At the time of Paradise Papers’ revelations about numerous tax schemes involving large international groups, it is interesting to look back at the activism of the European Commission, which has been campaigning since 2014 against the transfer pricing rulings it considers abusive, calling them illegal state aids. In France, these rulings could be reconciled with the Preliminary Transfer Pricing Agreements signed by the DGFiP, even if none of them have so far been called into question by the European Commission.
In 2016, the European Commission called the ruling signed between Apple and Ireland requiring Apple to repay €13 billion worth of debt as state aid. In the same way, Amazon and Starbucks must repay respectively approximately 250 million euros to the Luxembourg State and 25 million euros to the Dutch State. The decisions of the European Commission are officially targeting states, which are accused of having granted illegal tax advantages under European law. However, it is the taxpayers who ultimately suffer the financial consequences. These are particularly burdensome: on the one hand, the limitation period for state aid is ten years, compared to three years in France for tax audits; on the other hand, companies are subject to a double taxation since, unlike a tax adjustment, the repayment of state aid is not considered as an additional tax and cannot therefore give rise to the elimination of double taxation.
European law recognises four criteria to qualify a measure as state aid:
- The fact that the measure under consideration has been initiated by a State
- The fact that it affects trade within the European single market
- The fact that it grants an advantage which the recipient undertaking could not have obtained under normal market conditions
- And the fact that this advantage is selective, i.e. it favours only certain undertakings and excludes others, even though the beneficiaries and undertakings excluded from the measure are in a similar factual and legal situation
In the case of tax state aid, the first three criteria are presumed by the European Commission. It is therefore on the criterion of selectivity that rulings investigations are played out. In this respect, the logic adopted by the European Commission is to consider that there is selectivity when a ruling validates a transfer pricing policy that derogates from the arm’s length principle. The Commission’s approach is therefore crucially based on its technical analysis of the conformity of transfer pricing policies validated by rulings with the arm’s length principle. It is precisely on this point that doubts can legitimately be raised. In the absence of significant experience with transfer pricing, the Commission applies a very personal analytical grid to transfer pricing and considers, for example, that policies often accepted by tax administrations (royalties at variable rates) are not in line with the arm’s length principle. Similarly, the CUP (Comparable Uncontrolled Price) method is systematically favoured, to the extent that the use of another transfer pricing method can be considered as proof of the selectivity of the ruling. However, as every transfer pricing practitioner knows, the CUP method has become very rare, including for tax administrations, for methodological and practical reasons (data availability, comparability of transactions and relevance of possible adjustments, etc.). While state aid cases are on the increase, the European Commission’s analysis criteria are still very unclear.
The Commission’s behaviour, if confirmed in the coming months and years, seriously risks to call into question the usefulness of rulings and maybe unilateral advance pricing agreements (APAs), which is to provide the taxpayer with some legal certainty. Indeed, in the case of two taxpayers who have implemented exactly the same transfer pricing model at European level, one having obtained a ruling or signed a unilateral APA, the other not: only the first will suffer the risk of having its unilateral ruling/APP qualified as State aid by the Commission. Taxpayers will therefore have to ask themselves this question: is it more risky to obtain a ruling or to sign a unilateral APA that might qualify as state aid or not and wait for a tax audit to try to defend its positions? In a post-BEPS world where tax uncertainty is constantly growing, it seems that the Commission’s action may lead to even more insecurity for businesses.