The EC has added 15 more countries to its investigation into individual tax rulings. The competition and tax law experts in our Brussels office explain what the impact will be and what steps businesses should be taking, in particular where the rulings amount to illegal State aid.
Taxpayers with rulings, particularly relating to transfer pricing, in any of the following 15 EU countries should confirm with their respective country's tax authority whether their ruling is included in the request list sent out on 8 June 2015: Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Lithuania, Portugal, Romania, Slovakia, Spain and Sweden.
The Commission has asked these countries to provide a substantial number of individual rulings and has powers to enforce its request. Upon receipt of the rulings it will review each of them to determine whether or not there are indications that the individual taxpayer received a special tax deal. If so, the Commission will commence an investigation at the end of which the taxpayer may have to repay unpaid taxes with compound interest for as far back as 10 years from when the investigation started.
If inclusion of their ruling in the Commission's request is confirmed, taxpayers should conduct a thorough risk assessment and consider options to defend at this early stage rather than entirely relying on their country to do that. But even if not included, we recommend a risk assessment in the wake of increased transparency of rulings in the EU.
Background and chronology
The tax ruling investigation started in June 2013 following media reports on certain multi-national corporations allegedly saving substantial amounts of tax based on favourable tax rulings in several EU countries. First requests for individual rulings went to Cyprus, Ireland, Luxembourg, Malta, the Netherlands and the UK.
A year later, in June 2014, the Commission formally started to charge countries with having granted rulings in violation of EU law. The first three were the Netherlands, Ireland and Luxembourg which the Commission considered may have violated EU State aid rules by granting favourable rulings to Starbucks, Apple, and Fiat Finance and Trade. In October 2014, Luxembourg was charged with having given Amazon such a ruling as well. These cases remain ongoing.
The Commission expanded its initial general investigation to cover all 28 EU countries in December 2014.
In February 2015, the Commission charged Belgium with operating its excess profit rulings system in violation of State aid rules, which if the State aid allegations were confirmed could lead to recovery, according to the Commission, from as many as 47 taxpayers that received rulings under this system.
Following a complaint, the Commission is also investigating whether McDonald's benefits from a Luxembourg ruling in violation of State aid rules. In addition, it continues to review individual rulings and requests additional information to assess whether they may fall foul of EU State aid rules. Recently, for instance, Luxembourg was requested to provide detailed information on a number of rulings that became public as part of Lux-Leaks affair.
The Commission's most recent request of 8 June 2015 to the above-mentioned 15 EU countries is the latest development in the Commission's investigation that seeks to determine whether taxpayers are receiving special tax deals based on their individual tax rulings. The Commission has asked these countries to provide a significant number of individual tax rulings for review. It stated in this context that at this stage there are no concerns that individual rulings in the following five countries have given taxpayers special tax deals: Bulgaria, Croatia, Greece, Latvia and Slovenia. The remaining two EU countries, Poland and Estonia, are being pursued for not having provided the initial information requested in December 2014.
Implications for taxpayers
Special tax deals included in rulings may fall foul of EU State aid rules. These rules prohibit EU countries from granting selective advantages to companies, including preferential taxation. Should the Commission find that a taxpayer paid lower taxes based on such a ruling in violation of the State aid rules, the taxpayer will very likely have to pay the difference plus compound interest. Such recovery can go as far back as 10 years from the start of the Commission's investigation, regardless of the national statute of limitations.
The Commission's investigation technically targets only the EU country that granted the individual ruling, but although ultimately the taxpayer may have to pay the bill (and amounts to be repaid with interest go into the country's budget), taxpayers do not have a seat at the table during the investigation. However, experience shows that it pays off to get involved as early as possible and to stay as close as possible to the national authorities to ensure that the country properly defends its rulings. There are multiple opportunities and ways for taxpayers to do so depending on the country in question and the stage of the procedure.
In a worst case scenario, if the Commission orders recovery of alleged tax benefits plus compound interest from the taxpayer, the taxpayer must challenge the Commission's decision in the EU's General Court in Luxembourg within two months and 10 days from official publication. Otherwise the recovery order becomes final and its illegality can no longer be challenged.
Outlook and next steps
Rulings that have caught the Commission's particular attention so far and run a high risk of being found to grant special tax treatment include the following:
- Those issued for unusually long (>5 years) or unlimited periods of time without periodic revision
- Those that seemed to have been negotiated
- Those that appeared not to have been backed up by proper transfer pricing studies
Final decisions in individual cases as well as on the Belgian excess profit ruling system remain pending. High-ranking Commission officials have indicated that decisions in the first individual cases could be adopted in the next few months. But it appears likely that these cases will be appealed. In this case, it will easily be another 2-5 years (in case of further appeal) before decisions become final. During this time the Commission will continue its investigation of rulings.
Taxpayers should thus prepare for a prolonged period of uncertainty and:
- review rulings received from EU tax authorities;
- assess the possible related State aid and recovery risk; and
- consider strategies for mitigation of risk and exposure to recovery.
This applies particularly in the 15 countries mentioned above and where the Commission has specifically requested the taxpayer's ruling. But not having been identified by the Commission in its most recent request does not ensure that a taxpayer's ruling will not be investigated at a later point in time. The Commission's March tax transparency proposals provide that EU countries will have to exchange information on individual tax rulings, including those granted in the past and still in force, on a regular basis between each other and with the Commission as early as from 2016.