TP Minds congress: the latest developments on EU State Aid
Harmen van Dam, tax partner and transfer pricing specialist, was part of the panel of speakers at the TP Minds West Coast 2018 congress.
Harmen discussed the latest developments on fiscal State Aid with, among others, the head of the European Commission’s (EC’s) Directorate-General for Competition (which is in charge of State Aid control).
Since 2013, the EC has been carrying out an inquiry into tax ruling practices of EU member states. This has led to several formal State Aid investigations into individual tax rulings. In most of these investigations, the EC has concluded that the acceptance of certain transfer pricing methodologies by tax authorities constituted illegal State Aid. Harmen focused on the EC’s controversial application of the arm’s length standard in the State Aid decisions that are currently being disputed by EU member states and taxpayers in their appeals to the European Court of Justice.
EC’s controversial application of the arm’s length principle
One of the most controversial issues is that the EC, in its most recent State Aid decisions, applies its own interpretation of the arm’s length principle that does not stem from the domestic laws of EU member states. The EC argues the ät arm’s length principle, is a general principle of equal treatment based on the State Aid article included in the Treaty of the Functioning of the European Union.
When assessing how the EU arm’s length principle should apply, the EC refers to the OECD Transfer Pricing Guidelines (the OECD Guidelines), as “an international consensus on transfer pricing”. The OECD Guidelines, by themselves, are in many EU member states, a non-binding instrument. As a result of the position taken by the EC however, the OECD Guidelines would apply, even when EU member states have not (or only partially) implemented the OECD Guidelines in their domestic laws. The EC seems to disregard the fact that the OECD Guidelines are subject to deviating interpretations by EU member states, and there is no unanimously accepted view on how to apply them.
Another controversial issue is that the EC relies on, and extensively refers to, the OECD’s method of attributing IP income included in the 2017 version of the OECD Guidelines. Under this version, the legal owner of IP must exercise control over the ‘DEMPE’ functions in relation to the IP, exercise control over the DEMPE related risks and have the financial capacity to undertake the risks, to be entitled to IP income. This post-BEPS approach is a change from the pre-2017 OECD Guidelines. By applying the post-BEPS functional approach included in the 2017 OECD Guidelines in State Aid assessments of tax rulings entered into by taxpayers before 2017, the EC effectively attempts enforcing the 2017 OECD Guidelines with retroactive effect.
Impact on businesses
Harmen advised the transfer pricing professionals attending the congress to carefully monitor and review their internal transfer pricing position. In light of these recent State Aid developments and the controversial positions taken by the EC, it is recommended to make sure the transfer pricing position is well documented and the structure is aligned with the people functions to avoid State Aid scrutiny. As part of a long term transfer pricing strategy, restructuring could be opportune. Complying with the 2017 OECD Guidelines, for example by ensuring that contractual risks are allocated in line with the people functions, should minimize the State Aid risk going forward.
More info on fiscal State Aid
If you would like to receive more information on how to deal with your State Aid challenges, please visit our State Aid webpage or contact Harmen van Dam.
Harmenvan DamPartner Tax adviser
Harmen van Dam, tax expert, heads Loyens & Loeff’s International Tax Services practice group and the Transfer Pricing team. He focuses on corporate and international tax law.T: +31 10 224 63 48 E: firstname.lastname@example.org