On 24 September 2019, the General Court (the "Court") upheld the European Commission's ("Commission") ruling ordering Luxembourg to recover EUR 23.1 million from Fiat and annulled the Commission's ruling ordering the Netherlands to recover EUR 25.7 million from Starbucks. The Commission had found in October 2015 that certain tax rulings issued by the Member States in question on the transfer pricing applicable to intra-group transactions constituted unlawful state aid.
More specifically, the Court found that:
- While direct taxation falls within the competence of Member States, the Commission was entitled to consider whether the rulings were consistent with the EU state aid rules.
- The Commission was permitted to use the arm's length principle as a tool to assess whether the transfer pricing rulings conferred a selective advantage on Fiat and Starbucks.
- In Fiat, the Court rejected the applicants' arguments and upheld the Commission's assessment that the tax ruling granted Fiat a selective advantage by reducing its tax burden in comparison with the normal rules of taxation in Luxembourg law for arrangements between independent (non-group) companies.
- In Starbucks, the Court annulled the Commission's decision on the grounds that it had failed to demonstrate that the tax ruling conferred an advantage within the meaning of state aid rules, on Starbucks.
Although the outcome for the Commission was clearly mixed, the Court is broadly supportive of the Commission's approach in its state aid investigations into tax rulings, particularly in relation to the use of the arm's length principle to assess if a transfer pricing ruling conferred a selective advantage to a group of companies. This is likely to embolden the Commission in its approach to state aid taxation cases, despite recent cases where the Court has annulled the Commission’s decisions.
The Commission is likely to rely on the Court's observations around the arm's length principle in its ongoing investigations concerning tax rulings issued by the Netherlands in favour of IKEA and Nike and by Luxembourg in favour of Huhtamäki. However, the Court’s decision in Starbucks that the Commission failed to demonstrate that an advantage was granted will provide some ammunition for taxpayers in the ongoing cases, when it comes to the standard of proof that the Commission must follow.
Affected parties have two months and ten days in which to appeal the judgments to the Court of Justice (“CJEU”). While Fiat is likely to challenge the decision, it remains to be seen whether the Commission will simply reopen its investigation into Starbucks and/or appeal the Court's decision. The Commission has recently appealed several decisions of the Court annulling its state aid decisions, including the recent judgment annulling its decision on the aid scheme nature of the Belgian excess profit rulings.
The recent state aid investigations by the Commission should be seen against the backdrop of the wider initiatives at an EU and global (G20/OECD) level addressing perceived tax avoidance and harmful tax competition. As part of these initiatives, we have seen the adoption of a Directive providing for the automatic exchange of cross-border tax rulings since 2017, the Anti-Tax Avoidance Directives (ATAD) and the Directive on the mandatory disclosure of potentially aggressive tax planning arrangements by intermediaries from mid-2020 onwards (DAC6). The information made available and exchanged via these channels may in turn lead to further state aid investigations.
Looking more broadly at developments in the international tax sphere, at an OECD/G20 level, the work on developing a consensus solution to the tax challenges arising from the digitalisation of the economy (BEPS 2.0) seems to be advancing rapidly and may result in a (partial) overhaul of some fundamental taxation principles, such as the arm’s length principle.
It should also be noted that there have been certain changes to the Dutch tax regime and ruling practice based on the broader debate around the OECD base erosion and profit shifting (BEPS) and EU tax-avoidance measures. Similarly, Luxembourg has enacted a law to clarify the concept of the arm's length principle in line with the 2010 OECD Model Tax Convention. Following discussion with the Commission's competition officials, the Luxembourg tax authorities have also issued a circular to reshape the transfer pricing framework for companies carrying out intra-group financing activities and to provide guidance in terms of substance and requirements in line with the OECD Guidelines.
The Court has overruled the Commission in other recent state aid cases. The Court annulled the Commission's decision that excess profit rulings granted by Belgium were part of an illegal state aid scheme and it also found that the Commission erred in classifying a Polish retail tax as constituting state aid. Most recently, it rejected the Commission's finding that a Hungarian tax based on turnover derived from advertisements in Hungary constituted state aid. However, the Fiat decision shows that the Court is not opposed in principle to the Commission's focus on state aid and taxation.
The Court’s findings in Fiat and Starbucks have implications for several ongoing cases. While the technical merits of each case are different (as evidenced by the differing decisions reached by the Court in Fiat and Starbucks), some of the underlying issues are similar. First, the concern that the Commission is infringing Member States’ right to determine domestic tax laws and effectively pushing for tax harmonisation via state aid rules. Second, whether the Commission is correct in arguing that the at arm’s length principle is inherent in Article 107 TFEU (and the concept of state aid) and automatically part of the national reference system. In addition, there is the question whether the Commission can (or should) use the OECD methodology to clarify the arm’s length principle.
These issues are of direct relevance in the ongoing appeals in front of the Court with respect to the Commission's recovery orders against Apple (EUR 13 billion in 2016) and Amazon (EUR 250 million in 2017). The Court heard the oral arguments in Apple on 17-18 September 2019 and is likely to hear others later in the year. The Commission has ongoing in-depth investigations concerning individual tax rulings granted by the Netherlands in favour of Inter IKEA and Nike and by Luxembourg in favour of Huhtamäki. Following the Court’s decision on the Belgian excess profit rulings on 14 February 2019, the Commission announced last week that it has opened in-depth investigations to assess whether individual excess profit rulings granted by Belgium to 39 multinational companies gave those companies an unfair advantage over their competitors.
Affected parties have two months and ten days in which to appeal to the CJEU. Fiat is likely to challenge the decision before the CJEU.
It remains to be seen whether the Commission will decide to appeal the Starbucks decision, reopen its investigation to correct the deficiencies in its assessment, or both in parallel (perhaps the most likely outcome). The Commission has recently appealed the Court's judgment on the Belgian excess profit rulings but has in addition opened a formal state aid investigation into each of the 39 multinationals that obtained an excess profit ruling. It may have additional incentive to appeal given the pending appeals at the Court and a significant number of ongoing investigations.
The Court's decisions have immediate effect, even if they are subject to appeal. Luxembourg and the Netherlands both implemented recovery proceedings in 2016, with the aid amounts placed in escrow. The amounts are likely to remain in escrow, at least for Fiat, until the appeals to the CJEU are determined.
The decisions show that the Court is willing to support the Commission in its state aid investigations into tax rulings in principle. This is likely to embolden the Commission in its approach to state aid taxation cases, despite a number of cases where the Court has annulled the Commission’s state aid decisions. The Court’s observations, particularly in relation to the arm's length principle and tax harmonisation, are broadly supportive of the Commission and are indicative of the approach that it is likely to take with respect to similar issues in ongoing appeals, including those relating to Apple and Amazon.
However, the Starbucks decision and the Court's recent decisions in other state aid cases shows that the Commission is not immune from challenge. It seems likely that the Court will interrogate carefully whether the Commission has demonstrated that the tax rulings in question actually confer an advantage on the beneficiary. This is likely to provide some practical ammunition to taxpayers in ongoing cases.
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