UK and International Tax news

EC To Investigate TP Arrangements In Ireland Netherlands And Luxembourg

Tuesday 17th June 2014

The European Commission has opened three in-depth investigations to examine whether decisions by tax authorities in Ireland, The Netherlands and Luxembourg with regard to the corporate income tax to be paid by Apple, Starbucks and Fiat Finance and Trade respectively, comply with the EU rules on state aid.

The EC has been investigating under EU state aid rules certain tax practices in several Member States following media reports alleging that some companies have received significant tax reductions by way of tax rulings issued by national tax authorities.

Tax rulings as such are not problematic.  They are comfort letters issued by tax authorities giving a specific company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, tax rulings may involve state aid within the meaning of EU rules if they are used to provide selective advantages to a specific company or group of companies.

According to Art 107(1) TFEU, state aid which affects trade between Member States and threatens to distort competition by favouring certain undertakings is in principle incompatible with the EU Single Market.  Selective tax advantages may amount to state aid.

The EC does not call into question the general tax regimes of the three Member States concerned but is to look more closely at certain tax rulings which are usually used to confirm transfer pricing arrangements between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group.

Where normal market terms or arms length pricing are used by a group, this would normally exclude the presence of state aid.  However, if the intra group pricing is not  based on remuneration on market terms, it could imply a more favourable treatment of the company compared to the treatment other taxpayers would normally receive under the Member States’ tax rules and this may constitute state aid.

The EC will examine three transfer pricing arrangements validated in the following tax rulings involve state aid to the benefit of the beneficiary companies:

 – the individual rulings issued by the Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe;

 – the individual ruling issued by the Dutch tax authorities on the calculation of the taxable basis in the Netherlands for manufacturing activities of Starbucks Manufacturing EMEA BV;

 – the individual ruling issued by the Luxembourg tax authorities on the calculation of the taxable basis in Luxembourg for the financing activities of Fiat Finance and Trade.

 The EC has reviewed the calculations used to set the taxable basis in those rulings and, based on a preliminary analysis, has concerns that they could underestimate the taxable profit and thereby grant an advantage to the respective companies by allowing them to pay less tax. The EC notes that the three rulings concern only arrangements about the taxable basis.  They do not relate to the applicable tax rate itself.

In parallel to these three formal investigations, the EC will continue its wider inquiry into tax rulings, which covers more Member States.

Luxembourg, contrary to The Netherlands and Ireland, has only provided the EC with a limited sample of the information requested, which included the ruling for Fiat Finance and Trade, but not the complete information demanded by the EC.  The EC has therefore initiated infringement proceedings against Luxembourg by issuing letters of formal notice.

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