Coffee Beans & Cars: EC State Aid Decisions

Yesterday (21/10/15), the European Commission (EC) announced in its final decisions in respect of the formal state aid investigations into transfer pricing agreements secured under tax rulings between:

• A Dutch Starbucks entity, Starbucks Manufacturing EMEA BV (SMBV) and the Netherlands; and
• A Luxembourg Fiat entity, Fiat Finance and Trade (FFT) and Luxembourg.

The final decisions are broadly in-line with the preliminary conclusions as expressed in opening decisions (published on 14/11/14 for SMBV and 30/09/14 for FFT). In short, the Netherlands and Luxembourg granted selective tax advantages to Starbucks and Fiat, which are illegal under EU state aid rules via “tax rulings” covering pricing arrangements that do not reflect market conditions (i.e. generate an unusually favourable tax base amounting to state aid). The EC orders full recovery of all such state aid (estimated at Euro 20-30 million in each case), once quantified by the Dutch and Luxembourg tax authorities.

Key Points from Each Case:

Fiat

• The EC believes that Fiat Finance and Trade's activities are comparable to those of a bank, i.e. the taxable profits should be determined in a similar way as for a bank with reference to the return on capital deployed for financing activities. However, the tax ruling endorses an artificial and extremely complex methodology that is not appropriate for the calculation of taxable profits and does not reflect market conditions.

• The EC notes that the ruling artificially lowers taxes paid by Fiat Finance and Trade in two ways:

1. Due to a number of economically unjustifiable assumptions and down-ward adjustments, the capital base approximated by the tax ruling is much lower than the company's actual capital; and
2. The estimated remuneration applied to this already much lower capital for tax purposes is also significantly lower than market rates.

Whilst, further litigation in one or both of the cases before the European Courts appears likely, these decisions will put additional pressure on both Corporates and Tax Authorities during a tax ruling process to look very closely at the underlying defendability of the transfer pricing arrangements. In our brave new post BEPS world, Corporates should assume tax ruling documentation will enter the public domain and further that any tax ruling that appears to grant privileges that are “too good to be true” may be exactly that and subsequently overturned under EU State Aid rules. The EC’s final decisions in respect of Apple in Ireland and Amazon in Luxembourg, are expected shortly and the EC’s press release notes that the EC continues to investigate the ruling practices of all Member States, i.e. more state aid tax rulings investigations are likely.