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June 13, 2014
EU to Investigate Apple, Starbucks, and Fiat Tax Rulings
by Stephanie Soong Johnston

Full Text Published by Tax Analysts®

The European Commission on June 11 formally launched three separate investigations to examine whether Apple in Ireland, Starbucks in the Netherlands, and Fiat in Luxembourg all received transfer pricing-related tax rulings that violated EU state aid rules.
Joaquín Almunia, the EU executive arm's vice president and competition commissioner, said the commission has "serious doubts" about the compatibility of three specific tax rulings with EC Treaty rules on state aid, but he clarified that the commission is not questioning tax rulings as a general concept.

He acknowledged that some multinational enterprises use tax planning strategies to reduce their global tax burden and attempt to minimize their taxable income in higher-tax jurisdictions through transfer pricing within an MNE group. That is where state aid control at the EU level comes into play, according to Almunia.

He noted that if a member state accepts in a tax ruling that the remuneration of a company's subsidiary or a branch doesn't correspond to market conditions, reflecting normal conditions of competition, a company could be granted favorable treatment.

"This is the problem, because such treatment would constitute state aid within the meaning of our Treaty rules," Almunia said in a statement. "And such aid is in principle incompatible with the single market, because it would give these companies an unfair advantage and would distort competition."

In addition to examining specific tax rulings in Ireland, Luxembourg, and the Netherlands, the commission is starting a preliminary investigation into the patent box regimes of several EU member states.

Ireland and the Netherlands have complied with the commission's requests for information, but Luxembourg has been particularly reluctant to cooperate, according to Almunia. As a result, the commission has opened an infringement procedure against Luxembourg because the authorities there "answered only partially to our requests for information in relation with the use of tax rulings and also in relation to the way special tax regimes for intellectual property rights -- so-called 'patent boxes' -- are being used," he added.

The commission announced in September 2013 that it was taking a closer look at tax rulings issued by Ireland, Luxembourg, and the Netherlands, and started gathering information from the member states to determine whether formal state aid investigations should be initiated.

In March the commission issued two information injunctions to force Luxembourg to submit information needed to determine whether some tax ruling practices and patent box regimes in several member states, including Luxembourg, Ireland, the Netherlands, and Belgium, favor specific types of companies in breach of EU state aid rules. In April, however, Luxembourg said it would challenge the injunctions, arguing that the commission is acting beyond the scope of its powers.


Companies and Countries React

A Starbucks spokeswoman defended the coffee purveyor, saying it complies "with all relevant tax rules, laws, and OECD guidelines" and that the company is studying the commission's announcement related to the state aid investigation in the Netherlands.

In a June 11 letter to the Dutch parliament, Dutch State Secretary for Finance Eric Wiebes confirmed that the commission was examining an advanced pricing agreement with Starbucks Manufacturing EMEA BV, but he also emphasized that the commission had prefaced its investigation by saying that the Netherlands had a sound APA and advance tax ruling practice. He also said that the Netherlands would cooperate fully with the investigation and expressed confidence that the commission will conclude that the APA in question does not constitute illegal state aid and complies with OECD transfer pricing guidelines.

Apple similarly defended its tax affairs in Ireland, saying that the company had not received selective treatment from Irish officials and that the company is subject to the same tax laws as other multinational companies operating in Ireland.

Apple's tax affairs in Ireland have been a subject of much scrutiny, which came to a head in May 2013 when the U.S. Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations held a public hearing about the company's tax planning. During the hearing, senators criticized the company for exploiting the differences between the Irish method for determining residency, which is based on where management and control is located, and the U.S. method, which is based on the place of incorporation. The subcommittee heard that Apple uses a structure that includes an entity that is incorporated in Ireland but not managed and controlled there.

In a June 11 statement, a spokesman for the Irish Department of Finance said the commission is focusing on advanced tax rulings a company received several years ago to address the calculation of the company's taxable profit base, without naming Apple specifically. The state aid inquiry will cover a 10-year period, 2004-2014, as is customary in such investigations, according to the spokesman, who said that Ireland will "defend all aspects vigorously." He also added that the company in question did not receive favorable treatment and did not receive a "special tax rate deal."

"We are very confident that we will successfully defend our position as Ireland does not have a statutorily binding tax ruling system," the spokesman said, adding that the Irish government's technical experts do not believe that there is any state aid. "We will now turn to providing our detailed, technical legal rebuttal of the commission's position and if necessary will defend our position in the European courts."

Fiat Finance and Trade said it was "surprised" by the commission's decision to open a state aid investigation into a tax ruling the company received in 2012 from the Luxembourg tax authorities, according to a June 11 statement. The ruling related to the calculation of the taxable basis of Fiat Finance and Trade's financing activities; the company was created 15 years ago to perform cash management and treasury activities for Fiat S.p.A.

According to the statement, Fiat Finance and Trade had requested the tax ruling in question to clarify transfer pricing rules to be applied in its financing activities to subsidiaries and affiliates of Fiat S.p.A. around the world. The ruling was not requested in connection with any tax exemption, the company said.

"The company has no reason to believe that any favorable treatment was contemplated by the tax authorities of Luxembourg in issuing such tax ruling, because in fact no such treatment was ever received," the company said, expressing confidence that the commission will confirm the legitimacy of the tax ruling that is being examined.

A spokesman for the Luxembourg Ministry of Finance told Tax Analysts that the ministry wouldn't comment until it receives formal notification from the commission.

Almunia said that before the commission makes final decisions in the investigations, it will carefully consider comments from the member states in question, as well as comments from interested third parties.

If the commission determines that illegal state aid was provided, the member states could be directed to change their practices and recover any illegal state aid, plus applicable interest, from the companies that received such aid.

Selective tax advantages that benefit MNEs seriously distort competition in the EU single market, according to Almunia. "Moreover, when public budgets are tight, and citizens are asked to make efforts to deal with the consequences of the crisis, it cannot be accepted that large multinationals do not pay their fair share of taxes," he said.

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