By Leopoldo Parada, University of Turin, Italy
In late September, the EU General Court released its decisions in two long-awaited state aid appeals: Fiat (cases T-755/15 Luxembourg v Commission and T-759/15 Fiat Chrysler Finance Europe v Commission) and Starbucks (cases T-760/15 Netherlands v. Commission and T-636/16 Starbucks and Starbucks Manufacturing Emea v. Commission).
In form, Fiat represented a win for the Commission, who demonstrated the existence of a selective advantage granted by the Grand Duchy of Luxembourg to Fiat Chrysler Finance Europe, while Starbucks represented a loss.
In substance, however, both decisions confirmed most of the arguments raised by the EU Commission back to the beginning of these cases, which makes it a double win for the EU Commission, but an absolute loss for legal certainty.
An arm’s length standard once and for all . . .. Seriously?
One of the striking, and why not to say it, awkward, conclusions from the EU General Court in both cases came from the fact that Member States would be hypothetically obliged to apply an “arm’s length principle”, inherently recognized in their tax systems and inspired by the OECD transfer pricing guidelines, which could also be used as a benchmark to determine the existence of a selective advantage in state aid cases.
This conclusion is mistaken.
First, there is no such thing as a “European arm’s length principle”. Indeed, EU law does not even require Member States to have any arm’s length or other transfer pricing legislation, let alone apply any specific adjustment method.
Therefore, when the Court states that where a domestic tax law does not make a distinction between integrated and stand-alone companies for the purposes of their corporate income tax liability, that law is intended to tax the profit arising from the economic activity of such an integrated company as though it had arisen from transactions carried out at market price, it simply deviates from a well-settled doctrine in the Court of Justice of the European Union (CJEU) as regards the determination of the reference framework (or benchmark) in state aid cases (with the exception of British Aggregates, Sardinian Stopover Tax, and Gibraltar).
I do not claim that the determination of a benchmark in state aid cases is an easy task (it is not!), but granting the power to the EU Commission to do it according to its own arm’s length principle is simply nonsense.
Not even the inclusion of a provision similar to Article 9 of the OECD model treaty among Member States tax treaties would, by itself, ensure the conclusion that the arm’s length standard is a necessary element of that Member State’s tax system.
Second, the EU Commission claimed, unsatisfactorily, in Starbucks that the Dutch use of the transactional net margin method (TNMM) violated the arm’s length principle, granting a selective advantage.
The proper method to be used in this case was the comparable uncontrolled price (CUP) method. However, there is no EU legislation that forces a member state to give priority to one transfer pricing method over the other.
Therefore, the fact that the Commission simply does not trust in the results of the TNMM does not mean that this is the incorrect method and, even if it were, that would be anything other than a mistake, but not state aid. Transfer pricing has never been (and it will never be) an exact science.
The EU General Court confirmed that the use of the TNMM was correct, but it could have done it without entitling the EU Commission to use its own arm’s length view and just by testing the Dutch transfer pricing system as benchmark, which, by the way, includes both a TNMM and a CUP as adjustment methods.
Third, the use of the OECD transfer pricing guidelines to define what it is “arm’s length” is debatable.
On one hand, one could argue that if a member state has explicitly incorporated and acknowledged the OECD transfer pricing guidelines into its tax system, they would themselves form a benchmark independently on whether the arm’s length standard is part of that reference system itself.
On the other hand, this result would be absolutely arguable is there is no such an explicit reference to the OECD transfer pricing guidelines in the domestic law or administrative practice. Yet, accepting the OECD transfer pricing guidelines as a benchmark just because they “reflect the international consensus achieved with regard to transfer pricing” is just legally outrageous.
The new role given to the OECD transfer pricing guidelines has important consequences for Apple, a still pending state aid case.
While Irish law does not contemplate either an arm’s length standard nor transfer pricing adjustments, the new arm’s length standard recognized by the EU General Court would nonetheless apply to Ireland (and all Member States), regardless of what its domestic law says.
This result is odd and contradicts the sovereignty that member states have as regards direct taxation.
A plea for legal certainty…
Beyond the legal state aid technicalities of these two cases, there is one core tax policy issue that one should not avoid dealing with: the use of individual tax rulings to grant legal certainty.
Taxpayers look for individual tax rulings for the sake of legal certainty to undertake costly business transactions that otherwise would be very difficult to put in place. Therefore, when a court decision provides that a final tax assessment under domestic law in the form of a tax ruling is not anymore final and a “second ruling” might come (this time from the EU Commission) in a few years clearing the national ruling, the big loser is not Fiat or Starbucks, but the legal certainty in general.
Indeed, investors would be now obliged turn into the EU Commission to get that required legal certainty, which grants again the EU Commission extraordinary powers not only referred to the “automatic notification” of national tax rulings (investors need to be sure now, for example, that using the TNMM method, ensured in a tax ruling, is not equivalent to state aid), but with the power to determine how the proper allocation of profits among Member States should occur.
This is simply too much.
We shall wait until the CJEU makes the final touch.
Leopoldo Parada
Dr. Leopoldo Parada, LL.M. (Florida) is a visiting professor of International Tax Law at the Department of Management of the University of Turin. He also holds a position as an academic researcher on a project basis at the University of Liechtenstein.
In former years, he worked as a research associate at the Max Planck Institute for Tax Law and Public Finance in Munich and held also a position as postdoctoral researcher at the IBFD in Amsterdam”.
Latest posts by Leopoldo Parada (see all)
I don’t understand why the use of the OECD guidelines in the case is a legal outrage. In the UK courts often use soft law like OECD guidelines and other similar texts to assist in legal interpretation.