Apple. Photo: Songquan Deng/Shutterstock.com

In what is being billed as the world's largest tax case, Apple Inc. appeared before the European Union's General Court in Luxembourg on Tuesday to appeal a 2016 finding by the European Commission that the company owes €13 billion ($14.4 billion) in taxes.

During the first day of the two-day hearing, Apple lawyer Daniel Beard dismissed the Commission's arguments that the company's branches in Ireland should be liable for taxes on all sales outside the U.S., telling the court the claim "defies reality and common sense", according to a report by Reuters.

The dispute over whether Apple has paid its fair share in taxes has taken on broader importance, as it is seen as a test of EU competition czar Margrethe Vestager's efforts to end what the Commission views as sweetheart tax deals for multinationals. Vestager, who has been nominated for a second term as competition chief, has also ruled against Starbucks, Amazon and Fiat, ordering them to pay back billions in taxes.

In the case currently on appeal, the Commission contends that all of Apple's profits from its sales outside the U.S. should have been attributed to the company's two branches in Ireland, where the company is based. Ireland, which has benefited from investment by multinational companies attracted by low tax rates, is also challenging the Commission's decision.

According to news reports, Apple argued on day one of the hearing, which is expected to continue on Wednesday, that key intellectual property rights for Apple's products were developed in the U.S. – not in Ireland – so the company's branches in Ireland could not be responsible for generating almost all of Apple's profits outside the U.S.

The Commission argues that the low tax rate Apple pays on its activities in Ireland, which was estimated at 0.005% in 2014, is illegal government aid to the company.

The 28-member European Union has strict rules on the amount of "state" or government aid that can be used to attract investment or convince companies to maintain operations in a particular country. These rules are designed to prevent richer EU countries from using their public budgets to gain unfair advantages in the EU's single market.

The Commission is arguing that Apple's tax treatment in Ireland was a sweetheart deal with Irish tax authorities, reached to convince the company to base its operations there.

The European Commission is responsible for policing state aid across all of the bloc's 28 members, so it issued the order to the Irish government to collect the €13 billion – even though Dublin is defending its treatment of Apple.

The decision against Apple was one of a series in which Vestager ruled against multinationals, saying they had received sweetheart tax deals that distort competition and let companies play one EU country against another to get the most favourable tax treatment.

Vestager faces a series of legal challenges of her decisions in the coming months, as the EU's courts will rule on appeals against several orders. A judgment in the Apple tax case is expected in the next few months, while appeals by Fiat and Starbucks are due next month.

The court's ruling in the Apple case will not be the final word, however. Whoever wins, the case is likely to be appealed to the EU's highest court, the European Court of Justice. A decision there would not be handed down for several years.

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