Lessons from the State aid cases – anticipating the impact on your business
In August 2016, the European Commission adopted a decision holding that tax rulings issued by Ireland had given Apple a benefit of approximately €13bn in illegal State aid. This followed earlier decisions in which the Commission deemed that a Netherlands tax ruling for Starbucks, a Luxembourg tax ruling for Fiat Finance and Trade and a Belgian excess profits scheme all constituted illegal State aid. Further investigations, notably in relation to Luxembourg tax rulings regarding Amazon, Engie and McDonald’s, are pending.
Decisions that tax rulings may be illegal under State aid rules came as a surprise to many. The fact that the illegality in question could be viewed as operating retroactively, and that the alleged benefit would have to be repaid in full, has made this a story of global interest.
In the post-financial crisis world, in which individuals have been exposed to austerity measures, public anger at perceived tax avoidance by multinationals has intensified. Some view the Commission’s actions as a response to, and acknowledgement of, that anger.
Critics argue the Commission is using State aid enforcement as a means of pushing its political goal of tax harmonisation across the EU. Ultimately, however, the scope of the Commission’s powers in this area will be decided by the European courts. In the meantime, businesses will want to make sure that the approach they are taking is not going to fall foul of the Commission’s position.
The story so far
The State aid cases the Commission has brought so far combine a number of common themes. As a reminder, the basic concept of State aid requires there to be aid granted by a member state through State resources, in any form whatsoever, that distorts or threatens to distort competition, favours certain undertakings or the production of certain goods, and affects trade between member states.
The Commission argues, in the fiscal State aid cases, that the tax rulings member states issue grant an advantage (since, in the Commission’s view, they allow for a lower tax bill than should be the case). These rulings favour the individual company with whom they are agreed (since these companies are deemed to pay lower tax than comparable companies that do not have tax rulings). Those companies in receipt of a tax ruling that is viewed as giving a selective advantage are therefore seen as recipients of illegal State aid.
The Commission insists that it is not trying to police tax harmonisation – it is not suggesting the corporate tax rate should be the same in all EU member states – but the alleged effect is to harmonise corporate tax assessments on an EU-wide level. The Commission sees State aid as a tool it can use alongside the ongoing legislative reform at the EU level to fight harmful tax practices, arguing that if black letter tax laws were applied fairly to all companies, there would be no State aid.
Multinationals argue that, as a matter of good tax governance, they want to avoid disputes with tax authorities. Therefore, taxpayers and tax authorities alike prefer upfront certainty in the form of tax rulings, for example in relation to profit allocation between related companies operating across borders. The Commission acknowledges this, although the current challenge for businesses is the relative lack of guidance on how to ensure that tax rulings are compliant with EU laws.
In relation to transfer pricing, the Commission claims only to be examining ‘outliers’ – cases where there is a manifest breach of an EU arm’s length principle. There is limited guidance on this principle, although the Commission states that a transfer pricing arrangement that complies with the arm’s length principle as set out in the OECD guidelines is ‘unlikely’ to give rise to State aid. This has given rise to concerns about lack of legal certainty.
Many argue that this uncertainty is compounded by wider political pressures, illustrated by suggestions that the Commission is focusing on so-called ‘stateless income’ (income that is not subject to current tax by reason of a mismatch in national tax rules, often due to rules in US tax law).
Practical implications and steps to reduce risk
Tax rulings have never been simple. Companies seeking to reduce risk should ensure that any tax ruling, such as on transfer pricing arrangements, can be justified not only under the domestic laws of the country where the ruling is obtained, but also under international guidance.
Some practical steps can be taken:
- first, companies should investigate their current tax arrangements and in particular assess whether they have any tax rulings and/or tax planning structures in European countries. They should identify whether these rulings/arrangements are similar to the ones being currently investigated or are likely to be of interest to the Commission as so-called ‘outliers’. Any ‘stateless income’, although arguably not relevant for State aid purposes, may well be a trigger for the Commission to investigate;
- second, any transfer pricing arrangements currently in place should be re-examined and the underlying supporting analysis should be tested to see if it would withstand further scrutiny; and
- third, if any problems are discovered, companies should determine whether the structure or tax ruling should be changed or terminated. Although terminating the structure is not a safe harbour – as the Commission might still argue the ruling constituted illegal State aid during the years it was in effect – it would limit the potential recovery amount going forward.
Finally, companies may want to work with local national tax authorities to seek certainty in relation to their tax arrangements. This approach may also include encouraging lobbying at national and EU levels to strive for that certainty.
From a broader perspective, the Commission’s enforcement action in the State aid taxation cases could increase uncertainty in other areas of taxation. The Commission has broadened its investigation from just transfer pricing arrangements in relation to McDonald’s (questioning Luxembourg’s interpretation of the US–Lux double tax treaty) and Engie (financial transactions between related companies being treated both as debt and as equity). Moreover, investigations may not be limited to tax rulings; also tax settlements or de facto acceptance by tax authorities of certain tax positions taken by multinationals may be investigated.
Ultimately, it will be for the European courts to decide the scope of the Commission’s powers in this area. However, pending any such development, member state decisions specific to an individual company will be subject to some State aid uncertainty.
Many question whether the Commission’s interpretation of State aid law around tax rulings is impinging on national sovereignty. Ultimately, the courts will provide the checks and balances that are needed for these kinds of situation.
Andreas von Bonin, Partner, Brussels
One thing is clear, now even more than ever tax advisers have got to make sure they are giving clients advice which incorporates State aid (and what we would consider ‘political’) risks. Reliance by companies on their interpretation of black letter tax law is no longer sufficient.
Eelco van der Stok, Partner, Amsterdam
For a long time, State aid was not a weapon in the European Commission’s armoury that would raise major competence and sovereignty issues. The recent State aid tax ruling cases have completely changed that. Fundamental questions will need to be answered by the EU courts.
Onno Brouwer, Partner, Amsterdam and Brussels
Looking ahead in 2017
In 2017, companies will need to consider:
- areas of uncertainty: the appeals against the completed State aid decisions are unlikely to be ruled upon until 2018 at the earliest. And the Commission claims to have further cases in the pipeline. As such, 2017 will continue to see uncertainty. We are already seeing a shift from tax rulings to relying on opinions or ‘soft’ comfort given by tax authorities, neither of which gives full certainty;
- US reaction: with a new administration in the US, and given that any State aid recovery from US multinationals means that US corporate taxes that should be paid to the US Treasury are instead being paid to European governments, there is a possibility that the US will try to intervene in the (political) sphere. Also, the new administration may facilitate repatriation of offshore profits back to the US, which may mitigate State aid or recovery risks. And although at the moment unlikely, there are legislative tools in the US to retaliate with punitive measures on European corporates in the US;
- new tax claims: some governments in Europe believe they have lost out on tax revenues as a result of the allegedly unfair tax deals agreed between corporates and countries such as Ireland, the Netherlands and Luxembourg. Countries (such as the UK, France and Germany) with large volumes of ‘sales’ that received relatively low amounts of corporate tax – as corporate taxes, contrary to VAT, are not due where the sales are realised, but where the value is added – are likely to come under public and media pressure to pursue new claims for back taxes; and
- ongoing legislative reforms: in 2017 and beyond, we will see further implementation of the base erosion and profit shifting (BEPS) recommendations, including the European Anti-Tax Avoidance Directive (ATAD) directives. The Commission has also reproposed a European Common Consolidated Corporate Tax Base (CCCTB), which has the potential to impact the GDP of many member states and furthers the Commission’s aim of taxation being paid where sales are realised.