The European Commission recently published its preliminary decisions in the Apple (Ireland) and FFT (Luxembourg) cases. These decisions reveal the Commission’s concern whether particular advance pricing agreements (APAs) are compatible with European state aid rules. For this reason, the Commission has launched a formal investigation into these APAs.
Though an APA per se does not fall foul of the European state aid rules, the Commission considered whether an APA may, depending on its terms and conditions, afford a selective tax advantage to a taxpayer. If the Commission finds an APA to confer a selective tax advantage, it is authorised to initiate proceedings against the relevant member state and require it to recover the unlawful aid.
Because of these potentially far-reaching consequences, we will continue to monitor the formal investigations in the Apple and FFT cases closely and keep you updated.
On 30 September, the European Commission published its preliminary decisions of 11 June 2014 for the current state aid investigations into advance pricing agreements (APAs) entered into between Apple and the Irish Revenue Service, as well as FFT and the Luxembourg Revenue Service. In the preliminary decisions, the Commission found these particular APAs to constitute state aid and doubted whether the APAs were compatible with the competition rules governing the internal market. Accordingly, the Commission requested that Ireland and Luxembourg provide more information to determine whether the APAs afford incompatible state aid or not.
The Commission’s review of state aid
The Treaty on the Functioning of the European Union (TFEU) prohibits a member state from giving aid to taxpayers in a manner incompatible with the EU Single Market. In particular, the TFEU considers aid to be incompatible if:
- it is imputable to the Member State and financed through State resources
- it confers an advantage on its recipient
- the advantage is selective
- it distorts or threatens to distort competition and has the potential to affect trade between Member States.
In determining whether the APAs in the Apple and FFT cases under investigation constituted incompatible aid, the Commission took the position in its preliminary decision that a member state confers a selective advantage in so far as the APA results in a lower tax liability as compared to the tax liability of a taxpayer in similar factual and legal circumstances.
This position required the Commission to undertake a detailed review of transfer pricing methods in general, as well as the facts and circumstances underlying the transfer pricing methods agreed to by the tax authorities of the relevant member state. In particular, the Commission reviewed whether the APAs complied with the at arm’s length principle on the basis of guidance found in the Transfer Pricing Guidelines as set by the Organisation for Economic Cooperation and Development (OECD Guidelines). Following this review, the Commission may challenge elements of the APAs as constituting incompatible state aid.
Though the published decisions in the Apple and FFT cases do not represent the definitive findings of the Commission’s review, these decisions mark the first step in a formal investigation into the terms and conditions of the APAs in those cases. During a formal investigation, the Commission carries out an in-depth assessment with the aim of establishing whether the APAs amount to incompatible state aid or not.
If the Commission adopts a final decision finding the APAs to be incompatible state aid, it is authorised to require the member state to recover the aid with interest from the beneficiary. Both the decision adopted by the Commission and the recovery of aid considered incompatible are subject to a final review by the European Court of Justice.
APAs do not amount to incompatible state aid in and of themselves
In its preliminary review of the APA between Apple and Ireland as well as the one between FFT and Luxembourg, the Commission emphasised that, as a principle, tax rulings do not result per se in incompatible state aid. In particular, if the tax authorities of a member state agree in a tax ruling to a particular interpretation of the relevant tax provisions without deviating from administrative practice, the Commission does not consider that ruling to confer any selective advantage to the taxpayer having entered into it.
If a tax ruling deviates from administrative practice, however, the ruling according to the Commission results in a lower tax liability for the taxpayer than the tax liability that would have accrued in the absence of the ruling. In the context of APAs, the Commission considers the OECD Guidelines to represent the relevant administrative practice for its review purposes. In the Apple case, for example, the Commission referred to a taxable base being negotiated rather than being substantiated by a transfer pricing report of any sort – although Ireland itself introduced transfer pricing rules effective as of 1 January 2011.
Yet the Commission did not limit the relevant administrative practice to the OECD Guidelines exclusively. Again, in the Apple case, the Commission noted that the APA applied for a longer period than the typical length of APAs concluded by other member states. The preliminary decisions in the Apple and FFT cases clearly reveal the Commission’s broad understanding of a member state’s administrative practice as a touchstone for the state aid compatibility of APAs. This broad understanding may cause other APAs to come within the ambit of the Commission’s review of state aid measures, particularly when the APA has an undefined term or the transfer pricing method agreed to is substantiated insufficiently.
In addition to the Apple and FFT cases, the Commission has started preliminary investigations into an APA concluded by Starbucks and the Dutch Revenue Service, as well as another APA between Amazon and the Luxembourg Revenue Service. In contrast to the Apple and FFT cases, the Commission has not yet published its preliminary decisions in the Starbucks and Amazon cases. Those preliminary investigations remain ongoing.
Following publication of its preliminary decisions in the Apple and FFT cases, the Commission requested that Ireland and Luxembourg provide further information on the APAs before 1 November. Also, the Commission allowed interested parties to provide comments on the preliminary decisions before that date.
The Commission will consider the information and comments provided, if any, in deciding whether the APAs constitute incompatible state aid. If the Commission adopts a negative final decision, it has the authority to require Ireland and Luxembourg to recover the tax benefit afforded by the APAs in so far as that benefit is incompatible state aid. In the meantime, we will keep you informed of the Commission’s progress on the matters, and update you as soon as the final decisions are published.