Tax rulings granted to Apple, Amazon, Fiat, Starbucks and ENGIE have all been found by the European Commission to amount to unlawful state aid, and the countries which have given these rulings have been ordered to recover the aid from the companies concerned. To date, only McDonald’s has emerged from an investigation by the Commission with a finding that rulings given to it did not constitute state aid.
In the latest development, the EU General Court has annulled the Commission’s decision that a tax ruling given by Netherlands to Starbucks was unlawful state aid, but it has upheld a decision that a ruling given by Luxembourg to Fiat did constitute unlawful state aid.
The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether advantageous fiscal regimes or rulings given to particular companies would be prohibited under its state aid rules. These rules are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies, which are not available to all.
If the Commission rules that a member state has given unlawful state aid, it can require the member state to make any company pay back any unlawful reliefs granted, over a period usually covering up to ten years.
In October 2015, the Commission decided that rulings provided to Fiat by Luxembourg and Starbucks by the Netherlands constituted unlawful state aid and that the countries concerned would have to recover 20–30 million euros ($22–33 million) from each company to claw back the benefits of the state aid received. The Netherlands and Starbucks and Luxembourg and Fiat brought actions before the General Court for annulment of the Commission’s decisions.
In the Starbucks case, the Commission said an advance pricing agreement (APA) issued by the Netherlands in 2008 gave a selective advantage to Starbucks Manufacturing, a Dutch company, which had the effect of reducing its tax liability. The APA was calculated based on a “very substantial” royalty paid by Starbucks Manufacturing to a U.K.-based entity in the Starbucks group for coffee-roasting intellectual property.
In granting the APA the Netherlands tax authorities had accepted the transfer pricing methodology proposed in a transfer pricing report prepared by Starbucks. However, the Commission said that the method used (transactional net margin) did not provide arm’s length pricing and that a different method (comparable uncontrolled price) should have been used.
Starbucks and the Netherlands disputed the finding that the APA conferred a selective advantage on Starbucks Manufacturing. In addition to challenging the detailed findings of the Commission, they also argued that the Commission was not entitled to look at the application of the arm’s length principle to decide whether state aid had been given.
The General Court said that the Commission was entitled to use the arm’s length principle as a criterion for assessing the existence of state aid, but that although the Commission had criticized the transfer pricing methodology used, it had not demonstrated that this had resulted in an economic advantage for Starbucks.
The General Court stated that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction of the tax burden.
The Commission’s decision in Starbucks was controversial, as some thought it had crossed the line into interfering with the application by a member state of its own tax rules. As the Organisation for Economic Cooperation and Development (OECD) has admitted, “transfer pricing is not an exact science,” so there is no single correct answer.
The General Court’s decision is partly welcome news for corporates as it should give more certainty to those that have conducted a proper transfer pricing study and obtained an APA. It confirms that an APA cannot be challenged simply because the Commission thinks a different methodology should have been used.
In the Fiat case, the Commission said that a ruling issued by Luxembourg’s tax authorities on the calculation of the taxable basis in Luxembourg for the financing activities of Fiat Chrysler Finance Europe was unlawful state aid. The General Court upheld the Commission’s ruling. It found that the transfer pricing methodology was not properly applied and minimized Fiat’s remuneration.
The Court said the Commission was entitled to conclude that the tax ruling conferred a selective advantage on Fiat because it resulted in a lowering of Fiat’s tax liability as compared to the tax that it would have had to pay under Luxembourg tax law.
Although the Commission will be disappointed that the Starbucks ruling was overturned, both the Fiat and Starbucks decisions appear to confirm that the Commission’s approach to challenging special tax arrangements for multinational companies through the application of EU state aid law is valid and justified. The decisions confirm that the Commission is entitled to look into the application of the arm’s length rule to see whether it is being applied in a way which gives selective tax advantages.
Responding to the decisions, Margrethe Vestager, the European Commissioner for Competition, has reaffirmed the Commission’s intention to continue to look at aggressive tax planning measures under EU state aid rules to assess if they result in unlawful state aid.
The decisions can be appealed to the Court of Justice of the European Union but only on points of law. It is not yet clear whether they will be appealed.
The decisions will be relevant for other tax state aid cases which are proceeding. Appeals to the General Court are in progress in relation to rulings from Ireland given to Apple and rulings from Luxembourg to Amazon. The Commission is also in the process of investigating rulings issued by the Netherlands to Nike and IKEA and rulings from Luxembourg in relation to Huhtamäki.
Catherine Robins is a Partner with Pinsents Masons.
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