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Bridging the Atlantic - European Commission's tax investigations may suggest a new focus

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Summary: The European Commission announced on 11 June 2014 that it has opened in-depth investigations into whether transfer pricing rulings issued by the Irish, Dutch and Luxembourg tax authorities to Apple, Starbucks and Fiat comply with the EU rules on State aid.

While the Commission has gone to some lengths to say that rulings are not problematic as such, multinationals will be very concerned that rulings that have previously appeared to provide watertight protection may now be subject to challenge with potentially retrospective effect.

Multinationals, funds and other taxpayers that have benefited from a tax ruling that seems too good to be true may wish to consider reviewing their tax position to see whether any preventative steps can or should be taken.

State aid rules

The State aid rules prohibit any aid granted by an EU Member State which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods and which affects trade between Member States.

Aid can include tax exemptions, tax rebates or reduced tax rates which are selective in their application.

If the Commission finds that a particular measure amounts to unlawful State aid, it may order recovery of that aid by the relevant Member State from the taxpayer concerned.  The amount recovered will normally be the tax that would otherwise have been paid plus interest; the Commission’s intervention can therefore have retrospective effect.

The Commission’s investigation

This is not, of course, the first time that the Commission has scrutinised the tax laws of Member States from a State aid perspective.  The Commission made it clear as long ago as 1998 (in its notice on the application of the State aid rules to direct taxation) that Member States should take account of these rules in forming their tax policies.

Selective tax regimes (from those concerning Belgian co-ordination centres through Spanish measures for the Basque country to the UK’s stamp duty relief for disadvantaged areas) have had to be amended over recent years to comply with the State aid rules.

The significance of the current investigations is that, by questioning whether rulings given by tax authorities constitute State aid, the Commission potentially undermines one of the planks on which a number of jurisdictions have based their business-friendly regimes.  There will naturally be widespread concern that, for all the Commission says that it has no concern with rulings as such, this may be a sign of a more profound change in policy.

The Commission will conduct a formal examination of the three transfer pricing arrangements to determine whether these rulings provide selective tax advantages to the companies in question.

Accordingly, the Member State will have to recalculate (1) the taxable basis of the company concerned in line with the State aid rules and (2) the amount of taxes due. How a taxpayer’s position in other jurisdictions in which it does business will be affected is unclear.  However, taxpayers will obviously be keen to avoid a situation in which, based on a reallocation of their profits in conformity with the State aid rules, a group company which has previously benefitted from a favourable tax ruling in one EU Member State faces additional corporate tax assessments in other Member States.

What should you do now?

The outcome of the Commission’s investigations cannot be predicted at this stage.  However, multinational and other taxpayers in the EU should take note of the Commission’s decision to devote resources to these investigations.  If the conclusion is that the State aid rules have been breached, the consequences are very unlikely to be limited to either the taxpayers concerned or to the jurisdictions in question.

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