European Union: Tax May Be Taxing, But No Tax May Be Even More Taxing!

Last Updated: 4 February 2015
Article by Rory Ashmore

EU Competition Commissioner hints at potential state aid sanctions for favourable tax rulings

On 16 January 2015 the European Commission ("Commission") gave one of its clearest indications yet that it is seeking to clamp down on unfair tax breaks or 'waivers' for underpaying companies through the EU rules on state aid.  It published its decision to open an in-depth state aid investigation into the corporation tax treatment in Luxembourg of certain transfer pricing arrangements involving Amazon.

This serves as a stern reminder to businesses and their advisers that potential implications under the state aid regime must be considered very seriously when it comes to the question of tax compliance and corporate tax structuring.

How does State aid apply to taxation?

The EU rules on state aid prohibit the granting of finance or any other economic advantage to a particular "undertaking" (the EU term for a business or organisation) which favours it unduly over others in the market.  This is on the basis that it distorts competition; for instance, a member state government must have valid reasons for helping a struggling business to stay afloat (indeed, there are guidelines which assist in determining whether any subsidies or loans given to firms in financial difficulty would be deemed to comply with the rules). 

If a grant, loan, guarantee or other advantage exceeds certain thresholds in value then it must be notified to the Commission, which will assess whether it is "compatible" and, if applicable, whether a suitable exemption applies (e.g. for "rescue and restructuring" purposes, a category of aid which has been highly topical in the aftermath of the EU-wide credit crisis). 

This can include favourable tax treatment, notably in the form of agreements for a company seeking to pay less than its assessed amount of tax to 'settle' at a certain, lower sum.  The underpayment of corporation taxes by large, high-profile commercial organisations in recent years has generated numerous headlines within the business and general media, and so it comes as perhaps little surprise that the Commission is now seeking to clamp down in earnest in light of fresh stories in the press.

What has the Commission said, and what has it been doing?

On 6 November 2014, the EU's Competition Commissioner Margrethe Vestager made a statement on tax state aid investigations, reporting on investigations in Luxembourg and the Netherlands into the tax treatment of a series of large businesses, notably Fiat and Amazon in Luxembourg.  It is thought that this statement was made to address media reports (including in the UK newspapers) over leaked documents concerning tax agreements, returns and other sensitive papers relating to a number of major companies in Luxembourg.

Concerns over certain practices in Luxembourg have now culminated in the Commission launching an official enquiry into Amazon's treatment.  This has been announced by way of a formal letter to the Luxembourg authorities, explaining the Commission's suspicion that a tax ruling in November 2003 selectively favoured Amazon by conferring treatment that failed to comply with the so-called "arm's length" principle and was not granted under market conditions.  This all relates to the structuring of Amazon's corporate arrangements and intra-group transactions around its strategic headquarters in Luxembourg.

In light of the Commission's decision to launch its case regarding Amazon, it now seems particularly significant that Ms Vestager opened her November statement by clarifying that:

"in a tax ruling, the tax authorities of a Member State accept that a tax base of a specific company is calculated in a favourable way which does not correspond to market conditions, it may give to the company a more favourable treatment than what other companies would normally get under the country's tax rules, and this could constitute State aid." (Emphasis added)

This reminder was all the more salient since it was delivered against a backdrop of other recent large-scale investigations into unduly favourable tax treatment of major corporations, particularly in Luxembourg.  Most notably:

  • In the Netherlands, the Commission has been concerned that a tax ruling by the Dutch authorities has given Starbucks a selective advantage, in that it does not follow a market-based assessment of transfer pricing;
  • In Eire, the Commission's concerns surround suggestions that the Irish tax authorities have exercised significant discretion previously given to them in order to grant Apple a selective advantage, reducing its tax bill to below the level it should have paid; and
  • In Luxembourg the Commission has now taken serious action, both with the latest announcement in relation to Amazon and by having commenced infringement proceedings against its government for only providing part of the information it was asked to disclose regarding its tax rulings and also in relation to the use of 'patent boxes' to give favourable tax treatment in respect of intellectual property assets.  As indicated above, the Commission's comments related in particular to the two on-going investigations in Luxembourg over assessments made in favour Amazon and Fiat Finance & Trade.  

That the Commission has now announced its formal in-depth probe of Amazon in Luxembourg confirms that tax assessment is now firmly towards the priority end of its state aid enforcement agenda.

So, a major warning when assessing tax liability...

The Commission's announcement on Amazon confirms its seriousness and the focus of effort and resource it is prepared to direct towards utilising the state aid enforcement arm in tackling unfair tax rulings which unduly favour certain (especially larger) commercial organisations. 

Charles Russell Speechlys has dedicated, specialist corporate taxation specialists, including in Luxembourg and Geneva as well as in the UK, to assist our EU & Competition specialists in addressing any queries regarding the potential state aid issues that can arise in a taxation context. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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