By Julie Martin, MNE Tax
The EU General Court today released long-awaited rulings in the Fiat and Starbucks tax state aid cases, concluding in both decisions that it is appropriate for the European Commission to assess whether an advance pricing agreement (APA) confers a selective advantage to a taxpayer for state aid purposes by referring to the arm’s length principle.
Using this standard, the General Court reached opposite conclusions in the two cases, finding that an APA granted to a Fiat subsidiary by Luxembourg was illegal state aid but that an APA granted to a Starbucks subsidiary by the Netherlands was not.
“Today’s judgments give important guidance on the application of EU State aid rules in the area of taxation. At the same time, each case has its specificities and involves complex legal questions. We will study the judgments carefully before deciding on possible next steps,” EU Commissioner Margrethe Vestager said following the release of the judgments.
In the Fiat decision, the General Court concluded that, through a 2012 APA, Luxembourg granted a selective tax advantage to Fiat’s financing company, Fiat Finance and Trade, which provides treasury functions for Fiat group companies.
According to the General Court, in determining whether the Luxembourg ruling granted Fiat an advantage, the Commission was entitled to analyze the ruling in the light of the arm’s length principle, which the court considered to be determinative of “normal” taxation. The arm’s length principle is a tool for checking that intragroup transactions are remunerated as though they had been negotiated between independent undertakings, the court said.
Using that standard, the court agreed with the European Commission that the way that the transactional net margin method (TNMM) was applied in the Luxembourg APA was incorrect and resulted in inappropriately minimizing the Fiat subsidiary’s remuneration and the taxes paid to Luxembourg.
The Starbucks decision addressed a 2008 APA issued by the Netherlands to Starbucks Manufacturing BV, which roasts Starbucks coffee. The APA sets the Netherlands subsidiary’s remuneration for its activities within the group and establishes the royalties to be paid to a related entity for the use of intellectual property.
The General Court again said that the Commission can analyze the ruling in the light of the arm’s length principle.
This time, though, the court said that the Commission failed to prove that the remuneration sanctioned in the tax rulings was actually inconsistent with the arm’s length principle.
“[T]he mere finding of non-observance of the methodological requirements for the determination of transfer pricing is not sufficient to establish that there is State aid within the meaning of Article 107 TFEU. The Commission must also demonstrate that the methodological errors that it identified do not enable an approximation of an arm’s length outcome to be reached and that they resulted in a reduction of the taxable profit compared to a profit that would have been calculated in accordance with the arm’s length principle,” the court said.
Responding to today’s rulings, Netherlands State Secretary for Finance Menno Snel said that the Netherlands agrees with the European Commission that state aid must be tackled. “In the case of Starbucks, the Netherlands lodged its action in 2015 because the European Commission based its ruling that state aid had been provided on an arm’s length principle that does not exist in EU law,” Snel explained.
Snel said that the Commission’s decision should have been based on an assessment of the APA as compaired to Netherlands law. “It seems that the General Court did not rule in the Netherlands’ favour on this point,” the Snel said, even though the court concluded that no state aid was provided,
Dimitrios Kyriazis, Head of Law Faculty at NCH London said the cases are an important legal victory for the Commission regardless of the outcome of the individual cases.
Dimitrios Kyriazis, Head of Law Faculty at NCH London said the cases are an important legal victory for the Commission regardless of the outcome of the individual cases.
“The General Court seems to have sanctioned the Commission’s approach, according to which there is a link between primary EU law (Art. 107 TFEU) and the arm’s length principle,” Kyriazis said.
“With this link now in place, the outcome of individual cases will depend on their facts, and in particular on the rigor and quality of the transfer pricing report submitted by the taxpayer,” Kyriazis said.
Kyriazis added that are no immediate takeaways from the two cases that can be applied to the Apple state aid case because each case is decided on its facts.
Both decisions may be appealed to the European Court of Justice.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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