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Last month Starbucks won its case against the European Commission’s (EC) 2015 state aid decision, but the EC clawed back a win against Fiat Chrysler in two conflicting cases over the use of the transactional net margin method

The General Court of the European Union said the European Commission (EC) was unable to adequately demonstrate that Starbucks obtained a competitive and economic advantage from tax rulings granted by the Dutch government (Cases T-755/15 and T-759/15).

However, in the case of Fiat Chrysler Finance Europe (FFT) and Luxembourg against the European Commission’s 2012 decision, the court sided with the Commission, saying its decision-making process was in line with the law and the decision was valid (Cases T-755/15 and T-759/15).

At the centre of both issues was the use of the transactional net margin method (TNMM) and comparable uncontrolled price (CUP) method to determine whether intra-group transactions were at arm’s length and whether the agreements under each of the respective tax rulings would have been achievable under ‘normal’ – rather than advantageous – tax rules.

In both judgments, the General Court said Commission was able to used the arm’s-length principle as a benchmark to assess whether a tax ruling endorsing a transfer pricing method for an integrated group company to establish its taxable profit gives rise to an advantage under EU state aid rules. However, in the Starbucks case, the court found that the Commission had failed to establish the existence of an advantage.

Starbucks told ITR that it welcomes the decision by the European court that makes clear Starbucks did not receive any special tax treatment from the Netherlands, stressing that it pays all of its taxes wherever they are due.

The coffee franchise did not comment on whether it is anticipating the European Commission to appeal the decision. Fiat told ITR that it was "disappointed" with the General Court's judgment and "is considering the nest steps to take in this matter".

Meanwhile, EU Competition Commissioner said in a statement that each case has its specificities and involves complex legal questions. Therefore, the Commission "will study the judgments carefully before deciding on possible next steps".

Tove Maria Ryding, Eurodad tax coordinator, said the ruling in the Fiat case confirms that secret tax deals between governments and multinational corporations can, in some cases, constitute illegal state aid.

“However, the fact that the court ruled against the Commission in the case concerning the Netherlands and Starbucks is a reminder that state aid rules are difficult to use as a tax collection mechanism,” said Ryding.

Nevertheless, Vestager said the judgments confirm that, while member states have exclusive competence in determining their laws concerning direct taxation, they must do so in respect of EU law, including state aid rules.

"Furthermore, the General Court has also confirmed the Commission's approach to assess whether a measure is selective and if transactions between group companies give rise to an advantage under EU state aid rules based on the so-called arm's length principle," she added.

Victory for Starbucks

The European Commission decided in 2016 that a 2008 advance pricing arrangement (APA) issued by the Dutch tax authorities granted Starbucks Manufacturing EMEA BV (SMBV), part of the Starbucks group, an unfair competitive advantage, amounting to illegal state aid.

However, the Dutch authorities and Starbucks disagreed with this decision. They defended the APA and argued that that European Commission had used an “erroneous reference system” to assess the APA for potentially illegal state aid and was wrong in its decision that there was an advantage in relation to the transfer pricing (TP) methods used by the company.

The Dutch authorities and the coffee company further argued that the commission wrongly used the TNMM for determining SMBV’s remuneration to constitute an advantage.

The General Court, however, dismissed the argument made by Starbucks and the Netherlands over the Commission’s strategy to assess the tax ruling for compatibility with EU competition laws.

The court said the European Commission did not err in its use of the arm’s-length principle as a criterion for assessing the existence of state aid, saying the EC was “entitled” to analyse the tax ruling and assess whether the company’s intra-group transactions were at arm’s length in line with its powers as permitted in Article 107 TFEU.

However, the court’s review of the whether the TP methods used were correct was not a simple matter. Nevertheless, the court held that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden.

As such, the court said the European Commission was wrong to determine that the use of the TNMM endorsed in the APA – rather than the CUP method used by the commission – conferred a business advantage.

At the same time, the court did not agree with the EC regarding royalties. The commission argued that the transfer pricing report on the basis of which the APA had been concluded did not contain an analysis of the royalty that SMBV paid to Alki, another entity of the same group, for the use of Starbucks’ roasting IP.

The EC carried out its own analysis using the CUP method and said the royalty amount should have been zero. It also decided that based on SCTC’s financial data, SMBV had overpaid for the coffee beans in the period between 2011 and 2014.

The court said that just because the APA did not analyse the royalty payments, this does not mean that the transactions were not at arm’s length. It added that the Commission had also failed to demonstrate that the level of the royalty should have been zero or that it resulted in an advantage within the meaning of the TFEU.

In addition, it said the European Commission cannot rely on matters that happened after the APA was concluded. Fiat was less fortunate than Starbucks.

Defeat for Fiat

In the Fiat case, the General Court confirmed the European Commission’s decision that Luxembourg did grant FFT illegal state aid under the tax ruling of September 3 2012, which endorsed a method for determining FFT’s remuneration for treasury and financing services to the group companies established in Europe.

The court said that tax ruling endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg.

Luxembourg and Fiat had argued that the EC had adopted a TP analysis that led to “tax harmonisation in disguise” in its assessment and final decision of the 2012 tax ruling. However, the court dismissed this claim.

Instead, the court found that the European Commission did not engage in any ‘tax harmonisation’ but exercised the power conferred on it by EU law by verifying whether that tax ruling offered an advantage when compared to ‘normal’ taxation, as defined by national tax law. Similarly to the Starbucks case, the court said the Commission was well within its powers to assess whether intra-group transactions are at arm’s length.

Although the General Court may have ruled that the use of the TNMM was fair in the Starbucks case, the court said the opposite for Fiat.

The court concluded that the Commission was right to find the TNMM endorsed by the tax ruling to offer an advantage because “the whole of FFT’s capital should have been taken into account and a single rate should have been applied”.

“In any event, the Commission also correctly considered that the method consisting, on the one hand, in using FFT’s hypothetical regulatory capital and, on the other, in excluding FFT’s shareholdings in Fiat Finance North America (FFNA) and Fiat Finance Canada (FFC) from the amount of the capital to be remunerated could not result in an arm’s-length outcome,” the court said.

“Consequently, the court finds that the methodology approved by the tax ruling at issue minimised FFT's remuneration, on the basis of which FFT’s tax liability is determined,” it continued. “The Commission was therefore fully entitled to conclude that the tax ruling at issue conferred an advantage on FFT because it resulted in a lowering of FFT’s tax liability as compared to the tax that it would have had to pay under Luxembourg tax law.”

NGOs call for public CbCR

The two rulings have once again raised questions over how valid existing tax rules are in a globalised economy and what more needs to be done to ensure tax loopholes are not used to minimise corporate tax liabilities.

Eurodad’s Tove Ryding said that EU state aid rules cannot be used to patch up the cracks in the international tax system.

“The only way to ensure that multinational corporations are taxed fairly and effectively is to throw the existing corporate tax rules in the bin and create a new and better system,” she said.

Chiara Putaturo, Oxfam’s EU tax policy advisor, agreed. “Case-by-case investigations are not the solution to large-scale tax dodging. Governments in the EU and beyond must stop the destructive race to the bottom on taxation, and reform the global architecture to create a fairer and more equitable system.”

In Putaturo’s opinion, EU member states should endorse an effective minimum tax rate and end the deadlock in EU negotiations to introduce public country-by-country reporting (CbCR). This view has been expressed by several tax justice organisation leaping on today’s rulings as another reason to implement more corporate disclosures.

Sven Giegold, German MEP and financial affairs spokesperson for the Greens/EFA group, shares these views and the need for change, also calling for public CbCR.

“The court rulings prove the strengths and weaknesses of using the EU's state aid rules to fight tax dumping, and show the urgent need to review and improve the state aid framework,” Giegold said. “We should not have to rely on lengthy Commission investigations and court decisions to achieve tax justice.”

Giegold said his party expects Competition Commissioner Margrethe Vestager to use her hearing with the European Parliament to draw conclusions from the judgments.

However, he went one step further, suggesting the European Commission should use the Fiat win to “look into all similar cases of tax avoidance in Luxembourg and claw back the illegal state aid. One symbolic judgement against Fiat is not enough to restore fair competition.”

Nevertheless, while the tax justice organisations use the state aid judgments to call for more disclosures, Apple will be closely analysing both decisions as it fights its own state aid case in the courts this month.

While the Apple case continues, the European Commission and Fiat have two months and 10 days to appeal the General Court’s rulings before it goes to the European Court of Justice.

The above article was published on on 24 September 2019 and has been republished with the approval of the Publisher.

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