The European Union (EU) Commissioner for Competition, Margrethe Vestager, answered questions about the European Commission’s investigations of illegal state aid to certain multinational enterprises (MNEs), including Apple and McDonald’s.

She told the European Parliament’s TAXE 2 committee that her office has reviewed approximately 1,000 rulings, of which around 600 were related to the so-called “Luxleaks.” The Luxleaks disclosures showed that tax rulings by Luxembourg allowed more than 300 MNEs to reduce their tax bills.

Vestager stressed the importance of these investigations to restoring competition in the EU so that all businesses would be able to operate on a level playing field.

Probes into several rulings

The European Commission (EC) has been probing alleged illegal state aid granted by Ireland to Apple, the Netherlands to Starbucks and Luxembourg to Fiat Finance & Trade, Amazon and McDonald’s. The panel determined that tax benefits granted to Amazon in a transfer pricing ruling amounted to illegal EU state aid. It also ruled against Starbucks and Fiat Finance & Trade and ordered those companies to pay back taxes. The Dutch and Luxembourg Ministries of Finance have said they will appeal. The EC hasn’t made its final decisions in the Apple and Amazon cases.

Asked when the EC might reach an Apple decision, Vestager responded that Ireland recently requested additional information. “The first priority is the quality of the case work . . . therefore it is very difficult to make predictions as to when the case will be ready for a decision,” she said.

She also said that her team is in contact with the U.K. tax authorities on the recent Google tax settlement, following a complaint from the Scottish National Party.

The state aid investigations have led U.S. Treasury Deputy Assistant Secretary of International Tax Affairs Robert Stack, among others, to express concerns about U.S. MNEs being disproportionately targeted by the EC. In early 2016, U.S. Secretary of the Treasury Jack Lew wrote a letter to EC President Jean-Claude Juncker objecting to the use of the aid inquiries as a way to retroactively tax earnings that rightfully belong to the United States.

Handful of recoveries from U.S. firms

Such allegations have been denied by Vestager. And in response to questions about the alleged bias toward U.S. MNEs, Vestager retorted that the United States is part of the Organisation for Economic Co-operation and Development (OECD).The United States endorsed the G20/OECD final recommendations under the base erosion and profit shifting (BEPS) project, she added, to ensure that profits are taxed where the value is created. Vestager emphasized that the issue is not a U.S. one because, in the past 15 years, only a handful of recoveries have involved U.S. MNEs.

According to Vestager, most of the tax rulings her team has examined were confirmatory, which are simple rulings that don’t contain any calculation of profits and are thus much less likely to raise state aid concerns. Approximately 200 of those rulings relate to transfer pricing, she said, adding that they aren’t problematic if the transfer price is arm’s length and matches economic realities.

However, she said she’s found examples that are “much more worrying” in that they favor particular companies or particular types of companies. Examples include:

1.      Advance pricing agreements that focus solely on one side of a transfer pricing arrangement, where profit that is attributed to one company in a group is decided without considering the taxation of the remaining profits that may or may not be taxed in another jurisdiction, and

2.      Intercompany financing transactions, where one company in a group lends to another company in the same group to potentially reduce taxable profits.

Looking ahead

According to Vestager, intercompany transactions are the most common in the Luxleaks.  She said the EC will publish a working paper with more detailed information on the thousands of documents that have been reviewed. At this point, it is premature to provide guidelines, she said.

© 2016