The Commission’s letter publishing the reasons for its investigation of Apple’s advance pricing arrangements in Ireland this week (available here: http://ec.europa.eu/competition/state_aid/cases/253200/253200_1582634_87_2.pdf) has spawned much debate in the tax community. Indeed, it comes against the background of some serious activity with regard to reform of Transfer Pricing. It appears thus far however, that one particular element of the case has been overlooked, namely, the relevance of Al-Fayed (Fayed v Commissioners of Inland Revenue  SC 745).
This note will seek to give a background to the issues in Al-Fayed and how this might be relevant to the current Apple case. A detour through constitutional history, although not entirely necessary, provides a fascinating perspective to precede the analysis of Al-Fayed. Similarities likewise will be teased out briefly between the statutory scheme underpinning the Revenue authorities duties in both Ireland and the UK. Thereafter the issue of long-standing forward-looking agreements as arose in Al-Fayed will be analysed before finally examining the impact which that case may have on the current Apple issue.
Constitutional Background: The Gunpowder Plot & Catholic emancipation
In 1605, Guy Fawkes and others hatched the botched Gunpowder Plot to assassinate King James I. The ultimate goal of the scheme was to install a Catholic monarch, with religious tolerance having become unlikely under the reign of James I. 80 years and 2 kings later, a Catholic monarch was established with King James II. His reign was short-lived however as 3 years later his son-in-law William III of Orange invaded England on the request of the nobles. Thereafter, the Bill of Rights 1689 was passed which had the effect of curtailing the powers of the crown. Article 2 of this constitutional document reads as follows:
That the pretended Power of Dispensing with Laws or the Execution of Laws by Regall Authoritie as it hath beene assumed and exercised of late is illegall.
In other words, neither the Crown nor the executive has the power to exempt particular individuals or groups from the operation of an Act. At least as far back as 1689 in the UK accordingly, and against the backdrop of attempts at Catholic emancipation, it has been a constitutional principle that the executive does not possess a prima facie dispensing power.
It has been doubted elsewhere whether the Bill of Rights has effect in Ireland (Geoffrey Lock, ‘The Bill of Rights Act 1689’ (1989) 37(4) Political Studies 150), but nevertheless, this constitutional history provides an important framework within which the Revenue must operate. In the Republic of Ireland, the essential tenets of this principle are espoused by Article 28, which states that:
The executive power of the State shall…be exercised by or on the authority of the Government.
This renders the question of whether the Bill of Rights was imported into Ireland (by virtue of Article 73 of the 1922 Constitution (of the Irish Free State) and thereafter Article 50 of the 1937 Constitution (Bunreacht na hEireann)) as essentially redundant for our present purposes and thus relative constitutional symmetry with respect executive authority and the prohibition on dispensation has been established.
‘Care and management’ of taxes: Administrative Discretion
More importantly, however, Statutes of the United Kingdom must be read against the Bill of Rights. Accordingly, s. 13 of the Inland Revenue Regulation Act 1890 provides that the Revenue ‘shall collect and cause to be collected every part of inland revenue, and all money under their care and management’. In layman’s terms, this dictates that the Revenue is under a duty to collect the taxes which the legislature has prescribed to be due. Part 2 of S.I. No. 2/1923 – Revenue Commissioners Order, 1923 incorporated this section into Irish Law. On the converse, Article 2 of the UK Bill of Rights 1689 and/or Article 28 of the 1937 Irish Constitution likewise prevent the Revenue authorities in both jurisdictions from exercising a general dispensing power in favour of particular taxpayers.
Plainly, however, practical matters such as resource constraints and complexity in legislation ensure that neither Revenue authority is bound to this binary. An administrative discretion is necessarily and axiomatically inherent in the duty of the Revenue to collect all taxes due. To fail to acknowledge this would be to endorse a Diceyan view of the rule of law (see: Galligan, Discretionary Powers: A Legal Study of Official Discretion (Clarendon, Oxford, 1986)). Thus, when the Revenue authority is endowed with responsibility for the ‘care and management’ of taxes as occurs in both Ireland and the UK, an administrative discretion arises. In the UK, this concept has been dubbed ‘managerial discretion’ (R v IRC, ex parte National Federation of the Self-Employed and Small Business  AC 617, 636 (Lord Diplock))
Al-Fayed: The legality of forward-looking agreements
As the symmetries between the constitutional and statutory positions of the Irish and UK Revenue authorities have now been dealt with, it is now time to turn to the UK case of Al-Fayed.
The three Al-Fayed brothers were (and presumably still are!) wealthy Egyptian Businessmen who entered into a forward-looking agreement with the Revenue. This agreement concerned the level of taxes that would be paid by the brothers to the UK Revenue for prospective years. It was accepted that the three family members concerned would be subject to tax on foreign source income and capital gains on the remittance basis [para 4]. This being the case, appropriate arrangements could be put in place to avoid or minimise the charges [para 7]. To avoid the economic expense of actually putting such arrangements in place, the Fayeds negotiated with the Revenue forward-looking tax agreements in which the taxpayers would pay specified annual sums in respect of future years of assessment. The quid pro quo for the Revenue was that it would be incredibly costly to actually investigate the circumstances of the Fayeds and the Revenue would also face significant litigation costs if they were to challenge the affairs [para 12]. The Court ultimately held however that the agreement was outwith the ‘managerial discretion’ of the Revenue and thus ultra vires.
Several factors which drove this decision are relevant in terms of the Apple ruling, upon which I will shortly deliberate. First, even if the sum to be paid under an agreement between the Revenue and the taxpayer was a reasonable estimate of the taxpayers’ liability at the outset, it could not be taken as a measure of that liability throughout the period. The amounts involved could obviously change, as indeed could the provisions of the tax system. As such, the agreement would invoke a failure on the part of the Revenue to exercise its duty to collect taxes and thus its managerial discretion [para 74]. Further, the agreement contained no provision for termination or alteration on a material change in circumstances [para 80]. Second, when the agreement at hand was made, it was not based on any current information but had merely been updated from the figure which had been used in a previous agreement 12 years previously [para 79].
Al-Fayed accordingly serves as a lesson on the parameters of the administrative discretion which the Irish and UK Revenue authorities hold.
Apple and its current EC woes
The relevance with respect the current Apple case is in the parallel elements from Al-Fayed which were present in the 1991 and 2007 rulings which Apple obtained from the Irish Revenue Commissioners. The issue of State Aid ultimately hinges upon the Commission making out that Apple was subjected to selective benevolent treatment (Commission’s letter para ). If the Commission were to make out a case on the basis that the 1991 and 2007 rulings were contrary to Irish Law at the time, this criterion would likely be satisfied and this is where the Al-Fayed case becomes relevant, namely on the basis that the agreements were outwith the administrative discretion of the Revenue Commissioners. As noted in the Commission’s letter:
[T]reating taxpayers on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, particularly, where the exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria. [para 52]
The two factors outlined above in Al-Fayed appear from a reading of the Commission’s letter to be present in the Apple case. As to the first point, the Commission is doubtful as to whether the original ruling in 1991 was in fact based upon reasonable or commercial estimates:
[The Fact that] the taxable basis in the 1991 ruling was negotiated rather than substantiated by reference to comparable transactions…reinforces the idea… that a prudent independent market operator would not have accepted the remuneration [allocation] [para 58]
Furthermore, there does not appear to have been any amendment or review in light of any change of circumstance between 1991 and 2007, even if the initial agreement was commercially reasonable. The parallel with Al-Fayed is quite striking on this point:
[The 1991] ruling was applied by Apple for fifteen years without revision. Even if the initial agreement was considered to correspond to an arm’s length profit allocation, quod non, the open-ended duration of the 1991 ruling’s validity calls into question the appropriateness of the method agreed between Irish Revenue and Apple, given the possible changes to the economic environment and required remuneration levels [para 65]
As regards the second factor from Al-Fayed, the Commission has expressed misgivings about the 2007 agreement and whether it was based upon relevant, timely information:
[T]he profit allocation to the [relevant Apple subsidiary], agreed in the 2007 ruling, does not factor in the evolution of sales. In fact…the sales income of [the Apple subsidiary] increased by 415% over the three years 2009-2012 to USD 63.9 billion. For the same period, the operating costs as reflected by the taxable income (which represents around [8-18]% of operating costs of the branch according to the ruling of 2007) increased by [10-20]%… [T]he discrepancy between the sales growth and the growth of the Irish operating capacity, cannot be explained. [para 67] [My emphasis added]
On the basis of the above, there is a case to be made that there are parallels between Al-Fayed and the current Apple case. In both cases, there was either a failure, or lack of a provision, to review the agreement in light of changing circumstances. Similarly, the later agreement in both cases was based upon information which may not have been timely. It is necessary, however, to insert several caveats at this point. The first is obviously that Al-Fayed was a UK case and that the Apple case concerns Irish (and EU) law. As I have attempted to stress above however, there are symmetries between the constitutional and statutory laws in the jurisdictions. A much more important caveat is that to date, we have just seen one side of the argument. For instance, there may be more correspondence between the Revenue Commissioners and Apple between 1991 and 2007 than we are being shown and most definitely stronger reasons justifying the arrangements. It is important to remember in this respect that as soon as a boxer gets the first hit, his opponent immediately looks worse. But as we know, the fight does not end there.