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Autumn tax disputes: EU state aid law still causing headaches

Businesses are still facing uncertainty over their tax arrangements due to ongoing disputes over everything from state aid to intangible assets at the EU-level and the national level.

There have been several landmark developments in tax disputes in recent months, including the return of the Apple state aid case, but also further afield such as the Vodafone case in India where the taxpayer won its long battle with the tax authority.

There are many cases that continue to be a source of uncertainty for taxpayers. This is especially true in EU member states, where state aid continues to be a serious issue for taxpayers.

At the same time, tax authorities in some EU jurisdictions are more aggressive than ever and, in some cases, only the courts stand between them and raising their demands on businesses. Here ITR looks at three case developments that fit these trends.

Apple faces new battle

The European Commission announced on September 25 that it will appeal the European General Court’s July decision in the controversial Apple state aid case. In July, the General Court overturned the 2016 decision that found Ireland had granted illegal state aid to Apple.

The General Court found that the Commission had failed to meet the burden of proof that there was an illegal advantage granted to Apple. This was a victory for the taxpayer and the Irish government. Now the case is going to the European Court of Justice (ECJ), where it will continue for years to come.

Peter Vale, partner at Grant Thornton Ireland, described the Commission’s decision as a “surprise” because the ruling was such a “comprehensive defeat”.

“From Ireland’s perspective, the appeal by the EU Commission keeps the matter in the spotlight for a few more years, which could have adverse reputational implications for Ireland, regardless of the ultimate outcome,” said Vale.

“The decision by the Commission to appeal creates more uncertainty for investors looking at Ireland or the EU in respect of the EU tax landscape,” he explained. “Ultimately, I believe that the ECJ will rule in favour of both Ireland and Apple.”

The Apple case has been particularly controversial because the double Irish structure was running for many years and had been used by many other multinational groups such as Google operating in Europe via Ireland.

The case raised fundamental questions about transfer pricing. The General Court found that the structure was in line with the arm’s-length principle (ALP) by way of comparison with the cases of Fiat and Starbucks.

Both Apple and the Irish government have long denied the European Commission’s claims about the double Irish structure. In the years since the case started, Ireland has dismantled the structure in question and Apple has reshored assets following US tax reform.

Nevertheless, the ECJ will now have to decide the case after years of litigation. The outcome will either leave the European Commission reeling or set a bold precedent for state aid law.

Spanish tax treatment of lease agreements

In another state aid case, the European General Court was less favourable to the taxpayer and found that the Spanish Tax Lease System amounted to illegal state aid on September 23.

Under the Spanish Tax Lease System, companies entering into financing lease agreements were granted rebates of 20% to 30% on the price of vessels built by Spanish shipyards. The case dates back to 2006 when some companies complained to the EU competition authority that they had ‘lost out’ on contracts thanks to the Spanish tax scheme.

“The Spanish tax system applicable to certain finance lease agreements entered into by shipyards constitutes an aid scheme. The unlawful state aid granted under that system must be recovered,” said the court.

The General Court took the view that “the existence of those discretionary aspects was such as to favour the beneficiaries over other taxpayers in a comparable factual and legal situation”.

In short, the court ruled in favour of the European Commission which found that the tax lease scheme was granting a ‘selective advantage’ to investors and economic interest groupings in the Spanish shipping industry.

The taxpayers in the case disputed the Commission’s position and appealed to the General Court to overturn the case, which it did in December 2015. However, the European Commission appealed to the Court of Justice of the European Union (CJEU) to ensure the case would be heard again. The CJEU referred the case back to the General Court.

The Spanish taxpayers have gone from a position of certainty in late 2015 to having their position dismissed in 2020. There is a time limit of two months for an appeal to be waged and, so far, the companies have not sought an appeal.

Discretionary assessments in Denmark

The Danish National Tax Tribunal published its July decision on the case of SKM2020.387.LSR on September 24. The case concerns the taxable income of a Danish corporation, as part of a multinational group, providing software solutions in the country.

The multinational group reorganised in 2010 and turned the Danish operating company into a commissionaire. The change in the entity’s status meant that the company had to end a distributor agreement and replace it with a commissionaire agreement.

The latter would ensure that customer contracts were concluded by the consolidated corporation going forward. As part of the reorganisation, the company transferred intangible assets to the commissionaire. This drew the eye of the tax authority.

The Danish Tax Agency (Skat) argued that the transfer of intangible assets, including knowhow and customer relations, fell short of sufficient documentation standards. So Skat increased the amount of taxable income as part of a discretionary assessment.

The National Tax Tribunal found that there was insufficient legal basis for such an assessment because the TP documentation included a detailed account of the relevant business structures. It also included an analysis of the functions and risks, as well as a comparative analysis for the relevant transactions before and after the 2010 reorganisation.

Yet the key question was over the quality of the TP documentation. The taxpayer did not describe the transaction for which it was scrutinised, however, this alone, according to the tax tribunal, does not justify a discretionary assessment.

The Danish tax authority has to prove that the transfer of intangible assets on terms and prices is not in line with the ALP.  However, the National Tax Tribunal did uphold one claim the tax authority made in this case.

The tribunal found that the reorganisation was not made at arm’s length. This was reinforced by the OECD’s 2017 TP guidelines.

An independent distributor with high future profit potential is not likely to give that up in exchange for a lower rate earning without compensation. In this case, the Danish corporation had generated far more income than expected.

The tax tribunal found that the tax authority had proved that the transfer of valuable intangible assets had taken place and that such assets should be valued in accordance with Danish law. So the basis for the assessment was correct on these terms.

The tribunal rejected the taxpayer’s claim that the assessment should be based on the individual expiration dates for the contracts. The tribunal lowered the life expectancy of the assets from an “infinite period” to 10 years.

This was based on an assessment of the length of the customer relations of the Danish corporation, as well as the significant chance that the Danish entity will be overtaken by competitors in the near future.

Although the tribunal decision is not a court ruling, the National Tax Tribunal carries significant weight because it is the highest administrative appeals body for tax disputes in Denmark. The tribunal decision comes after a series of blows to the Danish tax authority.

The Danish Supreme Court and the High Court have both ruled against the tax authority in recent years, including the Adecco case in July. The result in this case was far from a clear victory for either side.

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