State aid and transfer pricing – Where are we headed?

In a number of recent decisions on state aid, the European Commission requires EU countries to recover billions of euros from companies deemed to have unlawfully benefited from tax benefits. These decisions have a major impact on the companies as the member states are now obliged to recover tax benefits granted over a 10 year period and these benefits will incur compound interest. In addition, these developments have a broader impact for all companies active in the European market who are seeking to obtain upfront legal clarity or to establish a solid tax position and transfer pricing model.

The European Commission (‘EC’) is taking action to make sure that the international tax system closes the door on aggressive corporate tax avoidance. The EC considers that certain multinationals are granted undue tax benefits by member states, allowing them to pay substantially less tax than certain other business operations. The EC opened several state aid investigations against the member states to investigate specific tax rulings issued by those states. A number of these investigations refer to transfer pricing and the application of the ‘the arm’s length principle’. Certain other investigations challenge the application of tax treaties. Should individual tax rulings or agreements imply tax benefits to ‘selected’ companies, such rulings may be illegal under the EU state aid rules as these rules provide such companies with an unfair advantage over other business operations that are subject to the same national taxation legislation.

At present, the EC has adopted its final decisions with regards to the tax rulings granted to Fiat in Luxembourg, Starbucks in the Netherlands, Apple in Ireland and as regards all of the companies that benefiting from the so-called the excess profit ruling in Belgium. In these decisions, the EC claimed that tax rulings that are not consistent with the arm’s length principle violate EU state aid rules, regardless of whether the country has any transfer pricing rules in place. The ‘arm’s length principle’ applied by the EC is, furthermore, according to the rulings, not the arm’s length principle of the OECD but another arm’s length principle, derived directly from the Treaty on the functioning of the European Union. This so-called EU arm’s length principle apparently deviates from the OECD arm’s length principle. In addition to the decisions already taken, investigations are still pending in the case of Amazon, McDonald’s and GDF Suez/Engie.

The decision of the EC that a certain tax ruling comprises state aid can be appealed. However, irrespective of whether an appeal is lodged, the rulings require immediate recovery of the state aid from the respective companies. On the matter of recovery, the EC has said that they have no legal authority to exempt the beneficiary of a selective tax ruling from a full recovery, unless the EC has already reviewed and approved the ruling. In this context, there appears to be little hope that a specific case would be exempt from recovery.

In the current climate of public scrutiny of tax structures, with companies being required to repay very significant amounts of alleged tax benefits, the question for every business active in the EU is what this means for the tax model of the future. Inevitably, a situation of legal uncertainty is created with the EC challenging the application of transfer pricing rules and tax treaties in Europe. Questions that are often raised include: What can we learn from the ongoing investigations and recent decisions? Is there a new arm’s length standard in Europe? Is it possible to still obtain full legal certainty via a ruling or an agreement with the tax authorities? What standards and principles should be taken into account when obtaining rulings and negotiating agreements?

Seminar on 19 April in Stockholm

On 19 April 2017, PwC will hold a seminar in Stockholm regarding state aid developments in the EU. The seminar will provide you with the possibility of obtaining an insight into the impact of the recent decisions of the European Commission regarding state aid. Pieter Deré, Director, PwC Belgium will be speaking about his views on this matter. Pieter will share his experience with the current stance taken by the EC based also on his personal experience with, amongst others, the Belgian Excess Profit case, where he advised the Belgian government and many corporates were subsequently affected.

The seminar will be held in English.