Harmen van Dam, partner and tax adviser, was one of the speakers at TP Minds. He talked about the EU State Aid controversies and the way the European Commission (EC)’s position in the State Aid cases may impact businesses. In the Starbucks, Apple and Amazon State Aid cases transfer pricing and State Aid cross paths. In all three cases the EC looked at how the arm’s length principle is applied in determining the remuneration or profit allocated to the entity under investigation. Harmen focused on how the EC’s thinking on transfer pricing has developed over the past years.
Key messages – evolution in the European Commissions’ thinking
One of the key messages was that the EC’s application of the arm’s length principle has changed over the past years. Where in the Starbucks case (2015) the EC looked at whether or not the Netherlands selectively applied the arm’s length standard included in Dutch law, the EC moved away from domestic legislation as a reference framework in the Apple case. In the Apple case the EC did not directly apply the arm’s length principle included in the OECD guidelines or domestic legislation. Instead, the EC applied its own interpretation of the arm’s length principle, with reference to the State Aid article included in article 107 (1) of the Treaty on the Functioning of the European Union.
Second, the EC has changed its approach towards risk allocation. The EC initially seemed to accept contractual risk allocation and the legal set-up of a structure. In the Amazon case (2017) the EC still claimed to respect the legal set-up but in effect allocated nearly all profits to a different entity. The EC focused on the way parties were perceived to manage and control risks, rather than respecting the legal structure and contractual risk allocation.
Impact on businesses
Harmen advised the transfer pricing professionals attending the conference to carefully monitor and review their internal transfer pricing position. In light of the recent State Aid developments, you need to make sure that a multinational group’s structure is well documented and has aligned its people functions. As part of a longer term transfer pricing strategy, restructuring could be opportune. Complying with the 2017 OECD Transfer Pricing Guidelines, for example by ensuring that risks are allocated in line with functions, should minimize the State Aid risk going forward.