Standing in the Eye of the Tax Storm

Transcription

1 Standing in the Eye of the Tax Storm Client Seminar Nick Skerrett Koen Platteau Peter Flipsen Pierre-Régis Dukmedjian 20 January 2015

2 Introduction Overview of current developments Introduction to state aid concepts Concept of selectivity Investigation and enforcement actions Technical examination of position in Netherlands, Ireland and Luxembourg Practical steps 1 / L_LIVE_EMEA1: v4

3 What is happening? Increasing political focus on harmful international tax competition OECD Action plans on Base Erosion and Profit Shifting ( BEPS ) EU Commission state aid investigations into the tax affairs of multinationals in: Netherlands Ireland Luxembourg EU Commission extension of ruling enquiry to all Member States Proposed Directive on automatic exchange of tax rulings Unilateral measures 2 / L_LIVE_EMEA1: v4

4 Why? Focus of investigations is on whether tax advance pricing agreements ( APA s) give favourable treatment to individual taxpayers Commission does not have competence over national tax regimes to control behaviours Political agenda for a single harmonised tax base Increased US IRS intervention and scrutiny in Congress legitimises intervention Huge leaks of tax rulings Public opinion and the austerity backlash 3 / L_LIVE_EMEA1: v4

5 What does it mean for tax professionals? A new tool in tax enforcement and compliance A new regulator Need to understand a different legal regime and the threats posed Need to understand and manage areas of risk for your organisation 4 / L_LIVE_EMEA1: v4

6 What is state aid? Five components Article 107(1) TFEU Public origin Advantage Selectivity: certain undertakings (Potential) impact on competition Impact on trade within EU any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods [ ] in so far as it affects trade between Member States 5 / L_LIVE_EMEA2: v1

7 State aid concepts (1) State aid is granted through state resources e.g. relief from any tax, duty or other impost which would otherwise be payable (including credits against tax liabilities) State aid favours certain undertakings or the production of certain goods Advantage ( favours ): broad notion: any economic benefit which an undertaking would not have obtained under normal market conditions Selectivity ( certain ): a measure that only applies to specific businesses, businesses based in a certain region, or businesses that manufacture a certain product 6 / L_LIVE_EMEA2: v1

8 State aid concepts (2) State aid distorts competition (or threatens to do so) In practice, once there is a finding of state aid it will usually be held to distort (or threaten to distort) competition State aid affects trade between Member States Similar considerations to competition Includes effect on potential, as well as existing, cross-border trade If there is or might be inter-state trade it will nearly always be held to affect cross-border trade But, not all state aid is incompatible. Block exemptions, notification and approval procedures 7 / L_LIVE_EMEA1: v4

9 Consequences of unlawful state aid Unlawful state aid is aid that has not been notified or approved by the Commission Decision on compatibility of state aid is matter of Commission competence Subject to the supervision of the Court of Justice Commission can impose a range of sanctions, including a requirement that the state recover the aid in question, with interest (10 year clawback) The national court can determine questions of liability arising where unlawful aid has been granted, e.g. grant injunctive relief and make awards of damages Any indemnity by the state to the recipient of aid will not only be unlawful and invalid, but also itself constitute aid 8 / L_LIVE_EMEA1: v4

10 Selectivity (Commission) Commission letters very brief on selectivity Notion of advantage is more elaborated Fiat Finance and Trade ( FFT ) letter, 58, 59 and 82 Comparison of the undertakings concerned with other undertakings in a similar legal and factual situation Treatment of taxpayers on a discretionary basis may lead to selectivity When exercise of discretionary power goes beyond simple management of tax revenue by reference to objective criteria When rulings deviate from administrative practice FFT letter, footnote 26 Case is not about ruling technique as such Position would be the same if tax administration granted same advantage in any other way 9 / L_LIVE_EMEA1: v4

11 Selectivity (TFEU and General Court) Article 107(1) TFEU: definition of state aid favouring certain undertakings or the production of certain goods General Court, Cases T-219/10 (Autogrill) and T-399/11 (Banco Santander), Spanish tax instrument Judgments of 07 November 2014: annulment of Commission decisions establishing state aid on the basis of lack of selectivity Selectivity criterion implies comparison with normal situation Tax measures: starting point is the normal tax regime Fiscal state aid: often debate on distinction between general and selective measures 10 / L_LIVE_EMEA1: v4

12 Selectivity (General Court) Three step analysis (Case T-399/11, 37) Identification and analysis of normal tax regime Review whether tax measure derogates from this regime and differentiates between undertakings in comparable legal or factual situation If tax measure is justified by nature or economy of tax system: no state aid Court stresses the need to identify undertaking or a category of undertakings which alone obtain a specific advantage ( 45) No selectivity if tax measure is potentially accessible to all ( 48) Derogation from the normal regime is not sufficient ( 49) Commission carries burden of proof ( 50) In practice: Spanish tax instrument accessible to all ( 65) Selectivity criterion must be assessed within the same Member State ( 75-80) 11 / L_LIVE_EMEA1: v4

13 Selectivity (tentative conclusion) Commission will have to redo its homework on selectivity Current reasoning does not meet standards of General Court judgments Mere derogation from general regime is not sufficient Need to identify category of undertakings which alone benefit from this regime Two important exceptions clearly stated by General Court Measure potentially accessible to all is not selective Differentiation can be justified by nature or economy of tax regime BUT court has held transfer prices between related entities that are not at arm s length lead to selective advantage 12 / L_LIVE_EMEA1: v4

14 Investigation powers Commission can launch investigation on its own initiative or after complaint Commission investigation powers More limited than in mainstream competition law Main instrument: request for information (RFI) To Member State concerned To other Member States/undertakings/associations of undertakings If information provided by Member State concerned is insufficient Proportionality principle If to beneficiaries: Member State concerned has to approve Sanctions: fines/periodic penalty payment Information injunction Only to Member State concerned 13 / L_LIVE_EMEA1: v4

15 Enforcement actions Investigation in two steps Preliminary investigation Opening of formal investigation procedure Commission can order suspension and provisional recovery Suspension injunction and recovery injunction In case of non-compliance: direct access to Court of Justice Outcome No aid Aid but compatible aid (possibly subject to conditions) Negative decision (incompatible aid) In case of unlawful aid: combined with recovery order 14 / L_LIVE_EMEA1: v4

16 Rights of defence Decisions/injunctions: subject to appeal Opening of formal investigation procedure: no appeal Requests for information Appeal Luxembourg (Cases T-258/14 and T-259/14) withdrawn Fishing expedition argument Protection of confidential data/business secrets Obligation of professional secrecy for Commission Decisions addressed to Member State concerned Member State can ask to remove confidential data Rights of beneficiary? 15 / L_LIVE_EMEA1: v4

17 Role of the national courts Private enforcement Courts can order suspension of non-notified aid Case C-284/12, Frankfurt Hahn: option for national courts after opening of the investigation procedure Suspend the implementation of the measure Order the recovery of payments already made Any other provisional measure which may be necessary Actions for damages for infringements of state aid rules Against Member State Against beneficiary? 16 / L_LIVE_EMEA1: v4

18 Netherlands Starbucks state aid investigation On distribution of "royalty": taxed in the US (credit system) Starbucks US LP: hybrid entity NL: fiscally transparent VS: Opaque US Alki LP offshore royalty Toll manufacturer (cost plus 9-12%). Difference gross profit and cost plus 9-12% = royalty Starbucks Manufacturing BV (NL) NL Switzerland Starbucks Coffee Trading Company SARL (CH) Central purchasing of coffee beans Deliveries Purchase of Coffee beans * * inventory risk for account of Starbucks CH 17 / L_LIVE_EMEA1: v4

19 Netherlands Starbucks state aid investigation In the Commission s opinion: the APA in favour of Starbucks constitutes unlawful state aid TFEU 108 (2) invoked, requiring the Netherlands to withdraw the aid the APA confers a selective advantage on Starbucks because it is not at arm's length Starbucks incorrectly qualified as a toll manufacturer with no inventory risk (according to its commercial accounts, Starbucks did have inventory risk) Adjustments to the comparables were incorrect The Dutch Revenue should not have accepted the over valuation of the royalties paid by SMBV under the APA To the extent that the Dutch authorities have deviated from the arm's length principle under the SMBV APA, the APA should also be considered as conferring a selective advantage Starbucks was incorrectly qualified as low risk (no inventory risk) toll manufacturer and therefore transfer pricing method (Transactional Net Margin Method) was not appropriate. See OECD TPG (NB. According to statutory accounts SMBV did have inventory risk) Adjustments to the comparables treating SMBV as consignment manufacturer (cost basis excluding cost of raw materials) were incorrect Royalty is not comparable unrelated price (CUP) for use of IP but equal to the profit in excess of cost plus 9-12%. Dutch Revenue should not have accepted this overvaluation of royalties paid by SMBV to Alki LP under APA 18 / L_LIVE_EMEA1: v4

20 Netherlands Starbucks state aid investigation Dutch Under Minister of Finance comments: Starbucks has no inventory risk => toll manufacturer Free choice in selecting a transfer pricing method as long as the method leads to an at arm's length result No selective advantage because transfer prices are in accordance with the OECD Transfer Pricing Guidelines (OECD TPG) and normal application of Dutch tax system The APA can only be considered state aid if it can be proved that there is a deliberate deviation from the OECD TPG and the arm's length principle is obviously misapplied The Dutch Association of Tax Advisors (Nederlandse Orde van Belastingadviseurs) has registered as an interested party in the investigation 19 / L_LIVE_EMEA1: v4

21 Netherlands Starbucks state aid investigation Criticism of the Commission's decision: Commission supposes norms that go beyond what the OECD TPG prescribes. Was the investigation politically motivated? Function of Starbucks: toll manufacturer with limited (inventory) risk. What part do the commercial accounts and contracts play in this determination? Commission supposes that one specific transfer pricing method is prescribed. However, the OECD TPG prefer a reliable method over a specific result in a given case. Use of a range: 2.2 The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances. According to the Commission, the remuneration is not proportional to the risks taken; an arm's length market player would have wanted to take more risks. Is the Commission taking the place of the entrepreneur? 20 / L_LIVE_EMEA1: v4

22 Ireland Apple state aid investigation Apple Structure: US Apple Inc. Offshore Irish non-resident Company Apple Operations Europe Ireland Irish Branch Purchase of materials Computer production (cost-plus 65% on costs up to USD 65-70m + X% of excess Sale to affiliates Irish non-resident Company Apple Sales International Irish Branch Acquisition and sale of finished product 1991: cost-plus 12.5% 21 / L_LIVE_EMEA1: v4

23 Ireland Apple state aid investigation Commission launched an investigation into the arm's length nature of the calculation of the profit of the Irish branches of Apple group companies Minutes of the meeting between the tax advisor and the Irish Revenue Apple biggest employer in Cork Net profit (1989) $270m with a turnover of $751m. Only manufacturing profit allocable to the Irish branch Base agreement: Only manufacturing element relates to the Irish branch. Apple prepared to accept maximum profit USD 30-40m assuming Apple will make such profit Later changed to cost-plus 65% over specified costs + 20% of additional costs (in order to not hamper growth). No transfer pricing report In 2007 cost-plus reduced. No transfer pricing report Commission considers that the Irish Revenue has used its wide margin of discretion to confer a selective advantage on Apple 22 / L_LIVE_EMEA1: v4

24 Ireland Apple state aid investigation Irish Position Transfer Pricing analysis: Assets, functions and risks Activities of Irish branch: routine functions (purchasing and sales). No valuable assets, value of goods mainly based on IP outside of Ireland. Irish branch does not carry significant risks Mark-up on operational costs is adequate remuneration Irish Finance Minister: It s more likely that the investigation will be dropped rather than there being further investigations" 23 / L_LIVE_EMEA1: v4

25 Luxembourg FFT state aid investigation Fiat S.p.A. Fiat Finance S.p.A. Lender / Borrower 40% 60% Lender / Borrower FFT (Lux) Borrower 100% 100% Borrower Lender / Borrower FFNA (USA) FFC (Canada) FFSpA (Italy) 24 / L_LIVE_EMEA1: v4

26 Luxembourg FFT state aid investigation The Commission challenges the arm s length features of the remuneration of FFT as follows: the transfer pricing report seems to aim at a fixed tax base; the use of a direct method, e.g. CUP method, could have been used as it is the best method at approximating conditions prevailing between prudent independent operators the amount of capital remunerated and the level of remuneration applied to this capital which determined the estimated arm s length remuneration on the basis of the CAPM, are set at too low level (e.g. list of comparables is challenged as well as the use of the lower range of comparables) The Commission considers that the remuneration derived from the transfer pricing does not correspond to arm's length remuneration and that a selective advantage has been provided to FTT through the APA The Commission concludes that the APA constitutes unlawful state aid Question: will pricing that is at arm s length infringe state aid regulations infringement if the LTA agree similar arrangements with all taxpayers 25 / L_LIVE_EMEA1: v4

27 Luxembourg Amazon state aid investigation Concerns the payment of a tax deductible royalty to a tax transparent Luxembourg partnership Tax ruling dates back to It applies to Amazon's subsidiary Amazon EU S.à r.l., which is based in Luxembourg and records most of Amazon's European profits Commission s doubts: no transfer pricing report, the choice of the appropriate transfer pricing method, the way the royalty is calculated, the margin is much lower than for Apple and Starbucks, the tax ruling contains a cap on the tax base and duration of the tax ruling Commission considers that the amount of this royalty, which reduces the taxable profits of Amazon EU S.à r.l. each year, might not be in line with market conditions Commission concerned that the ruling could underestimate the taxable profits of Amazon EU S.à r.l., and thereby grant an economic advantage to Amazon Can this type of arrangement be considered as state aid to the extent that it would have been granted to any taxpayer? 26 / L_LIVE_EMEA1: v4

28 Luxembourg changes its position and provides all the information requested by the Commission regarding its tax rulings and patent box Information request Commission actions Luxembourg actions Luxembourg decision Luxembourg refused to comply with information request made by Commission regarding its tax rulings and patent box Commission initiated infringement proceedings against Luxembourg Luxembourg brought two actions for annulment of the Commission's injunction decisions before the General Court On18 December 2014, Luxembourg decided to cooperate and to provide the Commission with a list of tax rulings and a list of beneficiaries of its IP box regime and to withdraw its legal actions Xavier Bettel comments: The vast majority of EU Member States issue tax rulings. Luxembourg is strongly in favour of the creation of a level playing field with regard to international taxation and tax rulings 27 / L_LIVE_EMEA1: v4

29 Luxembourg administration s response to Lux leaks scandal LTA reaffirmed that: The ruling practice is legal and only applies the existing tax rules to a specific situation It is common practice within Europe to give tax rulings It is not acceptable for corporations to use international regulations in such a way as to avoid or excessively reduce their tax burden Certain mechanisms, whilst complying with international and national law, may not be considered ethical 28 / L_LIVE_EMEA1: v4

30 Luxembourg and tax transparency Luxembourg supported the introduction of a provision to prevent double nontaxation via the use of hybrid financing arrangements and the introduction of a general anti-avoidance rule in the Parent Subsidiary Directive (2011/96/EU) Luxembourg is an active participant in the OECD s BEPS discussions. It has committed to fully implement the new regulations Luxembourg has approved Convention on Mutual Administrative Assistance in Tax Matters as well as the procedure for the exchange of information for tax purposes upon request Introduction of the automatic exchange of information for tax purposes as of 01 January / L_LIVE_EMEA1: v4

31 Luxembourg position on issuing tax rulings Ruling practice: New legislative basis for tax rulings Valid for a maximum of 5 years New Commission on rulings Companies will need to demonstrate to LTA that they have appropriate economic substance and are active in Luxembourg (Luxembourg Ministry of Finance position paper on tax transparency and rulings) All taxpayers can request a ruling from LTA Summary of tax rulings will be published on a no-names basis in the LTA s annual report Luxembourg supports the Commission s proposed directive on mandatory automatic exchange of information on tax rulings between Member States 30 / L_LIVE_EMEA1: v4

32 Legal Opportunities for Competitors Has a competitor received a tax ruling that might constitute unlawful state aid? Current investigation? Scope for complaint? Consider damages actions against the Member State concerned Seek injunctive relief? NB presumption of aid pending investigation Impact on public procurement bidding? 31 / L_LIVE_EMEA1: v4

33 Practical Steps (1) 1. Reassess the arrangement/ruling. Would your arrangements fail if investigated? 2. Review advice how robust is arm s length basis? Did advisers consider state aid? 3. Ensure any new documents reviewing or testing the arrangements are covered by legal privilege to avoid disclosure 4. Have equivalent arrangements been adopted by other taxpayers? Are you exposed to risk from precedent challenge? 5. Does arrangement share hallmarks with current enquiries? 32 / L_LIVE_EMEA1: v4

34 Practical Steps (2) 1. Understand your rights of representation and be prepared to defend 2. Ascertain national tax authority position. How will they respond to the Commission? Confidentiality vs fishing? 3. Quantify your risk exposure. Can you limit risk exposure by amending arrangements? 4. Be prepared to respond to media enquiries. What is your position? 5. Critically evaluate approach to rulings and documentation of new arrangements 33 / L_LIVE_EMEA1: v4

35 Round up/q&a Nick Skerrett Head of Contentious Tax London T E Nick.Skerrett@simmons-simmons.com Koen Platteau Partner, Dispute Resolution Brussels T E Koen.Platteau@simmons-simmons.com Peter Flipsen Partner, Tax Amsterdam T E Peter.Flipsen@simmons-simmons.com Pierre-Regis Dukmedjian Pierre-Régis Dukmedjian Partner, Tax Luxembourg T E Pierre-Regis.Dukmedjian@simmons-simmons.com 34 / L_LIVE_EMEA1: v4

36 Standing in the Eye of the Tax Storm Client Seminar Nick Skerrett Koen Platteau Peter Flipsen Pierre-Régis Dukmedjian 20 January 2015