With the recent decision re: Ireland state aid by the European Commission, the litigious stage now commences by Ireland, as the order has been provided to collect the state aid, with interest, from the multinational.
As the relevant rulings were not brought forward for approval upon their commencement by Ireland from the European Commission, the Commission now has the right to consider if such rulings are state aid.
This determination will not probably be final for several years as it progresses through the courts, however it does indicate a further trend of uncertainty re: transfer pricing rulings granted by EU Member States. Coupled with the intent of BEPS, the legal aspects of transfer pricing may start to sway towards a perceived “intention” for fairness and non-discrimination, with a “fair tax” flag being waved ever more rigorously.
This uncertainty will provide further chaos with new international tax perspectives being displayed in the public domain.
The EY Global Tax Alert is provided for reference.
The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States. Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.
Article 116 TFEU:
Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.
If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives. Any other appropriate measures provided for in the Treaties may be adopted.
The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:
- EU Common Corporate Tax Base (CCTB)
- Country-by-Country (CbC) reporting, public disclosure
- Tax rulings, (redacted) public disclosure
- Permanent Establishment (PE) definition
- Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
- Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
- EU Dispute Resolution approach
Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.
KPMG’s Euro Tax Flash provides a summary of the European Commission’s formal state aid investigations into tax rulings granted by Ireland (Apple) and Luxembourg (Fiat). This round of investigations follows three investigations, announced 11 June 2014, into alleged state aid granted by Ireland (Apple), Luxembourg (Fiat) and the Netherlands (Starbucks) via transfer pricing rulings.
The procedure is now open for interested parties, including Member States to provide comments to the Commission.
The KPMG Euro Tax Flash and preliminary decisions (English version for Ireland, French version for Luxembourg) are attached for reference:
- State Aid – Apple; Section 3.1, par. 46: Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the provision of certain goods shall be incompatible with the common market, insofar as it affects trade between Member States.
- Qualification as state aid – Apple; Section 3.1, par. 47: The following cumulative conditions must be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.
- Arm’s length pricing – Apple; Section 3.1, par. 55: The Court of Justice has confirmed that if the method of taxation for intra-group transfers does not comply with the arm’s length principle, and leads to a taxable base inferior to the one which would result from a correct implementation of that principle, it provides a selective advantage to the company concerned.
- OECD Guidelines – Apple; Section 3.1, par. 56: The OECD Guidelines are a reference document recommending methods for approximating an arm’s length pricing outcome and have been retained as appropriate guidance for this purpose in previous Commission decisions.
These formal rulings and comments by interested parties should be followed closely, especially in today’s challenging international tax environment.
EU case law and European Commission reviews have a significant impact upon the new international tax principles being established by the OECD and EU. For example, the general anti-abuse rule (GAAR) provision in the Proposal for the 2014 EU Parent-Subsidiary was ultimately not included in the final version of the 2014 Directive, one reason being that the requirements exceeded the precedents of EU case law and would not be ultimately sustained.
To the extent that new OECD guidelines provide an alternative, or exceptions, to the arm’s length principle, it should have a direct impact upon the precedence for reliance by the European Commission re: transfer pricing issues.