Jose Luis Buendia Sierra Partner, Garrigues, Brussels Visiting Professor, King’s College London Tax & State Aid IBC Conference London, 20 June 2016 Are Tax Rulings Selective?

2 contents I.introduction II.Advantage and selectivity III.The commission decisions IV.conclusions

3 i. introduction

4 Introduction Risks of ‘sweeteners’ under the cover of discretional ‘Tax Rulings’ validating ‘Advance Pricing Agreements’ (APAs). Transfer pricing issues and multinationals: – Multinational companies: undertakings active in more than one jurisdiction. Not necessarily large undertakings. – How to allocate revenue, cost & profits (and therefore taxes) among the different jurisdictions? Not easy or obvious, but unavoidable. The issue is politically sensitive: – EU countries have very different fiscal rules and rates. – This is the main distortion, but not State aid related. – State aid only if a Member State treats certain companies better. Some EC action is probably needed but… of what kind?

5 The ec opening decisions Five EC decisions initiating formal investigation procedures into certain individual tax rulings: – Apple in Ireland, – Starbucks in the Netherlands, – Fiat, Amazon and McDonalds in Luxembourg. One EC decision initiating an investigation into the ‘Excess profits’ ruling system in Belgium. On top of that, ‘Lux leaks’ and requests for information to all Member States. More cases may be in the pipeline… In parallel, legislative proposals. Interaction with State aid cases. Let’s look at the 3 final decisions adopted so far by the EC…

6 The ec final decisions Two EC decisions in October 2015: individual rulings granted by Luxembourg and the Netherlands to Fiat and Starbucks are individual State aid. An EC decision in February 2016: the Excess profits ruling system in Belgium is a State aid scheme. The EC finds that the Member States have provided favorable tax treatment to certain undertakings. We will focus on three legal issues: – Difference between the scheme and the specific tax rulings, – Definition of the system of reference, – Comparison with the ‘arm’s length principle’.

7 II. Advantage and selectivity

8 Advantage and selectivity (I) Both are required in order to speak of State aid. Both are based on comparisons but of a different kind. ‘Advantage’ requires a comparison… – … with normal treatment (often market terms) – not really with the treatment of other companies ‘Selectivity’ requires a comparison… – with the actual treatment that the Member State grants… – to the rest of the companies… established in its territory provided that… they are in a comparable legal and factual situation. Since one of the terms of the comparison is different, the exercise is necessarily different.

9 Advantage and selectivity (II) Advantage and Selectivity go hand in hand in many cases, but not in all cases. – A measure may be an advantage without being selective, if it is actually applied to all (general corporate tax rate). – Also if it is accessible de iure and de facto by all (see Case T-399/11 Santander) In any case, both advantage and selectivity must be established. Advantage and selectivity may be brothers but not ‘identical twin brothers’.

10 Individual aid vs. Aid schemes Another important distinction: individual aid and aid schemes. – The aid scheme allow the State to grant individual aids… – Like the chicken produces eggs. The EC may look at each individual aid (egg) or may look at the scheme (chicken): – If an egg is bad, this does not necessarily mean that the chicken is ill… – If the chicken is ill, does that necessarily mean that all the eggs are bad? The EC sometimes looks at the chicken and sometimes only looks at some eggs. Not ideal for legal certainty…

11 Selectivity, individual aid & aid schemes If a case is about ‘individual aid’, selectivity is normally assumed and the analysis is focused on the ‘advantage’ element i.e. investment decision) However, if a case is about a ‘scheme’ apparently open to all, the focus logically goes to ‘selectivity’ (i.e. a fiscal rule open to all contributors) What if the case is (like tax rulings) about the granting of individual aid resulting from a scheme? In such a scenario, both advantage and selectivity must be established carefully (see Case C-15/14P MOL) !

12 iii. The commission decisions

13 Fiat & Starbucks – scheme vs. individual In two decisions issued in October 2015, Fiat and Starbucks, the EC concluded that certain tax rulings by Luxembourg and the Netherlands, respectively, constitute State aid. – Tax rulings may be requested by any multinational company and only by them. – However, the EC seems to assume that the legislation concerning tax rulings (the scheme) is not selective in itself. This should normally mean that the reference system is ‘multinationals’ and does not embrace stand alone companies, Even if the decisions claim the opposite! – In any case, the EC clearly states that not every ruling implies State aid. – Only certain individual tax rulings to certain companies …. Which ones? Why those?

14 Belgian Decision – scheme vs. individual In another decision, issued February 2016, the EC concluded that the Excess profits ruling system in Belgium constitutes State aid. – Like in the other cases, tax rulings are not accessible to stand alone companies. – Moreover, in this case, rulings were not even accessible to all multinationals, only to large multinationals. – Based on this, the EC considered that access to the ruling system (the scheme) was selective, because small multinationals and stand alone companies were excluded. – As a consequence, the EC considers automatically that all companies having received such a ruling are beneficiaries of aid and must pay it back to Belgium.

15 Aid schemes vs. Individual aid Are the above EC decisions consistent? Problem with the ‘system of reference’: – If it embraces stand alone companies, a scheme not available to them should in theory be considered selective But the EC realizes that this is impossible - rulings are needed in order to deal with transfer pricing and this is an issue only for multinationals The correct reference system can only be multinationals (Case C-182/03 Forum 185) – Implications: A scheme not available to small multinationals is selective (Belgian case). An scheme available to all multinational should not be considered selective (even if some cases of individual application may be so). By insisting that the system of reference embraces all companies, the EC seems to be inconsistent with its inactivity towards the general ruling schemes. Why? Perhaps the EC thinks that a wide system of reference is necessary to prove selectivity.

16 Reminder: ‘selectivity’ comes from ‘selecting’ The Member State ‘selects’ a beneficiary… …within the ‘system of reference’: – all the entities – that are in its territory and – that are in a comparable situation If the system of reference is not well defined, selectivity is not well defined either… What is selectivity?

17 Problem if the system of reference goes too far by embracing: – Companies from other Member States and/or – Companies that are not in a comparable legal or factual situation. In our cases: – Contrary to EC’s view, stand alone companies do not seem comparable with multinationals as regards transfer pricing (Fiat & Starbucks) but… – Large and small multinationals seem comparable as regards transfer pricing (subsidiary argument in Belgian decision). So, the selectivity analysis in the former cases seem questionable… What is the system of reference?

18 The EC cannot compare actual treatment of the beneficiaries vs. actual treatment stand alone companies, since the latter do not have transfer pricing issues. So, the EC does a different kind of comparison: actual treatment of the beneficiaries vs. an ‘ideal model’ reflecting ‘economic reality’. What is this ‘ideal model’? Where does it come from? – Similar to the ‘Market Economy Operator’ (MEO)? Not really. MEO not directly invoked - but still applied – in the final Decisions. MEO is not about second guessing what a real private operator would do. – The ‘arm’s length principle’: Inspired in OECD criteria as interpreted by the EC. According to the EC, this principle would emanate directly from Art. 107 (EC Notice on the notion of aid 2016, par 172). Ideal model reconstructing ‘economic reality’. In any case, such a comparison may perhaps establish the presence of an ‘advantage’, but would tell us nothing about ‘selectivity’. How is the comparison made by the EC?

19 Some recent & relevant case law Judgments of 2014 in cases T-219/10, Autogrill and T-399/11, Banco Santander: – EC reasoning: the measure is selective because only certain undertakings make use of the provision. – The GC: the existence of a derogation from a reference framework, does not, by itself, establish selectivity, if that measure is available de iure and de facto to any undertaking. – EC appeal pending (Cases C-20/15P and C-21/15P) Judgment of 2015 in Case C-15/14P MOL: – A general scheme based on objective criteria would only be selective if the EC shows that it can actually only apply to certain categories. – This may be the case even if the scheme actually applies just to one company; the essential element is that it is open to all. – A discretionary decision by the public authorities does not automatically entail selectivity if the administration treats all companies equally as regards these eventual negotiations.

20 iV. Conclusions

21 What the EC is doing may probably make political sense but this does not mean that these State aid cases are legally bulletproof Indeed, it seems that the EC may be navigating uncharted waters: – System of reference questionable: all companies or multinationals only? – Confusion between ‘advantage’ and ‘selectivity’: State aid is not about comparing what a State actually does with what it ideally should do… But with what the State normally does in that kind of situation. By comparing with an ‘ideal model’, the EC comes very close to a harmonization of national transfer pricing practices. It is not impossible that the EC ends up winning before the EU Courts, but this should not be taken for granted… Conclusions

22 Judgements in Cases T-219/10 Autogrill & T-399/11 Santander (2014). Garrigues ( – Full range of legal and tax services to companies. – One of the largest law firms in Europe, present in 12 countries, 2000 people. – FT award: Most Innovative Firm in Continental Europe, 2014 and Jose Luis Buendia Sierra ( – Partner at Garrigues and head of its Brussels office. Specialisation in State aid: Band 1 in Chambers Global Specialisation in litigation before EU Courts: cases. – Editor of ‘European State aid Law Quarterly’ (EStAL). – Visiting professor at King’s College London, course on State aid. – Previously, he worked at the EC (Legal Service, DG Competition, Cabinets). – Education: PhD and Law Degree at the University of Zaragoza, Spain; LLM from the College of Europe, Bruges; Visiting Researcher, Harvard University. Some Credentials

Jose Luis Buendia Sierra | Partner Garrigues Av. d’ Auderghem – 1040 Brussels