1. EU State Aid Investigations and tax rulings
The perspectives of European practitioners
April 5, 2016

2. Speakers Julian Ellison , Partner Brussels James Hill, Partner London
Warren S.Payne , Senior Advisor
Astrid Pieron, Partner Brussels
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

3. Agenda Introduction Definitions.
What is fiscal State aid (in the context of tax rulings)?
The cases and their financial consequences.
What does it mean for US groups having operations in Europe?

4. What is State aid?
State aid consists of any form of “financial advantage” comprising “State resources” which “selectively” advantage an undertaking or group of undertakings.
A “financial advantage” includes a derogation, waiver or other modification of a tax regime which leads to a company paying less tax than would be due in the normal course.
A “waiver” or “other” giving up of tax revenue which would normally be payable equates to a transfer of “State resources” to the recipient.
State aid is prohibited by the Treaty on the Functioning of the European Union (“TFEU”) (Article 107(1)) unless notified to and approved by the Commission (under Article 107 (3)) (or other clearance mechanisms).
An undertaking or group of undertakings are treated “selectively” when their tax treatment departs from the norms of the relevant taxation regime with the result that they are treated differently to other undertakings in a comparable factual and legal situation.

5. What are tax rulings/ APAs
Article 25 (3) of the OECD Model Tax Convention permits countries to enter into Advance Pricing Agreements (hereafter “APAs”).
An APA is an agreement between a tax payer and a tax authority that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.
The Commission considers that APAs are an efficient tool for dispute avoidance with valuable advantages for tax administrations and taxpayers (Guidelines for APAs in the EU – February 2007).
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

6. What are tax rulings/ APAs
The APA should fix -according to the OECD arm's length principle -methodologies for determining the transfer pricing for future transactions.
APAs must provide certainty for taxpayers and tax administrations.
Multilateral APAs require agreements between multiple tax administrations and the taxpayer concerned. Unilateral APAs will require only an agreement between a single tax administration and the taxpayer concerned.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

7. What is fiscal State Aid?
Fiscal State aid must grant an economic advantage: i.e. the tax payable under the tax ruling must be lower than the normally applicable tax rate.
The advantage must be financed through State resources. Lowering the effective tax rate results in a loss of revenue to the State and a depletion of State resources.
Fiscal State aid must be selective. According to the Commission, “every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analyzed in detail.”  Thus, a tax ruling that merely interprets general tax rules or manages tax revenue based on objective criteria will generally not constitute State aid, while a ruling that applies the authorities' discretion to apply a lower effective tax rate than would otherwise apply may amount to State aid.  
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

8. What is fiscal State Aid?
The Court of Justice of the European Union has confirmed that if the method of taxation for intra-group transfers does not comply with a market based arm’s-length principle and as a result leads to a lower taxable base, then it provides a selective advantage to the company concerned. However, this interpretation of a single judgment is contested.
In the case of transfer pricing agreements, a tax ruling that deviates from the arm’s- length principle  is likely to be considered as specific and hence qualify as State aid under EU law.
Fiscal State aid must distort or threaten to distort trade and competition between Member States. Where the beneficiary carries out an economic activity in the EU, this criterion is easily met.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

9. The new transparency requirements
A fiscal State aid enquiry of all Member States began in December 2014.
Letters requesting individual tax rulings were sent to:
Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Lithuania, Portugal, Romania, Slovakia, Spain and Sweden.
Previously, the EU Commission had requested individual tax rulings from Cyprus, Ireland, Luxembourg, Malta, the Netherlands and the UK.
On 8 December 2015, the Economic and Finance Ministers Council formally adopted a mandatory automatic exchange of information in the field of taxation (published on 18 December 2015).
On 28 January 2016, the Commission proposed extending further the exchange of information to include country by country reporting.

10. The cases Decision or formal investigation Amount to be recovered
US headquarters? (Yes/No)
Decision
State aid granted by Luxembourg to Fiat
Approx. €20 - €30 million No
State aid granted by the Netherlands to Starbucks
Yes
Excess Profit exemption in Belgium
Approx. €700 million
Mainly EU
Formal investigation
Alleged aid granted by Ireland to Apple
Not yet decided
Alleged aid granted by Luxembourg to Amazon
Alleged aid granted by Luxembourg to McDonald’s
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

11. State aid granted by Luxembourg to Fiat – Decision of 21 October 2015
Amount: approx. €20 - €30 million.
Facts: tax ruling issued by Luxembourg authorities in 2012 confirming transfer pricing arrangement of Fiat Finance and Trade when calculating its corporate taxation.
Findings of the Commission: tax ruling endorsed artificial and extremely complex methodology for the calculation of taxable profits resulting in Fiat Finance and Trade paying taxes solely on a small portion of its actual accounting capital at a very low remuneration, not corresponding to market conditions.
Appeals: summary of appeals by Luxembourg and Fiat published on 15 February
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

12. STARBUCKS
State aid granted by Netherlands to Starbucks – Decision of 21 October 2015
Amount: approx. €20 - €30 million.
Facts: tax ruling issued by the Netherlands tax authority in 2008 confirming Starbucks’ transfer pricing arrangement when calculating its corporate taxation.
Findings of the Commission: (i) Starbucks Manufacturing paid very substantial royalty to Alki (a UK-based company in the Starbucks group) for coffee- roasting know-how, which did not reflect market value, shifting a large part of its taxable profits to Alki, which was not liable to pay corporate tax in the UK or in the Netherlands; (ii) Starbucks Manufacturing also paid an inflated price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL.
Appeals: summary of appeal by the Netherlands published on 15 February 2016.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

13. Belgian Excess Profits rulings
Belgian Excess Profits ruling – Decision of 11 January 2016
Amount: approx. €700 million.
Facts: ruling allowed multinationals to reduce their tax base for "excess profit" (i.e., profit made through synergies and economies of scale) on the basis of a binding tax ruling.
Findings of the Commission: (i) deviated from normal practice under Belgian company tax rules, giving those multinationals able to obtain such a tax ruling a preferential, selective subsidy compared with their competitors; (ii) "excess profit“ should be shared between group companies in a way that reflects economic reality, and then taxed where it arises, based on the application of the "arm's length principle“; (iii) scheme not justified as did not demonstrate a risk of double taxation.
Appeals: appeal announced by Belgian State (but not yet published). Many multinationals expected to intervene and/or appeal.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

14. APPLE Ongoing formal investigations
Alleged aid granted by Ireland to Apple - Opening Letter of 11/06/2014
Facts: rulings granted by Irish Revenue in 1991 and 2007 on the calculation of taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe.
Commission’s arguments: the rulings do not comply with the arm’s length principle and confer a selective advantage upon Apple. In particular:
1991 ruling “negotiated rather than substantiated by reference to comparable transactions” and apparent lack of a transfer pricing report;
doubts as to appropriateness of transfer pricing method chosen for the ruling and inconsistencies in applying the chosen method;
duration of ruling is contested given Apple’s growth during that period.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

15. AMAZON
Alleged aid granted by Luxembourg to Amazon - Opening Letter of 07/10/2014
Facts: 2003 tax ruling in favour of Amazon’s subsidiary, Amazon EU Sarl (“LuxOpCo”), based in Luxembourg and recording most of Amazon’s European profits. Based on the methodology set by the tax ruling, LuxOpCo pays a tax deductible royalty to a limited liability partnership established in Luxembourg.
Commission’s arguments: amount of this royalty lowers the taxable profits of LuxOpCo each year and might not be in line with market conditions. In particular:
not appropriate transfer pricing method and no transfer pricing report appeared to have been provided to the Luxembourg authorities;
royalty payment not calculated appropriately and may have been exaggerated;
ruling was in force without amendment for more than 10 years despite the expansion of Amazon’s business.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

16. McDonald’s
Alleged aid granted by Luxembourg to McDonald’s – Opening Letter of 03/12/2015 (not yet published)
Facts: two tax rulings given by the Luxembourg authorities in 2009 concerning McDonald’s Europe Franchising.
Commission’s arguments: McDonald’s Europe Franchising has paid virtually no corporate tax in either Luxembourg or the US on its profits since In particular:
The first tax ruling confirmed, by reference to the Luxembourg-US Double Taxation Treaty, that McDonald’s Europe Franchising was not due to pay corporate tax in Luxembourg. However, the profits were not subjected to tax in the US.
According to the second tax ruling, McDonald’s was no longer required to prove that the income was subject to taxation in the US.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

17. Financial consequences for the targeted groups
Illegal State aid must be repaid with interest.
A State aid decision can be challenged.
Ability to resist?
Accounting challenges.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

18. Illegal State aid must be repaid with interest
State aid is a part of EU competition law.
It is designed to ensure that Member States do not distort competition by giving State hand outs to undertakings who compete in markets against non State-aided undertakings.
State aid which has not been notified to and cleared by the Commission is illegal and must be repaid with interest by the recipient.
The Member State will be responsible for the recovery of the State aid (with interest) under national law.
State aid beneficiaries need to be alert to the risks of receiving State aid which has not been cleared by the Commission and which is therefore in principle illegal and repayable.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

19. A State aid decision can be challenged
Member States have ca. two months to lodge an appeal against a State aid decision.
State aid beneficiaries can either appeal directly (on the basis that they are directly affected) or intervene in support of the Member State’s appeal.
The current tax case appeals have certain common threads:
has the Commission identified the correct reference taxation system before considering whether there has been a derogation? For example, has it compared the tax treatment to a novel formulation of transfer pricing which is not in fact a part of the national taxation system in question?
does the measure confer a selective advantage? For example, in the case of the Belgian Excess Profits scheme, was it open to all multinationals and therefore not selective?
is there a legitimate expectation that the tax rulings would not amount to State aid? For example, based on a rulings’ compliance with existing OECD guidelines (which the Commission historically had accepted), and/or a lack of judicial authority for the Commission’s market based arms’ length principle?
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

20. A beneficiary has a limited ability to resist the recovery of State aid
Once there is a binding negative State aid decision (after any appeals) ordering recovery, the Member State must recover from the beneficiary, if necessary in the national courts.
A beneficiary has very limited powers to resist recovery.
There is a basic requirement that a beneficiary acts as a “prudent” and “discriminating trader” and checks that it is not receiving illegal State aid.
This means that a beneficiary should ensure that the aid has been notified to and cleared by the Commission and that the time for any appeal has expired (a total period of potentially up to 24 months or more) before utilising the aid.
In exceptional circumstances, for example with a novel type of State aid or where the Commission (or the Court) may have indicated that a measure was not aid, a beneficiary “may” be able to argue that it had a legitimate expectation of legality.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

21. WHAT DOES IT MEAN FOR US GROUPS HAVING OPERATIONS /TAX RULINGS IN EUROPE?

22. Risk assessment Risks factors linked to State aid procedures
Essentially unilateral APA.
US foreign tax credit position?
But also new transparency and anti tax avoidance framework:
IP-Patent box regime;
Finance companies and leveraged structures;
Hybrid structures; and
Hybrid instruments.
EU State Aid Investigations and Tax Rulings:
The Perspective of European Practitioners

23. Closing remarks
“In this world nothing can be said to be certain, except death and taxes”
(B. Franklin).
Dynamic monitoring of (European) structures is a must!

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