State aid – the European Commission charges forward

Global Tax Alert


This note provides an update on the EU state aid decisions and aims to put recent developments in context.

We review the current state of the state aid investigations, provide some political context, touch on the US position, and offer guidelines to help US multinationals address and discuss state aid matters with internal and external stakeholders. 

1.            The current state of the state aid investigations 

The Apple decision is the latest in the state aid decisions from the European Commission.  Previously, the Commission ruled that the Netherlands, Luxembourg and Belgium all had granted state aid to corporations – in Belgium’s case, about 35 companies were caught up in so-called “excess profits” rulings. 

The Commission’s state aid investigations walk a fine line between the Commission’s authority and EU member states’ tax sovereignty.  The domestic tax systems of the EU member states do not fall within the competency of the Commission.  However, based on the Treaty on the Functioning of the European Union (TFEU), the Commission is authorized to challenge any aid granted by a member state that is incompatible with the free internal EU market.  It is this particular section of the TFEU (article 107(1)) that effectively gives the Commission the tools to influence tax policy. 

Although all state aid cases are different, the common denominator in the Commission’s recent decisions is the reference that the respective rulings and, in so far as available, the corresponding transfer pricing documentation and mechanics are not in line with arm’s length standards. There has been much debate in the tax community about this theme; one could argue that the Commission is introducing its own concept of arm’s length transfer pricing principles that is separate from existing OECD transfer pricing guidelines and that also has the potential to deviate from the revised transfer pricing guidelines of the OECD BEPS initiative. 

Apart from two pending state aid decisions of the Commission in Luxembourg, no new formal investigations have been initiated at the moment, nor are we aware of an initiative by the Commission to start challenging state aid positions on a broad scale. 

2.            The political context and the US position 

An interesting element in the Commission’s press release was that the Commission has invited both the US IRS and, indeed, other countries to consider taxing Apple’s historic profits.  This is a clear challenge to the respected OECD international framework of taxation.  It can be viewed as the introduction of a form of EU common consolidated tax base allowing each member state to claim taxing rights linked to sales and other activity in that state.  The common consolidated tax base has been on the Commission’s political agenda for some years now, but, after its initial proposal in 2012, has not been able to gain enough political momentum.  As part of the 2016 EU anti-tax-avoidance package, the CCTB initiative is making its way back onto the political agenda, albeit in a slimmed down form, of the Commission.  The UK was not an advocate of the original CCTB proposal. It will be interesting to see, post-Brexit, how the renewed effort on the CCTB will play out in the EU and if this will affect the Commission's going-forward strategy on the state aid investigations. 

The Netherlands and Luxembourg are appealing the Commission’s decisions and there is a strong belief in these jurisdictions that the Commission’s decision does not have sufficient merit to be upheld by the EU Court of Justice.  Ireland is still considering if it will appeal, but, in any case, Apple will appeal − hence the case will go to court.  

Although the US Treasury has on occasion indicated that it is concerned about the EU state aid investigations, more recently it has taken a much stronger position against the Commission’s direction.  Most notably, on August 24, 2016, shortly before the Apple decision, Treasury issued a White Paper specifically dealing with the state aid investigations and decisions.  In the White Paper,Treasury sets out three main areas of concern: 

  1. The Commission’s approach is new and departs from prior EU state aid case law
  2. The Commission should not seek retroactive recovery and
  3. The new approach is inconsistent with international norms and undermines the international tax system (including the BEPS initiative).

The positions in the White Paper are further supported by subsequent statements in the media from Secretary of the Treasury Jack Lew and Deputy Assistant Secretary for International Tax Affairs Robert Stack. 

3.            What’s next for US companies? 

  • Inform stakeholders.  There is a lot of press coverage on the state aid cases, as a result of which the nuance can get lost within your organization. Inform all stakeholders based on the facts of the different cases.  Not all state aid cases are equal and rulings agreed upon in recent years often have a different profile than rulings concluded more than 20 years ago.
  • Review existing structures and rulings.  Make sure you understand your position.  Be sure that you are also taking into account the audit perspective to help you understand your company’s position when it comes to possible state aid risk.  In case you deem it necessary, old rulings can be updated to ensure compliance with the latest international developments.
  • Focus on transfer pricing documentation and compliance.  Organizations are currently revisiting their transfer pricing documentation requirements as a result of BEPS developments.  Master files and local files are required.  Appropriate transfer pricing documentation is the first line of defense against state aid investigations.  In addition, companies should ensure that operating models act in line with the agreed upon transfer pricing methodology.
  • Consider state aid aspects of any rulings when conducting M&A activity.

Learn more about the significance of the Commission’s state aid ruling by contacting the author.