European Commission working paper on State aid and tax rulings

Competition Commissioner Vestager has set out her State aid policy priorities on tax rulings.

It is the result of a global inquiry into tax rulings in all Member States for the period 2010–2012 and part of 2013. DG Competition investigated more than 1,000 tax rulings and focused on tax rulings that endorsed transfer-pricing arrangements proposed by the taxpayer for determining the taxable basis of an integrated group company.

Following this inquiry, the Commission opened several formal State aid investigations into tax rulings granted by Ireland (Apple case), Luxembourg (Fiat, Amazon and McDonald’s cases), the Netherlands (Starbucks case) and Belgium (the “excess profit” tax scheme).

These investigations led to three negative decisions in the Starbucks, Fiat and “excess profit” scheme cases. The Apple, Amazon and McDonald’s cases are ongoing. More inquiries will certainly follow.

DG Competition recently presented a working paper on State aid and tax rulings which summarizes its preliminary findings regarding tax rulings with respect to transfer-pricing rulings.

In its preliminary findings, the Commission observes that Member State practices differ significantly in quantitative terms over the period investigated. Indeed, some Member States issued thousands of rulings to economic operators every year, while five Member States (Bulgaria, Croatia, Latvia, Greece and Slovenia) did not grant any transfer-pricing rulings in the same period.

As for the procedure itself, most Member States follow closely the procedural guidance provided by the Commission communication on advance pricing agreements and the OECD for granting a transfer-pricing ruling.

Nevertheless, the Commission notes in its investigations that some transfer-pricing arrangements do not seem to reflect the arm’s-length principle when the outcome is manifestly different from a reliable approximation of a market-based outcome. It often concerns tax rulings on the remuneration of financing companies that are part of group companies, for example the passing-on of funds or IP rights within the same group. 

The Commission also questions the endorsement of tax deductions for payments or charges between group companies. 

In the working paper, the Commission announces that it will focus on cases where there is a manifest breach of the arm’s-length principle.

Nevertheless, many tax lawyers object to this new approach under State aid rules and remind DG Competition that it should not act as an EU tax police officer in the absence of fiscal harmonization at the European level.

Belgium has recently lodged its appeal against the European Commission on the “excess profit” scheme and it will therefore be up to the Tribunal of the European Union to verify the Commission’s approach to tax rulings.