The EU Commission today published the non-confidential version of its decision concluding that an advance pricing agreement (APA) granted to a Fiat subsidiary by Luxembourg is illegal state aid.
The decision was first announced by the Commission last October, but the text of the decision had been withheld until today. Both Luxembourg and Fiat have since brought actions in the EU Court of Justice contesting the Commission’s decision.
According to the Commission, Fiat must pay unpaid taxes to Luxembourg of €20 — €30 million on account of the aid.
In its decision, the Commission concluded that through a 2012 APA, Luxembourg granted a selective tax advantage to Fiat’s financing company, Fiat Finance and Trade (FTT), which provides treasury functions for Fiat group companies based in European countries except for Italy.
The Commission asserts that the APA inappropriately lowered FFT’s remuneration for intragroup financing and treasury activity, and thus lowered the company’s Luxembourg tax liability.
The Commission accepted Fiat and Luxembourg’s contention that the APA’s transactional net margin method (TNMM) was the most appropriate transfer pricing method but disputed how the method was applied, stating that the APA sanctioned a capital base that was too low as well as estimated remuneration to be applied to the lowered base that was too low.
Among other things, the Commission said the APA departed from an arm’s length outcome because the APA inappropriately used regulatory capital as a profit level indicator. The Commission said that use of FFT’s accounting equity would have been a more reliable.
The Commission also said the APA used an inconsistent application of the Basel II framework to calculate that capital. Moreover, several inappropriate deductions from FFT’s remaining capital were taken that depart from a market-based outcome, the Commission said.
Commission said that the manner in which the APA arrived at the estimated level of required return to be applied to the capital base did not result in a reliable approximation of a market-based outcome and therefore is not in line with the arm’s length principle.
The Commission also disagreed the Fiat and Luxembourg’s contention that no advantage existed for the Fiat group from the APA because any increase of the taxable base in Luxembourg would be offset in full by an increased tax deduction in other Member States.
The Commission also said that the general Luxembourg corporate tax system constitutes the appropriate reference framework for selectivity analysis. Luxembourg’s Circular 164/2 on tax rulings is too vague and its ruling practice is too inconsistent to constitute an appropriate reference system, the Commission said.
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