In focus: Unlawful State Aid in taxation - Member States reactions to the Commission's decisions

The central question in each case was whether certain fiscal regimes constituted unfair tax advantages and unlawful state aid to large multinational companies. The commission found that the relevant tax rulings endorsed artificial and complex methods to establish taxable profits for the companies that do not reflect economic reality.

These member states have now launched appeals in the general court against the commission’s decisions.

These appeals centre on the question of how to interpret the arms length principle in transfer pricing rules. This principle is based on Section 9 of the Organisation for Economic Co-operation and Development (OECD) Treaty which essentially provides that where the companies involved are part of a group, the transfer price should be the same as if the two companies involved are two independents and not part of the same corporate structure.

In the above cases, the commission used arguably a new interpretation of the principle, by changing the comparator to establish how the arms length principle is to be applied. Instead of using another multinational company who is in a similar situation, the commission has opted to compare the multinational to a stand alone company.

According to the commission: ‘Tax rulings cannot establish methodologies, no matter how complex, to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company. It would give that company un unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use.’

Both Luxembourg and the Netherlands dispute the commission’s approach. In particular, the Dutch government has complained that instead of using the Transnational Net Margin Method (profits taxed where value is created), the commission has used the Comparable Uncontrolled Price (CUP) method. By using the CUP method the commission has adopted its own interpretation and application of the OECD guidelines about the transfer pricing methods. The Dutch Government does not believe that the CUP method should have been applied in the Starbucks case because of the absence of suitable data. Moreover, the commission applies its own new criterion for profit calculation, which is incompatible with domestic regulations and the OECD framework. The Dutch government has argued that the decision has caused confusion and uncertainty for businesses and tax authorities.

The appeals have been allocated the following numbers at the court: case T755/15 Luxembourg v commission and case T-760/15 The Netherlands v commission. The Belgian government has now also filed an appeal against the decision and is challenging the commission’s view that its arrangements constituted illegal state aid. It is likely that several companies will also appeal the decision.

Meanwhile, the commission is not waiting to see what will be the result of the appeals. The decision on Irish tax regimes and treatment of Apple is expected any time now. Furthermore, the commission has decided to open a formal investigation against Luxembourg on whether it has given favourable treatment to MacDonalds.

US Influence

The US Treasury has complained that the commission is biased against US companies which have been disproportionately targeted. Furthermore, Washington has argued that as the companies in question are based in the US, these outstanding taxes are owed to the US Treasury.

However, it would seem that the above appeals and the complaints from the US have not deterred others to take action against alleged instances of state aid. It was reported in Financial Times that the Tax Justice Network and the Scottish National Party respectively have asked the commission to investigate the UK’s tax treatment of Google. This all promises that the state aid litigation will continue for years to come.