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Commission to extend state aid investigation into more transfer pricing agreements

The European Commission is looking into advance pricing agreements (APAs) given to financing companies and other businesses to see if they constitute illegal state aid, the MNE Tax news site has reported. 07 Apr 2016

EU competition commissioner Margrethe Vestager told the European Parliament's TAXE 2 committee that her office has reviewed 1,000 tax rulings over the past few years, of which around 600 were related to 'Lux Leaks', MNE Tax reported.

The 'Lux Leaks' revelations in late 2014 showed that tax rulings given to international companies by Luxembourg allowed over 300 companies to reduce their tax bills.

Most of the Lux Leaks rulings are 'confirmatory', Vestager told the committee. These are simple rulings that do not contain any calculation of profit and are less likely to raise state aid concerns.

However, Vestager said: "We have also found examples  …  where rulings seem to be used in a way that could favour particular companies or particular types of companies," MNE news reported.

One concern is about APAs issued to financing companies, common in the Lux Leaks materials, Vestager said, according to the news site.

"Their only role is to borrow money from one company in the group and lend it to another company in the same group, and we see that there is a risk that this is being used to reduce the taxable profits," she said.

The Commission is also investigating some 100 APAs that look at only one side of the transaction, MNE Tax said.

"They decide on an appropriate profit on the activities of just one company of the group. As for the profit that remains, it may be taxed somewhere else or it may not be taxed at all, and this creates a potential for loopholes. We will be looking into these issues in detail in the months to come," Vestager said, according to MNE Tax.

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-Law.com said: "Where rulings result in profit that is not taxed anywhere, this is likely to come within the scope of work being done by the OECD in its BEPS project. The interaction between the work of the Commission and the OECD is difficult to untangle, and is causing a lot of uncertainty for businesses."

The OECD's (Organisation for Economic Co-operation and Development) BEPS (base erosion profit shifting) project aims to counter the use of tax planning by multinational businesses to exploit gaps and mismatches in international tax rules by artificially shifting profits to low or no-tax locations.

The Commission will publish a working paper outlining what it has learned from its examination of the 1,000 tax rulings, along with an impact assessment on further measures to increase public transparency of country-by-country reports, MNE Tax said.

"There is still no sign of the Apple decision, which could give rise to a material tax liability for the company, and progress on other investigations is also slow. The US Treasury is also expressing strong concerns about the impact on US multinationals doing business in Europe," Self said.

The Commission has been investigating Apple since 2014, when it said that APAs agreed between the Irish tax authorities and Apple may have given the company unfair advantages incompatible with EU state aid laws.

In December, the Commission said that it would formally investigate the tax arrangement granted to McDonalds by Luxembourg. It has previously said that tax rulings issued by the Netherlands to Starbucks and by Luxembourg to Fiat Finance and Trade constituted selective tax advantages illegal under EU state aid rules, and that the countries would have to recover €20 to €30 million from each company to claw back the benefits of the state aid received.

"The continuing uncertainty is making it difficult for businesses to have confidence in their tax position," Self said.  "Ultimately, certainty is a key ingredient in investment decisions."