/NN), "Alleged Aid to Apple: Invitation to Submit Comments Pursuant to Article 108(2) of the Treaty on the Functioning of the European Union," 2014/C 369/04l Official Journal of the European Union, C 369/22 (Oct. 17, 2014).
10 Tom Fairless, "EU's Vestager Says Governments Should Close Corporate Tax Loopholes," The Wall Street Journal, Dec. 15, 2015.
12See Christians, supra note 4. See also Amanda Athanasiou, "The Great State Aid Debate," Tax Notes Int'l, Apr. 11, 2016, p. 119 (quoting Kleinbard: "The right way to think about these cases from an American perspective is not that the European Union, through the medium of the European Commission, is imposing new tax rules or new definitions of transfer pricing, it's that these are sham transactions, in which there is no effort made to analyze or rationally tax income arising in the relevant member state").
13 Finet, "EU Investigating McDonald's Luxembourg Rulings," Tax Notes Int'l, Dec. 7, 2015, p. 798.
14 Itai Grinberg, "A Constructive U.S. Counter to EU State Aid Cases," Tax Notes Int'l, Jan. 11, 2016, p. 167.
15See, e.g., In State ex rel. Rockwell v. State Board of Education, 213 Minn. 184 (Minn. 1942); Hoover Motor Exp. Co. v. Railroad & Public Utilities Commission, 195 Tenn. 593 (Tenn. 1953); and Stratton v. Railroad Commission of California, 186 Calif. 119 (Cal. 1921).
16See, e.g., 19 USC section 1677f(a)(3); 13 CFR section 207.5; and International Trade Administration policy statement regarding issuance of ex parte memoranda (Feb. 13, 2001).
17 WTO, Dispute Settlement Understanding, Annex 2, articles 1(2) ("The reports of panels shall be drafted without the presence of the parties to the dispute in the light of the information provided and the statements made") and 18(1) ("There shall be no ex parte communications with the panel or Appellate Body concerning matters under consideration by the panel or Appellate Body").
18See Model Rules of Professional Conduct, rule 3.5.
19 Code of Conduct for U.S. Judges, canon 2.
20 IRS Restructuring and Reform Act of 1998.
22See http://ec.europa.eu/about/index_en.htm (noting that "the European Union's activities today affect millions of European citizens' lives. The decisions affecting them must be taken as openly as possible").
23 EU Commissioner's Code of Conduct, C(2011) 2904 final (Apr. 20, 2011).
24 Commission decision on the publication of information on meetings held between members of the Commission and organizations or self-employed individuals (Nov. 26, 2014).
25 Rules of Procedure of the General Court, article 64.
26 Apple, as an affected entity, could either join an appeal by the Irish government as an intervenor or begin a separate appeal against any European Commission appeal under article 263(4) of the Treaty on the Functioning of the European Union.
27 EC Council Regulation 659/1999, article 20.
28 EU Council Regulation 734/2013, preamble (para. 4), article 6a.
29 Apple release on opening Europe's first iOS app development center in Italy (Jan. 21, 2016).
30 Vestager, "No One Likes a Free Rider," The Huffington Post, Apr. 7, 2016.
31 EC Council Regulation 659/1999, article 14.
32 Teri Sprackland, "Vestager Denies Retroactive Nature of EU State Aid Decisions," Tax Notes Int'l, Apr. 18, 2016, p. 233.
33See Johnston and Lewis, "Google's U.K. Tax Deal Sparks Controversy," Tax Notes Int'l, Feb. 1, 2016, p. 391.
34 Svenja O'Donnell, "McDonnell Presses Osborne Over Google's 'Derisory' U.K. Tax Deal," Bloomberg (Jan. 26, 2016).
END OF FOOTNOTES