IAFEI Quarterly - 34th Issue

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International Working Committees
Introducon
Tax evasion has remained in the top of the “heate-
dly-debated-issues” charts for several years and is not
expected to “drop down” soon. Instead, the intensity
in the fight against it seems to be increasing on every
occasion (Lux Leaks, Panama Papers etc.). In this “war”,
European Commission’s (EU) decisions on fiscal state
aid are beyond doubt the most controversial “wea-
pon”. In essence, such decisions invalidate tax rulings
issued by Member States since they allow mulnao-
nals (MNEs) to pay less tax than standalone companies
in comparable situaons under Member States’ tax
laws in violaon of state aid rules. Apple1 , Starbucks 2,
Fiat3 are some of the most striking cases where EU, ap-
plying the above rules, ordered payment to the rele-
vant member state of unpaid taxes amounng from €
20-30 million to € 13 billion.
McDonald’s4 and Amazon’s cases are sll pending whi-
le new ones are being opened on an alarmingly regular
basis. For MNEs, these imply (i) increased risk of tax
rulings becoming subject to invesgaon as well as (ii)
the end of the illusion that tax rulings can actually gua-
rantee immunity agreed transfer prices (TP).
In addion, potenal discovery of reasons for the EU
to open a case or – worse – to issue a decision on the
existence of fiscal state aid means huge costs for the
MNE, not only in terms of recovery but also of repu-
taonal damage. In light of the above, it is crucial that
1
cfm?proc_code=3_SA_38373
2
cfm?proc_code=3_SA_38374
3
cfm?proc_code=3_SA_38375
4
cfm?proc_code=3_SA_38945;
de/isef/case_details.cfm?proc_code=3_SA_38944
boards are fully aware of the current developments in
the area of fiscal state aid and their implicaons and
take them into account in their tax risk management
policies. This arcle gives an overview of the most re-
cent EU acons in the field and the lessons to be lear-
ned therefrom.
Cases: Apple, Starbucks, Fiat
Very recently, Ireland was found to have granted state
aid to Apple by virtue of a tax ruling issued in 1991 and
revised in 2007. These two tax rulings constute the
agreement between Ireland and Apple on the method
for the calculaon of the net profit of the Irish PEs of
two Apple-group companies5. The remaining profit was
allocated to the “head offices” of the PEs, which howe-
ver were found to exist “only on paper”; in fact before
the opening of the invesgaon, Ireland admi"ed that
“the territory of tax residency […] was not idenfied.”
It follows that the residual net profit remained unta-
xed. The decision opening the case6 referred to the
following discrepancies in the tax rulings in queson:
(i) inappropriate use of operang costs as net profit
indicator for the applicaon of Transaconal Net Mar-
gin Method (TNMM) where specific know-how is/was
idenfied; (ii) lack of any jusficaon for mark-up on
operang costs7; (iii) untenable jusficaon for the
use of lower mark-up for costs exceeding specified
amount8; (iv) lack of jusficaon for the existence of a
capital allowance claim as well as the limit relang the-
5 Apple Operations Europe and Apple Sales International
6 !e "nal decision of the EU is not publicly available yet. We refer to
C(2014) 3606 "nal dated June 11, 2014
7 !e mark-up seemed to be the result of reverse engineering, on the
basis of the amount of net pro"t desired as the end result.
8 EC noted that “employment considerations” cannot constitute a
valid reason in the context of application of the arm’s length principle.
FISCAL STATE AID: WHAT CONCLUSIONS
MAY BE DRAWN FROM THE EU’S RESERVATIONS
by PIERGIORGIO VALENTE
Chairman IAFEI Internaonal Tax Commi"ee Managing Partner of Valente Associa GEB Partners
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