US criticizes EU probe of multinational corp tax as Apple decision nears

The Obama Administration, in a letter and white paper released today, ramped up its criticism of European Commission efforts to force large multinational firms to pay back amounts deemed illegal state aid that were allegedly received through overly generous tax rulings, known as advance pricing agreements (APAs).

The Commission determined last October that APAs granted by the Netherlands to a Starbucks subsidiary and by Luxembourg to a Fiat subsidiary amounted to illegal state aid and ordered the EU nations to recover the back taxes and penalties from the firms. The decisions are being appealed to the EU General Court.

The Commission could soon order its largest state aid recovery yet, though, on account of 1991 and 2007 APAs granted by Ireland to Apple. The final determination in the Apple case is expected this fall, and could result in Apple owing several billion dollars to Ireland.

In a letter to EU Commission President Jean-Claude Juncker, US Treasury Secretary Jacob Lew reiterated the US’s opposition to the EU Commission actions, asserting that state aid recoveries based on inappropriate transfer pricing rulings should be prospective only.

The financial burden of these recoveries could be born by the US, Lew said, as the amounts recovered may be considered foreign income taxes which are creditable against the multinational’s US taxes, should the multinationals repatriate their earnings.

Lew acknowledged that an EU country’s selective application of tax rules could potentially constitute impermissible state aid under longstanding EU competition law principles. Nonetheless, he said that the theories being applied in APA cases are “entirely new” and thus it would be unfair to apply them retroactively.

The EU Commission is advancing a novel view, Treasury said, by stating that selective advantage can occur if the Commission believes an APA is inconsistent with its view of the arm’s length principle.

Moreover, Treasury argues that prior EU decisions have never held that a selective advantage is granted by an EU state if multinationals receive tax benefits that are not available to a standalone companies, as has been asserted by the Commission in these cases.

Treasury also said that, by substituting its own views on transfer pricing for those in the OECD transfer pricing guidelines, the Commission undermines the international consensus on transfer pricing. The Commission has also threatened the ability of member states to honor tax treaties, and undermines progress made under the OECD/G20 base erosion profit shifting project, Treasury said.

The letter and paper also reiterate the US’s assertion that the EU is disproportionately targeting US MNEs in its state aid inquiries. EU Competition Commissioner Margrethe Vestager has denied this charge in multiple forums.

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