The European Commission has ruled that two decisions made by national tax authorities artificially reduced the tax burden on the companies involved.
What do today’s decisions on tax rulings mean for you?
A novel principle
Today’s decisions send a "clear message" (Commissioner Vestager) to companies that they cannot obtain unfair competitive advantages – in particular over SMEs - by creating artificial price tags for internal transactions for the sake of avoiding taxation. They are an important step in the European Commission’s crusade against "aggressive tax planning". As expected, the Commission did not allow any legal, economic or political argument to derail it from the path chosen in the opening letters that were published last summer. It remains open how much the companies have to pay to the Member States that granted the tax rulings, but it will likely be between € 20-30 million per company. The Commission devised a methodology to calculate the amount of State aid to be recovered. Further, the companies cannot benefit of the rulings any longer.
Today’s decisions establish the novel legal principle that the OECD's Transfer Pricing Guidelines for Multinational Companies and their "arm's length" principle are an important benchmark for assessing a company's internal profit allocation scheme for the purposes of EU State aid control. The Member States and companies concerned will likely appeal against the decisions, but it will take two to three years before a judgment will be rendered.
What is the practical relevance of today’s decisions? First they will have a chilling effect on the future grant of discretionary tax rulings. The Commission expects that tax rulings are made "by the book". Second, the decisions, whilst not final in light of the possibility of being overturned on appeal, constitute a precedent for more EU investigations into alleged fiscal aid granted in the past. Due to Luxleaks and information provided by Member States to the Commission about their rulings, more investigations should be expected in the very near future.
However, the real question is whether and to what extent national courts will enter the arena to support the Commission with its limited resources. It has been long established that whenever a company has received unauthorized State aid, a competitor of the beneficiary may require the national courts to take all necessary measures pending the Commission's substantive assessment of the measure, including the temporary recovery of the State aid. Commissioner Vestager also sees a role for "whistleblowers". Where a complainant has or may be able to obtain sufficient evidence that a competitor has benefitted from a discretionary tax ruling, the national court seized may be compelled to order "temporary recovery". As State aid through tax rulings will generally not be justified in substance, the temporary recovery will become indefinite.
Damage control - what should you do next?
- The ruling is based on a scheme deviating from the OECD Transfer Pricing Guidelines or similar soft law;
- The taxable basis has been freely negotiated with the tax authorities without any reference to other comparable transactions;
- The tax authorities merely accepted the proposals of the company seeking the ruling without further investigation or review;
- Internal documents (e-mails) reflect that the cost have been reverse engineered to obtain a certain taxable income;
- The financial parameters of the ruling lack motivation in economic terms and are not substantiated by any generally accepted methodology;
- The timeframe covered the ruling is open-ended or excessively long;
- The profit allocation factors are not consistent throughout the company's organization.
If such assessment suggests that the ruling may involve State aid, please contact any of the individuals below. We can quantify your financial exposure, advise on procedural risks and discuss appropriate risk mitigation measures, all of which depend on the particularities of the tax ruling and the Member State which has granted it.
In respect of future rulings, we can help you ensure compliance to avoid State aid risks.