Out-Law News | 12 Jun 2014 | 10:23 am | 5 min. read
Heather Self of Pinsent Masons, the law firm behind Out-Law.com, made her comments after the European Commission launched three in-depth investigations into the tax affairs of Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg.
The Commission also said that in parallel to these formal investigations it will continue its wider inquiry into tax rulings, which covers more member states.
Self said the development could have implications for any company which has secured a "favourable" tax ruling from national tax authorities
"Any company which has a favourable tax ruling will need to assess the risk that the Commission may decide that this is state aid," said Self. "The investigation is at an early stage, but a deal which seemed 'too good to be true' may now turn out to be just that - and could lead to significant costs."
Caroline Ramsay, an expert in state aid law at Pinsent Masons, said that any company found to have benefited from state aid would find itself obliged to pay taxes it previously understood it was not required to pay.
"There is no doubt that there will be claw-back if the Commission rules that this is state aid, and that it is the companies who will be liable to pay the bills," said Ramsay. "The Commission has made it clear it is widening the net with its investigations into other member states, and this is part of a tightening up on tax and state aid issues in the EU."
The Commission's investigations follow widespread public debate in some EU member states about tax avoidance by some multinational companies. Last year, the UK's Public Accounts Committee (PAC) said that HM Revenue and Customs had not done enough to tackle corporate tax avoidance while investigating why Google paid the equivalent of US $16 million of UK corporation taxes between 2006 and 2011 despite generating US $18 billion revenue from the UK in this period. In relation to this, Self said: "Comments about low tax bills on high turnover are misleading. Companies pay tax on profits, not turnover. However, there is widespread acceptance that the international rules for the digital economy do need to be updated. An EU group of experts reported on this last month."
Although Brussels does not have direct authority over national tax systems it can investigate whether certain advantageous fiscal regimes would constitute what it described as "unjustifiable state aid" to companies.
The Commission has been investigating certain tax practices in several member states following media reports alleging that some companies have received what it described as "significant tax reductions" by way of "tax rulings" issued by national tax authorities.
Tax rulings are used in particular to confirm transfer pricing arrangements, which are the prices charged for commercial transactions between various parts of the same group of companies, particularly prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries.
A statement by the Commission said: "Tax rulings as such are not problematic. They are comfort letters by tax authorities giving a specific company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, tax rulings may involve state aid within the meaning of EU rules if they are used to provide selective advantages to a specific company or group of companies."
The Commission said it will examine whether transfer pricing arrangements validated by authorities in Ireland, the Netherlands and Luxembourg involve state aid to the benefit of the beneficiary companies.
In relation to Apple, the Commission will investigate individual rulings issued by Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe.
In relation to Starbucks, it will examine the individual ruling issued by the Dutch tax authorities on the calculation of the taxable basis in the Netherlands for manufacturing activities of Starbucks Manufacturing.
In relation to Fiat Finance and Trade, the Commission will scrutinise the individual ruling issued by Luxembourg's tax authorities on the calculation of the taxable basis in Luxembourg for the financing activities of the company.
The Commission statement said: "The Commission has reviewed the calculations used to set the taxable basis in those rulings and, based on a preliminary analysis, has concerns that they could underestimate the taxable profit and thereby grant an advantage to the respective companies by allowing them to pay less tax. The Commission notes that the three rulings concern only arrangements about the taxable basis. They do not relate to the applicable tax rate itself."
The Commission said: "Selective tax advantages may amount to state aid. The Commission does not call into question the general tax regimes of the three member states concerned."
European Commission vice president in charge of competition policy Joaquín Almunia said: "In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes. Under the EU's state aid rules, national authorities can not take measures allowing certain companies to pay less tax than they should if the tax rules of the member state were applied in a fair and non-discriminatory way."
EU commissioner for taxation, Algirdas Šemeta, said: "Fair tax competition is essential for the integrity of the (European) single market, for the fiscal sustainability of our member states, and for a level playing field between our businesses. Our social and economic model relies on it, so we must do all we can to defend it."
The Commission pointed out that interested third parties are able to submit comments in relation to the investigation.
According to the Financial Times, both Ireland and the Netherlands said they were confident that there had been no breach in state aid rules.
“Ireland is confident that there is no state aid rule breach in this case and we will defend all aspects vigorously,” said a statement by Ireland's Department of Finance. “We will now turn to providing our detailed, technical legal rebuttal to the commission’s position and if necessary will defend our position in the European courts.”
Apple also said it had not received a special exemption, according to the Financial Times. It said: “Apple pays every euro of every tax that we owe. Since the iPhone launched in 2007, our taxes in Ireland have increased tenfold.”
Starbucks said in a statement: “We comply with all relevant tax rules, laws, and Organisation for Economic Co-operation and Development guidelines and we’re studying the commission’s announcement related to the state aid investigation in the Netherlands," reported the Financial Times.
The commission also launched “infringement proceedings” against Luxembourg on Wednesday, complaining that the Grand Duchy had provided a “limited sample” of the documents required for its tax investigations", said the newspaper.