|Bob van der Made|
On October 21 2015 the European Commission (EC) announced in a press release the adoption of final decisions in the formal state aid investigations into transfer pricing agreements between a Dutch Starbucks entity, Starbucks Manufacturing BV (SMBV), and the Netherlands, and Fiat Finance and Trade (FFT) and Luxembourg.
The EC largely confirmed the preliminary conclusions as expressed in the non-confidential versions of both opening decisions which were published on November 14 2014 (SMBV) and September 30 2014 (FFT). The EC formally decided that, in its opinion, both companies have benefited from unlawful state aid granted by the Netherlands and Luxembourg, respectively, and it ordered full recovery of all the aid. The EC estimates that the amounts to be recovered are between €20 million – €30 million for each company. The EC notes, however, that it considers that it is for the Dutch and Luxembourg tax authorities to establish the exact amounts based on the methodologies set out by the EC.
Both final decisions by the EC in these investigations pertain to the use of tax rulings on the application of transfer pricing rules. In each case, the EC takes the position that the agreements made between the taxpayer and the member state do not reflect economic reality and the prices set do not reflect market conditions.
The EC concludes that in each case the agreements reflect the application of transfer pricing rules in a way which gives rise to a particular (favourable) tax base.
Key aspects identified by the Commission
- The EC holds that the royalty paid by SMBV for coffee roasting 'know-how' in its view cannot be justified as it would not appear to reflect market value. The EC further notes that independent roasters to whom roasting is outsourced would not appear to be required to pay similar royalties;
- The EC questions the price paid by SMBV for the coffee beans and states that in its view the price is inflated. It further notes that such an inflated price would appear to reduce the profits generated from the coffee roasting activities to a level that is not sufficient to cover the payment of the know-how royalty;
- In the FFT case, in the view of the EC, the transfer pricing method leads to a capital base lower than the company's actual capital due to economically unjustified assumptions; and
- Furthermore with regard to FFT, in the EC's view the remuneration applied to the lowered capital base would not reflect market rates.
In its press release, the EC stated that in the context of these two investigations it has used for the first time the investigative tools granted by Council regulation (EC) 734/2013 which allows the EC to directly ask for information from member states as well as from the beneficiary of the aid and their competitors.
Transfer pricing and EU Law
As in its preliminary decisions, the EC asserted in its press release on both final decisions that if the method of taxation used for intra-group transfers does not 'correspond to market conditions' and leads to a taxable base that is lower than the one which would result from the correct implementation of that principle, it provides a selective advantage to the company concerned.
Further litigation in these two cases before the EU courts will ensue as Starbucks and Fiat have indicated that they will appeal the decisions, as have the governments of the Netherlands and Luxembourg. The Dutch Ministry of Finance has published a summary of its position and an unofficial English summary translation of the EC's Starbucks decision. The Court of Justice of the EU will ultimately have the final say on the validity of the EC's decisions, which could take several years.
The EC's final decisions in the remaining two of its four most advanced investigations – into Apple in Ireland and Amazon in Luxembourg – which also involve the use of tax rulings concerning the application of the transfer pricing rules and the arm's-length standard, as well as the ongoing investigation into the Belgian Excess Profits Tax Rulings regime, are expected either before the end of the year or, more likely, in the first quarter of 2016.
The non-confidential version of the decisions will be made available under case numbers SA.38375 (FFT) and SA.38374 (SMBV) in the state aid register on the EC's DG Competition website once any confidentiality issues have been resolved, a process which may take several months.
The press release notes that the EC continues to investigate the ruling practices of all member states, and EU Competition Commissioner Margrethe Vestager has indicated that more EC fiscal state aid tax rulings investigations are entirely possible (see, for example, the EC's opening decision on McDonalds in Luxembourg dated December 3 2015).
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