In June, the European Commission (“EC”) announced the opening of three investigations into tax rulings in Ireland, Luxembourg and the Netherlands and, in particular, into tax rulings applied by Ireland to Apple, by Luxembourg to Fiat Finance and, last, by the Netherlands to Starbucks. In October 2014, the EC announced the opening of a fourth investigation into the application of tax rulings of Luxembourg to Amazon. Most recently, the EC ordered Spain to recover money from companies that benefited from rules that encouraged merger activity outside of the country.
We understand that the EC also has requested that Luxembourg produce all tax rulings that were issued in 2010, 2011, and 2012. Luxembourg has not complied with this request, and the matter will be heard by the EU Court of Justice. Companies with tax rulings that do not withstand challenge can be responsible for up to ten years of tax liabilities. In essence, the EC is investigating whether certain tax practices of Member States have conferred prohibited selective advantages on multinational companies via tax reductions.
The four investigations relate to tax rulings which validate transfer pricing agreements, also referred to as advance pricing agreements (APAs). Transfer pricing relates to the prices charged for commercial transactions between parts of the same corporate group (intra-group commercial transactions) e.g., the prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. APAs are agreements that determine an appropriate set of criteria, or methodology, for the determination of the transfer pricing for intra-group commercial transactions. Since the prices set for these intra-group transactions will be accepted by the taxing authority that enters into the APA, APAs affect indirectly the allocation of taxable profits to that taxing jurisdiction and the tax paid by the corporate group in that jurisdiction.
The four investigations concern the calculation methods of certain APAs as negotiated between Member States and the various affected companies as set out in the tax rulings. In particular, the investigations concern the compatibility of these calculation methods with internationally agreed standards as well as with the arm’s length principle.
The risk for the companies involved is that, in case the aid is considered to be incompatible, the Member State is required to claim the financial advantage back from the benefited company. In addition to the companies already under investigation, other companies may well become the target of additional investigations. As a result, any company with an APA from an EU member state should determine ― and assess ― the State aid risk. They should then consider whether any changes to the company’s trading structure may be merited.