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On September 24, the European Union General Court (“EGC”) canceled the European Commission (“EC”) decision that forced Starbucks to return between €20 million and €30 million to the Netherlands because it had benefited from unlawful state aid. However, the EGC confirmed the decision declaring the favorable tax treatment granted by Luxembourg to Fiat unlawful, and ordered Luxembourg to recover the unpaid amounts.
In 2015, the EC considered that the tax agreements, also known as tax rulings, that Starbucks and Fiat had entered into with the Netherlands and Luxembourg, respectively, constituted unlawful state aid and were incompatible with the internal market, in line with article 107 of the Treaty on the Functioning of the European Union (“TFUE”).
According to the EC, under these tax rulings, Starbucks and Fiat received selective advantages enabling them to artificially reduce their tax burden. In the case of Starbucks, to reduce its tax burden in the Netherlands, the company Starbucks Manufacturing paid (i) a group company in the United Kingdom and not subject to taxation a high price for the coffee-making know-how, and (ii) paid a company in Switzerland and subject to low taxation, a high price for the coffee beans used. In the case of Fiat, the EC found that the group financer, Fiat Chrysler Finance Europe, charged the other group companies a price below market standards for that financing, thus reducing its tax base, which was also taxed at a very low rate in Luxembourg.
The EC found in both cases that the companies had fixed the sale prices of goods and services between companies belonging to their respective groups (“transfer prices”) at levels that did not correspond to normal market conditions, thus breaching the arm’s length principle (“ALP”), which requires that transfer prices be equivalent or similar to the prices agreed between independent entities. As a result, the companies had moved part of their profits to countries in which they were not taxed. Therefore, the EC ordered the Netherlands and Luxembourg to recover the taxes not paid by the companies to withdraw the economic advantage granted, thus guaranteeing equal treatment for the other companies in the internal market.
Fiat, Starbucks, and the states involved filed appeals against the EC rulings. The EGC has now ruled on the appeals in two judgments, focusing its analysis on the evidence of economic advantage, and specifically on the use of ALP as a method to assert its existence.
In the Starbucks judgment, the EGC upholds the use of ALP as a valid tool to verify that the intragroup transactions approved by the tax ruling were carried out at a market price, to establish whether the companies’ tax base was artificially reduced. However, the EGC considers that the EC did not sufficiently prove in its decision that the use of a calculation other than ALP in the intragroup transactions has actually reduced Starbucks’ tax burden, and thus has generated a selective economic advantage for it over other companies. According to the EGC, the use of a specific calculation method other than ALP cannot be presumed to automatically confer an economic advantage.
As for the Fiat judgment, first, the EGC restates that tax rulings can be examined by community authorities if a lower taxation contrary to article 107 TFEU derives from them. The EGC acknowledges that the calculation method included in the tax ruling approved by Luxembourg artificially reduced Fiat’s tax base on which its taxation in Luxembourg was to be calculated. Consequently, the EGC finds in this case that the EC was right in that the tax ruling generated an unjustified economic advantage for Fiat, which was also selective as the other companies did not benefit from this favorable treatment in Luxembourg.
Despite the different judgments, it seems clear that the EGC is warning the EC that the use of a method other than ALP does not automatically constitute an economic advantage, and thus the burden of proving falls to the EC in each case, in a sound and sufficient manner, that the calculation method approved by the national tax authorities generated a real and selective economic advantage for the company, which constitutes unlawful state aid.
These are not the EGC’s first judgments on tax rulings. In February 2019, it cancelled an EC decision as it found that the community authority had not proved that the Belgian “extraordinary profit” tax system was incompatible with state aid regulations (as we reported here). Nor will these be the last cases. The EC is currently investigating several multinationals, including Ikea and Nike, over their tax agreements with the Netherlands. However, there is no doubt that the most awaited-for judgments are those on Apple and Amazon, which were ordered by the EC to return €13 billion and €250 million for unpaid taxes in Ireland and Luxembourg, respectively.
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