EC investigates transfer pricing arrangements on corporate taxation
12 Jun 2014 10:39 AM
The European Commission
has opened 3 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.
Commission Vice President in
charge of competition policy Joaquín Almunia said: "In the
current context of tight public budgets, it is particularly important that
large multinationals pay their fair share of taxes. Under the EU's state
aid rules, national authorities cannot take measures allowing certain companies
to pay less tax than they should if the tax rules of the Member State were
applied in a fair and non-discriminatory way."
Algirdas Šemeta,
Commissioner for Taxation, said: "Fair tax competition is
essential for the integrity of the Single Market, for the fiscal sustainability
of our Member States, and for a level-playing field between our businesses. Our
social and economic model relies on it, so we must do all we can to defend
it."
The Commission 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 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 Article 107(1) of
the Treaty on the Functioning of the European Union (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 Commission does
not call into question the general tax regimes of the three Member States
concerned.
Tax rulings are used in
particular to confirm transfer pricing arrangements. Transfer pricing refers to
the prices charged for commercial transactions 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. Transfer pricing influences the allocation of taxable profit
between subsidiaries of a group located in different
countries.
If tax authorities, when
accepting the calculation of the taxable basis proposed by a company, insist on
a remuneration of a subsidiary or a branch on market terms, reflecting normal
conditions of competition, this would exclude the presence of state aid.
However, if the calculation 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. This may constitute state aid.
The Commission will examine if
the 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 Luxembourgish tax authorities on the calculation of the taxable basis in
Luxembourg for the financing activities of Fiat Finance and
Trade.
The Commission 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 Commission 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 Commission will continue its wider inquiry into tax
rulings, which covers more Member States.
Luxembourg, contrary to The
Netherlands and Ireland, only provided the Commission with a limited
sample of the information requested (see IP/14/309), which included the ruling for Fiat Finance and Trade,
but not the complete information demanded by the Commission. The Commission has
therefore initiated infringement proceedings against Luxembourg by issuing
letters of formal notice.
Background
The Commission is looking at the
compliance with EU state aid rules of certain tax practices in some Member
States in the context of aggressive tax planning by multinationals, with a view
to ensure a level playing field. A number of multinational companies are using
tax planning strategies to reduce their global tax burden, by taking advantage
of the technicalities of tax systems, and substantially reducing their tax
liabilities. This aggressive tax planning practice erodes the tax bases of
Member States, which are already financially constrained.
Regarding tax rulings
specifically, the preliminary enquiries have shown that the quality and the
consistency of the scrutiny by the tax authorities differ substantively across
Member States. In particular, the Commission notes that The
Netherlands seem to generally proceed with a thorough assessment
based on comprehensive information required from the tax payer. The Commission
therefore does not expect to encounter systematic irregularities in tax
rulings. However, at this stage the Commission has concerns that the tax ruling
for Starbucks Manufacturing EMEA BV is providing that company with a selective
advantage, because there are doubts whether it is in line with a market-based
assessment of transfer pricing.
In the case
of Ireland, the authorities have been fully cooperative
in providing comprehensive replies in response to Commission's requests.
The Commission notes that although the transfer pricing rules have been
tightened over the years, the tax administration had a significant degree of
discretion in the past. The Commission has concerns that such discretion has
been used in the case of Apple to grant a selective advantage to that company,
reducing its tax burden below the level it should pay based on a correct
application of the tax rules. The Commission notes however that the number of
tax rulings issued in Ireland relating to transfer pricing arrangements is
limited.
The opening of formal
investigations allows Member States' authorities to further explain their
practices and the Commission to gather further information from interested
parties.
The non-confidential versions of
the decisions will be made available under the case numbers SA.38373, SA.38374
and SA.38375 in the State Aid Register on the competition website once any confidentiality issues have been
resolved. New publications of state aid decisions on the internet and in the
Official Journal are listed in the State Aid Weekly e-News.