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European Commission approach to EU tax rulings and state aid goes too far, says expert

The European Commission is checking whether governments apply a 'market-based price' when approving transactions between subsidiaries of multinational companies, European commissioner for competition Margrethe Vestager has said.06 Jun 2016

The measure is designed to identify possible illegal state aid, she said. 

Tax expert Andrew Scott of Pinsent Masons, the law firm behind Out-Law.com said that he would question whether the Commission is over-reaching its own powers in this, as there is "no state aid if a measure is in conformity with the general nature and logic of the tax system". 

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies. If the Commission rules that a country has given unlawful state aid, it can require the country to make any company pay back illegal reliefs granted over a period usually covering up to 10 years.

By the end of 2014 all EU countries were asked by the Commission to provide information about their tax ruling practice and a list of tax rulings issued in certain years. The Commission has examined more than 1,000 individual tax rulings. 

Vestager said that EU governments must consider the price that is used in calculations in order to make sure multinationals do not gain a "selective advantage" through moving their profits. 

"We have seen some examples of unrealistic transfer prices, without any sign that the authorities had a convincing reason to accept them. That's where state aid can be involved and where the Commission does have to act," Vestager said. 

Scott said: "It is clear that state aid applies to tax law but it is equally clear that there will be no state aid if a measure is in conformity with the general nature and logic of the tax system. The issue has to be determined by reference to the general legal rules actually applying in the jurisdiction concerned, not by reference to rules that the Commission believes should be applicable." 

"Obviously, if a jurisdiction requires intra-group transactions to be on arms’ length terms, then a ruling given to one party that is not within the arms’ length range could, in principle, constitute state aid. But it is not clear that EU law requires any more than that," he said.

The Commission treats profits as though transactions were between separate companies under "market conditions", Vestager said, but as the Commission is not a tax authority it is "not always easy to decide what the market price should be".

The Organisation for Economic Cooperation and Development's (OECD's) Transfer Pricing Guidelines set out five methods to approximate an arm’s length pricing of transactions between companies of the same corporate group. 

"What really matters from a state aid angle is that the transfer pricing methodology used to calculate the profits of a group leads to a reliable approximation of a market-based price. To see if that is the case for a particular ruling, you have to look at all the details. But our investigation shows that some methods are more often linked to aggressive tax planning than others," Vestager said. 

"For example, so-called 'one-sided’ methods don't even try to split a company’s profits between the countries that might have a claim to tax them. Instead, one country simply works out the taxable profit based on an indicator, such as operating expenses. But those figures can be a poor indicator of how successful a company is, so using them to set the taxable profit is only appropriate in a limited number of cases." she said.

In October 2015 the Commission decided that rulings issued by the Netherlands to Starbucks and Luxembourg to Fiat Finance and Trade constituted selective tax advantages that contravened EU state aid rules. The Commission said that the countries concerned would be required to recover €20 to €30 million from each company to claw back the benefits of the state aid received.

The commission is also investigating rulings given to Amazon and McDonald's by Luxembourg and rulings given to Apple by Ireland.

From 1 January 2017 EU member states will be required to exchange information automatically on advance cross-border tax rulings, as well as advance pricing arrangements. The Commission is developing a secure central directory where the information exchanged will be stored. The directory will be accessible to all member states and, where it is required for monitoring implementation of the directive, to the Commission.