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16 January 2015 / news

European Commission opens investigation to the APAs concluded by Apple, Fiat Finance & Trade (“FFT”), Starbucks and Amazon

The European Commission started formal state aid investigations into certain advance pricing agreements (“APAs”) and advance tax rulings (“ATRs”) concluded by large US and European multinationals with the tax authorities of Ireland, Luxembourg and the Netherlands. So far, the European Commission published its decisions to open a formal investigation to the APAs concluded by Apple, Fiat Finance & Trade (“FFT”), Starbucks and Amazon. Similar tax arrangements of other multinationals may follow. This briefing explains what is going on and what multinationals should do.

According to European law, any selective advantage granted by an EU Member State to a particular company is prohibited if it distorts or threatens to distort competition on the European internal market (State Aid).

The opening decisions show that the European Commission is determined to challenge alleged potential State Aid elements embedded in APAs, focusing on the transfer pricing methodologies and application thereof agreed to by tax authorities in advance. Basically, the European Commission considers that an APA amounts to unlawful State Aid if it is clearly not in line with the ‘at arm’s length principle’ and has the effect of granting taxpayers a lower taxable basis than other taxpayers in a similar legal and factual situation.

The European Commission will use the “OECD Transfer Pricing Guidelines” (OECD Guidelines) as the source of reference for purposes of assessing the alleged State Aid aspects.

The most important elements that the European Commission puts forward to support its preliminary conclusion that the relevant pricing arrangements constitute State Aid are the following:

  • The lack of appropriate transfer pricing documentation underlying pricing arrangements.
  • An “open-ended” (indefinite) duration of an APA, which may cast doubt as to the appropriateness of the agreed transfer pricing arrangement for later years, as (market) conditions may have changed.
  • The European Commission seeks to investigate whether the taxable basis in the APA was negotiated (‘reverse engineering’) rather than based on appropriate transfer pricing methods and procedures.
  • Doubt as to the appropriateness of the choice for a particular transfer pricing method.
  • Inconsistencies in the practical application of the transfer pricing method chosen.

The European Commission compares the transfer prices used with those of a third party “prudent market operator”. In determining the “correct price”, one should – according to the European Commission - not depart “from the arrangement or remuneration that a prudent independent operator acting under normal market conditions would have accepted”. However, the OECD Guidelines do not contain such a test.

It should be noted that for State Aid purposes, the general national tax laws and practice in a EU Member State at the time an APA was concluded is the relevant benchmark. It is questionable whether the European Courts would accept a distinct European transfer pricing notion (comparison with “prudent market operator”).

The investigations are expected to draw the attention of many multinationals. This is because the potential downside is substantial: if the presence of State Aid were to be confirmed, the taxpayer will have to reimburse within a period of four months the full amount of the financial ‘advantage’, including interest, over a period of up to a maximum of ten years prior to the start of an investigation.

Clearly, the Commission is using the State Aid instrument as a (political) instrument to attack perceived inappropriate tax planning concepts used by multinationals in Europe. This political element combined with the constant political and media attention is turning State Aid into a more public relation sensitive subject for multinationals.

In particular the LuxLeaks revelations continue to propel the subject of “aggressive tax planning” to the headlines of the newspapers. Multinationals of which rulings have been revealed or will be revealed, should not only focus on the technical State Aid aspects, but also on reputational aspects. Please note in this respect that the EU Commission decided to extend the information inquiry on tax rulings to all EU Member States.

Multinationals should carefully review potentially State Aid-sensitive European APAs and rulings in process and content.
We see the following phases where we can assist you:

  • Discover risk: assess whether existing advance pricing agreements and advance tax rulings are State Aid-proof.
    Loyens & Loeff has designed an elaborate check list to analyse potential State Aid issues and assess the potential adverse consequences, if any.
  • Explain risk: inform and educate executive and supervisory boards, audit committees and auditors. Even if no State Aid risk should be present, it may be required to explain why to various stakeholders.
  • Reduce risk: prepare improved transfer pricing documentation to support the transfer prices used, consider amendment of existing structures, etc. If State Aid risks are detected, it will be important to pay attention to potential reputational issues and develop a public relation strategy.
  • Fight risk: assist in the entire enforcement and litigation process if an investigation by the Commission is taking place or is upcoming. This is a technical, legal, public relations and, possibly political process that can go from the European Commission to, eventually, the European Courts.

Given the European Commission’s enforcing powers, it is of great importance that the above activities are carried out under the protection of the client-attorney privilege.


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