Wednesday, December 9, 2015
State Aid Investigation
In June 2014, the European Commission opened three in-depth investigations to examine whether decisions by tax authorities in Ireland, the Netherlands, and Luxembourg with regard to the corporate income tax paid by Apple, Starbucks, and Fiat Finance and Trade, respectively, complied with the EU rules on state aid. In October 2014, the EU announced that it had also opened an in-depth investigation into whether the decision by Luxembourg’s tax authorities with regard to the corporate income tax to be paid by Amazon complied with EU rules on state aid. On October 21, 2015, the EU Commission announced its conclusions that Luxembourg has granted selective tax advantages to Fiat’s financing company and the Netherlands has granted selective tax advantages to Starbucks’s coffee roasting company. Finally, press reports have explained that tax rulings given to several other U.S. companies are also being examined by the EU Commission.
In the area of state aid, as I understand it, the remedy is for the Commission to require the member state to collect the amount of income tax that, in the Commission’s view, should have been imposed in the first place. State aid rulings can go back and reexamine up to ten years of prior conduct.
Treasury has followed the state aid cases closely for a number of reasons. First, we are concerned that the EU Commission appears to be disproportionately targeting U.S. companies.
Second, these actions potentially undermine our rights under our tax treaties. The United States has a network of income tax treaties with the member states and has no income tax treaty with the EU because income tax is a matter of member state competence under EU law. While these cases are being billed as cases of illegal state subsidies under EU law (state aid), we are concerned that the EU Commission is in effect telling member states how they should have applied their own tax laws over a ten-year period. Plainly, the assertion of such broad power with respect to an income tax matter calls into question the finality of U.S. taxpayers’ dealings with member states, as well as the U.S. Government’s treaties with member states in the area of income taxation.
Third, the EU Commission is taking a novel approach to the state aid issue; yet, they have chosen to apply this new approach retroactively rather than only prospectively. While in the Starbucks case, the sums were relatively modest (20 to 30 million Euros), they maybe substantially larger – perhaps in the billions – in other cases. The retroactive application of a novel interpretation of EU law calls into question the basic fairness of the proceedings. Fourth, while the IRS and Treasury have not yet analyzed the equally novel foreign tax credit issues raised by these cases, it is possible that the settlement payments ultimately could be determined to give rise to creditable foreign taxes. If so, U.S. taxpayers would wind up footing the bill for these state aid settlements when the affected U.S. taxpayers either repatriate amounts voluntarily or Congress requires a deemed repatriation as part of tax reform (and less U.S. taxes are paid on the repatriated amounts as a result of the higher creditable foreign income taxes).
Finally, and this relates to the EU’s apparent substantive position in these cases, we are greatly concerned that the EU Commission is reaching out to tax income that no member state had the right to tax under internationally accepted standards. Rather, from all appearances they are seeking to tax the income of U.S. multinational enterprises that, under current U.S. tax rules, is deferred until such time as the amounts are repatriated to the United States. The mere fact that the U.S. system has left these amounts untaxed until repatriated does not provide under international tax standards a right for another jurisdiction to tax those amounts. We will continue to monitor these cases closely.
Download Treasury Response to State Aid: Testimony of Robert B. Stack, Deputy Assistant Secretary (International Tax Affairs), U.S. Department of the Treasury, Before the Senate Finance Committee, December 1, 2015
See my comments at: Starbucks’ Transfer Pricing & The EU Commission Decision
The existing standards in the area of transfer pricing have been clarified and strengthened as part of the BEPS project. Because the transfer pricing work is based on the arm’s length principle, it is consistent with U.S. transfer pricing regulations under section 482. A key element of the work relates to the arm’s length return to so-called “cash boxes,” which would be entitled to no more than a risk-free return if they are mere funders of activities performed by other group members. The work on cash boxes is one aspect of new approaches to risk, which generally provide that contractual allocations of risk are respected only when the party contractually allocated risk has the capacity to control the risk and the financial capacity to bear it. The transfer pricing work also addresses specific issues relating to controlled transactions involving intangibles, including providing a special rule for hard-to-value intangibles akin to the U.S. “commensurate with income” standard.