Abstract
This contribution explores the influence of state aid law on tax measures for the provision of relief from double taxation and the consequences of its application to transfer pricing adjustments. In particular, it analyses the compatibility of measures that prevent merely virtual double taxation and transfer pricing adjustments that might result in “white income”. It also reviews the merits of the Commission’s claim that Member States have to apply the arm’s length standard to transfer pricing adjustments as a matter of State aid law.
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Notes
- 1.
See, e.g. Rust (2011).
- 2.
See Introduction to the Commentary on the OECD Model Tax Convention, paragraph 1: “Its harmful effects on the exchange of goods and services and movements of capital, technology, and persons are so well known that it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries.”
- 3.
In the famous words of AG Colomer, “the most serious obstacle there can be to people and their capital crossing internal borders”. See Opinion in C-376/03 D, ECLI:EU:C:2005:663, para 85.
- 4.
- 5.
See, e.g. Lang (2012), p. 85 at 97 et seq.
- 6.
For this most recent formulation, see Opinion of AG Bobek in NN (L) International (C-48/15, EU:C:2016:45, para 59, referring in particular to Kerckhaert and Morres (C-513/04, EU:C:2006:713, paragraph 20) and Damseaux (C-128/08, EU:C:2009:471, paragraph 27).
- 7.
See, e.g. De Groot (C-385/00, EU:C:2002:750).
- 8.
See, e.g. Manninen (C-319/02, EU:C:2004:484) for economic double taxation, and Orange European Smallcap Fund (C-194/06, EU:C:2008:289) for juridical double taxation.
- 9.
In particular, the Court requires the granting of a credit on the basis of the nominal corporate tax rate charged in the dividend distributing subsidiary’s residence state. See FII Group Litigation (C-35/11, EU:C:2012:707, paragraph 65).
- 10.
- 11.
Commission notice on the application of State aid rules to measures relating to direct business taxation of 11 November 1998, OJ C 384/3 (10 December 1998), para 13.
- 12.
Commission decision 2003/601/EC of 17 February 2003, OJ L 204/51 (13 October 2003).
- 13.
- 14.
Luja (2004), p. 234 at 235.
- 15.
D (C-376/03, EU:C:2005:424, paragraph 61).
- 16.
Columbus Container Services (C-298/05, EU:C:2007:754).
- 17.
- 18.
Such was essentially the finding of the Commission in its decision 2003/601/EC of 17 February 2003, OJ L 204/51 (13 October 2003) concerning the exceptional application of the exemption method to foreign dividends that are reinvested in Ireland.
- 19.
Supra Section 2.1.
- 20.
Cf. Art. 4 Parent Subsidiary Directive.
- 21.
See Gilly (C-336/96, EU:C:1998:221, paragraph 34).
- 22.
See FII Group Litigation (C-35/11, EU:C:2012:707, paragraph 65).
- 23.
Luja considers both tax sparing and matching credits, finding the former more problematic as their objective is indeed to maintain incentives for investment without any real justification based on the need to avoid double taxation, whereas the latter provide relief at a standard rate that may over- but can also undercompensate. See Luja (2004), p. 234 at 236.
- 24.
Luja (2004), p. 234 at 236.
- 25.
Autogrill España (T-219/10, EU:T:2014:939, paragraph 52 et seq).
- 26.
Banco Santander and Santusa (T-399/11, EU:T:2014:938, paragraph 56 and seq).
- 27.
See Opinion of AG Kokott in Finanzamt Linz (C-66/14, EU:C:2015:242, paragraph 108 et seq) referring to Gibraltar (C-106/09 P and C-107/09 P, EU:C:2011:732, paragraph 104): “[T]he criteria forming the basis of assessment which are adopted by a tax system must also, in order to be capable of being recognised as conferring selective advantages, be such as to characterise the recipient undertakings, by virtue of the properties which are specific to them, as a privileged category”.
- 28.
Luja answers this question in the affirmative, considering investors in a specific country to be a sufficiently selective group for purposes of Article 107(1) TFEU. See Luja (2004), p. 234 at 236.
- 29.
Cases C-20/15 P and C-21/15 P, EU:C:2016:624, paragraph 84 et seq.
- 30.
See Art. 9(2) OECD Model Tax Convention concerning mandatory corresponding adjustments.
- 31.
See, e.g. Manninen (C-319/02, EU:C:2004:484), FII Group Litigation I (C-446/04, EU:C:2006:774), Meilicke (C-292/04, EU:C:2007:132), Haribo and Salinen (C-436/08 and C-437/08, EU:C:2011:61), Meilicke II (C-262/09, EU:C:2011:438), FII Group Litigation II (C-35/11, EU:C:2012:707).
- 32.
See, e.g. Bosal (C-168/01, EU:C:2003:479, paragraph 32), Columbus Container Services (C-298/05, EU:C:2007:754, paragraph 51 et seq), X Holding (C-337/08, EU:C:2010:89, paragraph 40).
- 33.
- 34.
See Rossi-Maccanico (2015), pp. 63–77. See also further infra 3.4.
- 35.
Cf. Lyal (2015), p. 1017 at 1043.
- 36.
It is worth noting that this effectively mirrors the Court of Justice’s approach to transfer pricing under the fundamental freedoms, which leaves the Member States free to allocate taxing rights among themselves, but limits their unilateral allocation of (excess) profits to companies. While, on the one hand, double taxation is not in itself a problem, discriminatory transfer pricing adjustments for one company are not justified by the absence of resulting double taxation because of a corresponding adjustment for another company. See Schön (2015), p. 417 at 422; also Schön (2013), p. 73 at 83 et seq.
- 37.
See Kofler (2015).
- 38.
Consider e.g. the case of adjustments made in Germany on the basis of formal criteria: this, although originally based on case law of the BFH on transactions between (domestic) closely connected persons and maintained as a basis for adjustment for cross-border intra-group relationships, has been found by the BFH to violate the arm’s length principle. The BFH thus limits its application to situations that are not covered by a tax treaty.
- 39.
See the arguments concerning corresponding adjustments contrary to the arm’s length standard, infra 3.4.
- 40.
Preliminary Decision SA 38944 (Amazon), paragraph 78 (emphasis added).
- 41.
It should be noted that, in its recent (preliminary) decisions concerning the cases of Amazon, Fiat and Starbucks, the Commission has not substantiated what the correct application of the law would have been; it merely raised doubts as to whether the Member State has done enough to ensure that its laws (as interpreted consistently in its own practice) have been applied correctly by the taxpayers calculation of transfer prices. This effective reversal of the burden of proof seems prima facie problematic; upon closer inspection, it may not be so: if, as in the Amazon case, the very existence of a transfer pricing study is in doubt, although such would normally be required under domestic law for such cases, this may well justify such reversal. By contrast, the mere fact that an existing study had been approved within a certain (short) period of time can hardly be considered to be a “smoking gun” equivalent to that case and thus exonerate the Commission from the need to substantiate its objections to the content of that study.
- 42.
Preliminary Decision SA 38944 (Amazon), paragraph 55; see also Preliminary Decision SA 38375 (FFT), paragraph 62.
- 43.
Preliminary Decision SA 38944 (Amazon), paragraph 55: “Moreover, depending on the facts and circumstances of the taxpayer, not all methods approximate a market outcome in a correct way. When accepting a calculation method of the taxable basis proposed by the taxpayer, the tax authorities should compare that method to the prudent behaviour of a hypothetical market operator , which would require a market conform remuneration of a subsidiary or a branch, which reflect normal conditions of competition”. (emphasis added)
- 44.
Note Simmons & Simmons Report (study on behalf of the European Commission on Administrative Practices in Taxation, 1999): “We found that few countries have explicitly adopted the OECD guidelines (the UK has incorporated the guidelines into domestic law), but a majority of Member States either follow the guidelines, or adopt an approach consistent with them. Greece, Ireland and Luxembourg do not appear to do so, and the approach taken in Finland and France amounts to only a partial adoption of the guidelines. Sweden applies OECD principles, but in many cases in an inappropriate manner. Many countries follow OECD principles but will not accept secondary methods of profit determination (Belgium and the Netherlands being examples of this).” (emphasis added)
- 45.
Preliminary Decision SA 38944 (Amazon), paragraph 60 (emphasis added).
- 46.
The Commission seems to go into that direction in the beginning of its (preliminary) decisions: see e.g. Preliminary Decision SA 38944 (Amazon), paragraph 11: “The internationally agreed standard for setting such commercial conditions between companies of the same corporate group or a branch thereof and its parent company and thereby for the allocation of profit is the ‘arm’s length principle’ as set in Article 9 of the OECD Model Tax Convention.”
- 47.
The OECD TPG are, as the work of the OECD generally, the result of work done by experts with different background, but ultimately agreed upon by the official representatives of the OECD Member States in the Fiscal Committee. These are government representatives who exercise their function in this international forum entirely unconstrained by any influence of their national legislatures as the competent authority to decide on direct tax matters.
- 48.
Preliminary Decision SA 38944 (Amazon), paragraph 55; see also Preliminary Decision SA 38375 (FFT), paragraph 62; see also [Commission Decision 2003/755/EC of 17 February 2003 on State aid C 15/02, Belgian Coordination centres, OJ L 282, 30.10.2003, p. 55, recitals 89 to 95 and Commission Decision 2003/512/EC of 5 September 2002 on State Aid C 47/01, German Coordination Centres, OJ L 177, 16.07.2003, p. 17, recitals 27 and 28.
- 49.
Cf. Lyal (2015), p. 1017 at 1039: “More general application of the Court’s approach in Gibraltar would be problematic: it would require careful determination of the basis of comparison and an assessment of the legitimacy of differentiation. In other words, it would require potentially far-reaching intrusion in the tax policy of Member States.”
- 50.
Commission and Spain v. Government of Gibraltar and United Kingdom (C-106/09 P, EU:C:2011:732, paragraph 101).
- 51.
The ECJ thus seemed to employ a similar strategy to the one uses in its case law on economic double taxation, where it ignores certain elements of a Member State’s goals with a certain tax measure: in Manninen, the ECJ held the relevant objective of the tax credit system was merely to “avoid economic double taxation” and thus easily found comparability between income derived from domestic companies as compared to income derived from foreign companies, as both could be subject to economic double taxation. The ECJ thus ignored the real objective of the system, which was to avoid economic double taxation occurring as a consequence of Finland’s own taxation. This approach may be sound in substance if it can be shown that the “real” objectives of a Member State are themselves contrary to the internal market, but the ECJ did not undertake that analysis and simply re-interpreted the national tax systems underlying principles.
- 52.
Note: “the difference between profits and losses” does not make much sense, and should be explained as a mere mistranslation from the original French “la différence entre les produits et les charges” which rather means “the difference between receipts and costs”, i.e. a simple calculation of commercial profits.
- 53.
E.g. Preliminary Decision SA 38944 (Amazon), paragraph 53; see also Preliminary Decision SA 38375 (FFT), paragraph 60.
- 54.
One should note that finding such derogation, e.g. with respect to the profit allocation of companies that form part of an international group, would not necessarily result in a finding of prohibited aid, as such derogation could be consistent with the nature or general scheme of the tax system. A tax system may legitimately distinguish between domestic and cross-border situations because of the need for coordination with the tax jurisdiction of other countries; see the discussion above concerning the potential different treatment under different relief mechanisms to the extent that they lead to double taxation relief. I shall revisit this issue again below when discussing the search for the right comparator.
- 55.
As explained above, the fact that the concrete cases before the Commission relate to individual tax rulings appears to be of little import: there is no reason to believe that the Commission would take a different view if the treatment of the multinational enterprises under scrutiny were fully compatible with the tax rules laid down in domestic law.
- 56.
E.g. Preliminary Decision SA 38944 (Amazon), paragraph 55; see also Preliminary Decision SA 38375 (FFT), paragraph 62 (emphasis added).
- 57.
Decision SA 37667, published 4 May 2016, paragraph 150.
- 58.
ECJ C-182/03 and C-217/03, Belgium and Forum 187 v. Commission, ECLI:EU:C:2003:385, paragraph 95: “Pour examiner si la détermination des revenus imposables, telle que prévue dans le régime des centres de coordination, procure un avantage à ces derniers, il y a lieu, comme le suggère la Commission au point 95 de la décision attaquée, de comparer ledit régime à celui de droit commun fondé sur la différence entre produits et charges pour une entreprise exerçant ses activités dans des conditions de libre concurrence”.
- 59.
E.g. Preliminary Decision SA 38944 (Amazon), paragraph 54; see also Preliminary Decision SA 38375 (FFT), paragraph 61.
- 60.
E.g. Preliminary Decision SA 38944 (Amazon), paragraph 60.
- 61.
See e.g. SGI (C-311/08, EU:C:2010:26).
- 62.
One might also be tempted to argue that there can be no “aid” in that case because the State does not renounce any resources: any tax forgone from one member of the group would be collected from another member of the same group. For this to be true, however, it is necessary to look not at the individual company, but rather the group as a whole. If not the group, but the individual company is the taxpayer under the corporate tax system, such an approach does not seem warranted: Theoretically, any resources the State uses to provide “aid” to a certain entity have to be collected elsewhere—in the absence of any productive market activity of the State, necessarily from another taxpayer. If we were to look beyond the concrete taxpayer to define the “renunciation of revenue”, we would thus never find any aid. Practically, the distinction between taxpayers matters: the tax not collected from one entity may not be collectible from the other entity, e.g. because it is insolvent; also, transfer pricing manipulation may be used domestically to offset losses and thus defer taxation, which would again result in a reduction of tax revenue.
- 63.
In fact, the “justification” with the “nature and general scheme of the tax system” makes similarly little sense as it merely repeats the exercise already undertaken in the comparability analysis. This is notably different from the situation under the fundamental freedoms: there, the ECJ (also) accepts justifications which lie “outside” the internal logic of the system in question, whereas it only looks for “internal” justifications applying state aid rules (cf. Commission State Aid Draft Notice at paragraph 138; see also Paint Graphos (C-78/08, EU:C:2011:550, paragraph 69).
- 64.
E.g. Preliminary Decision SA 38944 (Amazon), paragraph 55; see also Preliminary Decision SA 38375 (FFT), paragraph 62.
- 65.
See Bullen (2011), p. 335.
- 66.
See Gunn and Luts (2015), p. 119 at 123.
- 67.
This notwithstanding the fact that recent developments surrounding the BEPS debate raise questions as to the sustainability of the arm’s length standard, as various suggestions for changes to the Transfer Pricing Guidelines seem to signify effective derogations from its content.
- 68.
See e.g. Eigelshoven (2015).
- 69.
- 70.
- 71.
See e.g. European Commission (2015). Similar arguments have been raised with respect to the Starbucks case, where payments deducted by the Dutch company to its British sister entity was allegedly not taxable in the UK as a consequence of that entities hybrid nature.
- 72.
Supra Section 2.
- 73.
This is clearly the Commission’s view in the case of the Belgian unilateral adjustments under its Excess Profits tax scheme. See European Commission (2016).
- 74.
See Rossi-Maccanico(2015), p. 63 at 67.
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Haslehner, W. (2016). Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law. In: Richelle, I., Schön, W., Traversa, E. (eds) State Aid Law and Business Taxation. MPI Studies in Tax Law and Public Finance, vol 6. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-53055-9_8
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