The Most Innovative Law Firm in Europe
EU State aid enquiries into tax rulings
December 2015
The European Commission has found that tax rulings given to Starbucks and Fiat breached EU State
aid rules and that the companies are each required to repay €20 – €30 million. Decisions are expected
soon in relation to Apple and Amazon. A further investigation has been launched into rulings given to
McDonald’s in Luxembourg. Any business which has secured a favourable tax ruling in the EU could be at
risk of having to make large payments to repay tax benefits received.
Who could be affected?
The aptly named ‘Lux Leaks’ disclosures have been the biggest tax scandal
to hit the EU, especially significant as the European Commission has been
actively seeking to eliminate ‘harmful tax practices’ within the EU.
Do you have business activities in
any European Union (EU)
countries*
Yes
Have you received a ruling from a
tax authority in an EU country?
Yes
No
No
You should not be
currently affected
– but if in the future
you set up any
structures in the EU,
take advice on the
State aid implications
Take advice from tax and state aid
specialists on whether you could
have a possible liability
* Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia,
Slovenia, Spain, Sweden and United Kingdom
In February 2015, the European Commission announced it had begun an
in-depth investigation into Belgium’s “excess profit” ruling system. This is a
Belgian tax provision that allows companies to reduce their tax liability on
the basis of the ‘excess profits’ that are said to result from being part of a
multinational group. The Commission said the scheme could constitute
State aid as it appears to only benefit multinational groups, whilst Belgian
companies only active in Belgium cannot claim similar benefits.
In December 2015 the Commission announced it was investigating tax
rulings granted by Luxembourg to McDonald’s. The rulings enabled
McDonald’s to pay no corporate tax in Luxembourg on the grounds that
the profits were subject to US tax under the Luxembourg-US double
taxation treaty. However, as the company had no taxable presence in the
US under US law, the profits were not in fact subject to US tax.
Why is the European Commission investigating these deals?
Although the European Commission does not have direct authority over
national direct tax systems of EU Member States, it can investigate
whether tax incentives breach EU ‘State aid’ law.
State aid can occur whenever state resources are used to provide
assistance that gives organisations an advantage over others. It can distort
competition which is harmful to consumers and companies in the EU and is
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Background
In 2014 the European Commission launched in-depth investigations into
tax incentives given to Apple in Ireland, Starbucks in the Netherlands and
Fiat Finance and Trade and Amazon in Luxembourg.
It has now published the decisions in relation to Starbucks and Fiat, finding
that State aid rules were breached – although both decisions are likely to
be appealed. Decisions from the Commission in relation to Apple and
Amazon are expected soon.
Shortly after these investigations were opened over 340 multinational
companies were exposed for securing secret deals from Luxembourg in
order to save billions of dollars in taxes. Hundreds of documents were
leaked that showed some companies paying an effective 1% rate of tax on
profits moved from higher tax jurisdictions to Luxembourg through the use
of private tax rulings – also known as ‘comfort letters’ or advance pricing
arrangements (APAs).
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The Most Innovative Law Firm in Europe
EU State aid enquiries into tax rulings
December 2015
effectively a breach of EU law. A tax ruling can be seen to constitute an
advantage as it effectively means a tax authority is waiving a right to
collect taxes otherwise due.
What are the implications of the investigation?
It will not be a defence to a State aid enquiry that rulings have been a
common arrangement, even though almost every major group will have
used a Luxembourg (or other low tax jurisdiction) finance ruling as part of
its overall structure. The consequences are that companies may have to
repay up to 10 years’ worth of tax benefits.
What does the future hold?
Undoubtedly the days of being able to get very favourable rulings in EU
States desperate to attract foreign investment are gone. All future
investment in the EU needs to be checked to ensure it is State aid
compliant and groups should carry out a ‘health-check’ on
past investments.
The EU is introducing automatic exchange of information on tax rulings
between tax authorities every six months. It is aiming for a
1 January 2017 start date.
A particularly worrying aspect of the Starbucks case is that the company
appeared to have undertaken a full transfer pricing review and to have
complied with the Netherlands’ long-established and internationally
well-respected rulings process.
There is no current proposal for making this information publicly available
but this will be kept under review – and tax campaigners in Europe have
been pushing for more and more publicly available information about the
tax affairs of multinationals.
The European Commission has undertaken to scrutinise the papers
published as part of the ‘Lux Leaks’ disclosures meaning that hundreds of
companies risk joining Apple, Starbucks, Fiat and Amazon under the
microscope of a formal State aid investigation.
News of further investigations by the Commission is likely in the coming
months, as the EU continues to look closely at the tax affairs of
multinationals – and US multinationals in particular.
There could also be serious adverse publicity if a group becomes the subject of
a formal investigation by the Commission. Such an investigation would result
in the tax affairs and planning of the group being made public and could mean
that company officials are named.
The European Commission has extended its tax ruling probe to all 28 EU
member states. The European Parliament has set up a special committee to
look at tax ruling practices in EU member states, going back to 1 January 1991.
What could have to be repaid?
If a ruling is found to constitute unlawful State aid, the recipient could have
to repay to the State in question the difference between the tax charged and
the tax it would have paid without the ruling. Interest is also charged.
The amounts to be repaid could be very substantial. For example Apple
disclosed in a US Securities filing that the figure could be material and one
analyst estimated the figure at $19bn.
In repaying the aid no account is taken of the expenses a group has incurred
in setting up in a particular state or region. A group can therefore be left
seriously out of pocket as a result of a requirement to repay State aid.
The US has begun to complain about the potential consequences of the
EU’s investigations into US multinationals. It is possible that the US will
bring in anti-avoidance rules which would charge US tax on ‘exempt
branch’ structures like that used by McDonald’s.
What action should companies take?
Companies whose effective tax rate in any EU country has been reduced by a
ruling should consider the potential impact of the State aid challenge.
It is likely to be particularly relevant to any group that has intellectual
property, financing operations or group debt in the EU. Although all 28
Member States will be investigated, Luxembourg looks likely to remain a
particular focus of the Commission’s investigations.
Taking action now, before an approach by the Commission, could minimise
a company’s liability and significantly reduce the risk of adverse publicity.
We can help clients understand the EU process as well as the potential tax
issues. We can provide strategic risk mitigation advice as well as advising
on alternative tax structures which are compliant with State aid law.
For more information please contact:
Heather Self
Partner
Tax
T: +44 (0)161 662 8066
M: +44 (0)7919 392006
E: heather.self@pinsentmasons.com
Caroline Ramsay
Senior Associate
State Aid
T: +44 (0)20 7054 2504
M: +44 (0)7860 607027
E: caroline.ramsay@pinsentmasons.com
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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© Pinsent Masons LLP 2015.
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