The European Commission (Commission) has adopted a decision on 21 October 2015 on the tax rulings – also referred to as “comfort letters” – granted by Luxembourg to Fiat Finance and Trade (FFT) and by The Netherlands to Starbucks. Rejecting the decisions of domestic authorities in Luxembourg and The Netherlands, the Commission concluded that these rulings artificially reduced the tax burdens for the two companies awarding them selective advantages, which constitute State aid.
A State aid under EU competition rules, is a State measure (decided and financed by the State) which grants a “selective advantage” that would not be available under normal market conditions and that is likely to distort competition and affect trade between Member States. The Commission has the exclusive authority to declare if notified State aid is compatible with the EU internal market. Should Member states fail to notify State aid, then the Commission would deem them unlawful and national courts must order their recovery.
Over the last two years, the European Commission – calling upon its prerogative in State aid matters – has been conducting inquiries into certain tax practices such as transfer pricing or advantageous taxation of profits using certain IP rights or licenses within the same group. These tax practices and measures are widespread and well-established in certain Member States. When taking on the role of EU Commissioner for Competition in November 2014, Ms. Verstager declared her intention to make swift progress in the investigation of four particular cases: Amazon, FFT, Starbucks and Apple. Quickly thereafter, the Commission announced that it would request from all Member States lists of all companies that have benefited from tax rulings between 2010 and 2013.
In essence, the Commission ruled that the complex intra-group transfer pricing mechanisms and license payment agreement involved in two of the cases at issue could not be considered as compliant with the “arm’s length” principle. In one case complex group transfers shifted taxable profits in a manner the Commission called ‘unjustifiable’. In the other case, the Commission concluded that royalties to another group entity for the use of intellectual property did not reflect market value and that the transfer price paid to a subsidiary in Switzerland for inputs were excessive. In both cases the domestic authorities had approved the business arrangements. The ruling will cause a lot of disturbances and create an unpredictable business environment for multinationals who have relied in good faith on the lawful decision of a national authority. The Commission’s decisions will certainly be contested before the General Court of the European Union. These annulment proceedings are not suspensory and the recovery process will trigger a number of issues which may lead national courts to make preliminary references to the Court of Justice, thereby allowing for some further legal guidance.
Are All Tax Rulings At Risk?
No, the Commission considers that the practice of tax ruling is normal and justified by the need for legal certainty. Only rulings that grant a “selective advantage”, such as a financial benefit under the form of advantageous tax rulings, are State aid and invalid if not notified or found incompatible. That said, it is clear that multinationals with complex corporate tax structuring and aggressive transfer pricing mechanisms will come under higher scrutiny.
The Commission ordered both Luxembourg and The Netherlands to recover the unpaid tax in order to restore ‘equal treatment’ with other companies in similar situations. The Commission estimates that in each case the respective governments could recover between 20 and 30 million euros. Hundreds of companies are at risk of being investigated. However, the Commission does not currently have the resources to do this. After Luxembourg and the Netherlands, the Commission will certainly adopt decisions in the case of Ireland and in the case of Belgium (involving a specific excess profits scheme). The Commission also announced that other Member States may be investigated as well, and the Commission may also define common rules and guidelines following the precedents set by these cases.
The tax ruling mechanism itself is not undermined, but those tax rulings are at risk if they provide a significant advantage to specific companies or group of companies in a manner that could distort the EU internal market. Multinationals that have operations in Europe and have benefited from tax rulings in any Member State will need to carefully review their special tax provisions and corporate tax structures. This will require specialised State aid advice.