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EU: Commission publishes working paper on state aid and tax rulings


Bob van der Made

The European Commission (EC)'s Directorate General for Competition has published its working paper on state aid and tax rulings. It provides an overview of DG Competition's preliminary orientations after review of the member states' tax ruling practices.

The working paper, released on June 3 2016, does not call into question the granting of tax rulings by member states as such, and recognises the importance of legal certainty. It rather provides an overview of the EC's understanding of the concept of state aid and its application to tax rulings.

As part of an inquiry, DG Competition has looked at more than 1,000 tax rulings focusing in particular on tax rulings endorsing transfer pricing (TP) arrangements but also analysing confirmatory rulings, leading in mid-2014 to the opening of formal state aid investigations into various tax rulings. The working paper focuses solely on rulings related to TP issues leaving aside other potentially problematic areas. It announces that further investigations will be opened in TP cases where there are serious reasons to believe that state aid has been granted.

The working paper states that while tax ruling practices of member states differ significantly in quantitative terms, most member states closely follow the procedural guidance from the EU (COM (2007) 71 final) and OECD on the granting of TP rulings. It notes that if an arrangement complies with the OECD TP Guidelines, including the guidance on the choice of the most appropriate transfer pricing method, and leads to a reliable approximation of a market-based outcome, it is unlikely to give rise to State aid.

However, according to DG Competition, some TP arrangements do not seem to reflect the arm's-length principle (ALP) when the outcome manifestly deviates from a 'reliable approximation of a market-based outcome'. As examples, DG Competition mentions tax rulings for group financing companies whereby the taxable profit is determined as a margin of the underlying transaction without a clear economic analysis, and rulings endorsing tax deductions for payments or charges between group companies where such payments are not actually made.

The working paper suggests that the use of certain TP methods provides a more reliable means to approximate a market- based outcome than others. Specifically mentioned are the comparable uncontrolled price (CUP) method (if sufficient comparables are presented) and the profit split method, as the latter is typically based on a two-sided analysis approach.

DG Competition states that rulings based on a one-sided approach (typically the transactional net margin method (TNMM), according to the paper often used when IP is involved) sometimes automatically allocate residual profit to another company in another jurisdiction without any information about the activities of that other company. It also states that under the TNMM method, operating expenses are sometimes chosen systematically as performance indicators without necessarily representing the commercial value of the functions of the company, while a more appropriate indicator (e.g. return on sales or return on equity) may be available.

The working paper states that DG Competition's focus is on cases where there is a manifest breach of the ALP. It notes that the approximate nature of the ALP could not be used to justify a TP analysis that is either methodologically inconsistent or based on an inadequate comparables selection. According to DG Competition, any deviation from the best estimate of a market-based outcome must be limited and proportionate to the uncertainty inherent in the TP method chosen or the statistical tools employed for that approximation exercise.

The working paper seems largely consistent with the 2016 EC Notice on the notion of state aid and the EC investigations in respect of tax rulings on TP and the ALP. However, it is not always clear in those investigations whether the EC's approach to the ALP is entirely consistent with what one might have expected per the OECD TP Guidelines. Therefore the question of what is a 'reliable approximation of a market-based outcome' may still remain a matter of some debate for the foreseeable future. In addition, the EC's arguments in this area remain to be tested by the European courts.

Bob van der Made (

PwC EU Public Affairs-Brussels

Tel: +31 88 792 3696


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