EU STATE AID An International Tax Perspective Wednesday, December 7, 2016 4:00 p.m. 5:00 p.m. GMT *This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter. www.dlapiper.com Wednesday, December 7, 2016 0
Table of Contents 1. Introduction EU state aid in an international tax landscape 2. State aid doctrine from legal principles to state aid tax rulings 3. Recent EU state aid tax rulings 4. EU state aid A US angle 5. Impact and next steps for (US) multinationals www.dlapiper.com Wednesday, December 7, 2016 1
Introduction
EU state aid from an international tax perspective EU Anti-Tax- Avoidance Directive Certain Uncertain US Tax Reform OECD BEPS (C)CCTB EU State Aid Local antiabuse rules MNC Country-by- Country reporting Audit position (FASB ASC 740) Increased transparency tax authorities Lux Leaks Sharing of Tax Rulings Fin48 www.dlapiper.com Wednesday, December 7, 2016 3
State Aid Doctrine
Why EU state aid control? State aid control is enshrined in the Treaty on the Functioning of the European Union (TFEU) which is the constitutional act of the European Union (EU). The TFEU has primacy over national law of the respective member states. The EU was originally intended to be a guarantee not only against war, but also for a better economy. The objective was the establishment of an internal market, i.e. one territory without any internal borders or other regulatory obstacles to the free movement of goods, services, capital and persons. To allow the creation of an internal market, the Founding Fathers generally prohibited member states from intervening in the economy with a view to favoring their national industries or attracting business to the detriment of other EU member states. To ensure that this prohibition is respected and exemptions are applied equally across the EU, the European Commission (EC) is in charge of ensuring that State aid complies with EU rules. www.dlapiper.com Wednesday, December 7, 2016 5
What is EU state aid? A European concept which may impact MNEs with operations in the EU EU state aid rules prohibit the granting by a public authority of selective advantages capable of distorting competition and affecting trade between EU Member States Intervention by the State and through State resources Some state aid measures may nevertheless be declared compatible with the internal market State aid measures can only be implemented after approval by the EC, unless exempted by a specific regulation because they would be presumed to be compatible with the internal market Likely to affect trade between Member States EU State Aid Competition has been or may be distorted Economic advantage on a selective basis www.dlapiper.com Wednesday, December 7, 2016 6
Examples of EU state aid Guarantee Subsidy Material Feed-in tariffs Material Infrastructure Exclusive or special rights Right to use a the payable bus lane bus lane for free Research facility www.dlapiper.com Wednesday, December 7, 2016 7
Tax as a priority of enforcement Competition Commissioner Margethe Vestager 2014-2019: priorities in state aid were tax investigations and the banking sector: o tax breaks granted by certain EU member states to multinationals (aggressive tax planning) o strict application of State aid rules by continuing the investigations started by the previous Commission stop any tax schemes found to constitute unlawful state aid State aid rules can cover tax arrangements entered into by MNEs o o EC assessment of 20 million 30 million 35 MNE - excess profit rulings (Belgium): EC assessment 700 million More than 1,000 tax rulings reviewed by the EC www.dlapiper.com Wednesday, December 7, 2016 8
Recent EU State Aid Rulings
Do EU state aid rules apply? Tax Arrangements with EU Member States Tax rulings, including, excess profit tax rulings Other agreements with local tax authorities Unilateral Advance Pricing Agreements Audit settlement agreements Even if a tax arrangement complies with national law, it may still constitute unlawful state aid www.dlapiper.com Wednesday, December 7, 2016 10
State aid investigations: EC perspective and scope Scope of state aid investigation into tax rulings according to EC publications 1. Transfer pricing Not reflecting conditions between unrelated parties Not reflecting economic reality 2. Profit allocation methods Allocation not based on factual or economic reality 3. Inconsistent application of national law Discretionary double non-taxation www.dlapiper.com Wednesday, December 7, 2016 11
State aid investigations: a pragmatic approach If the method endorsed by the ruling does not result in a reliable approximation of a marketbased outcome in line with the arm's length principle => State aid 1. Transfer pricing TP methodology not substantiated sufficiently Direct TP method preferred No comparables in benchmark Different tested party TP based on forecasts/hypotheticals 2. Profit allocation methods TP methodology not substantiated sufficiently 3. Inconsistent application of national law 4. Other factors No transfer pricing documentation Ruling appears negotiated Reverse engineering to desired transfer pricing outcome Ruling concluded for long or no fixed term Ruling granted quickly Transfer pricing margin dependent on increase in employment in jurisdiction Ruling granted in combination only with increase of operational activities in jurisdiction www.dlapiper.com Wednesday, December 7, 2016 12
State aid and transfer pricing A deviation from the arm's length principle, or a derivative thereof? There is no single interpretation of the arm's length principle The OECD Guidelines provide a useful and highly influential framework for the application of the arm's length principle as elaborated in Art. 9 of the OECD Model Tax Convention The way the arm's length principle and the concepts elaborated in the OECD Guidelines have been applied in practice has evolved over time: As country-specific practices develop As business operations change As experience with transfer pricing develops OECD Guidelines 1979 OECD Guidelines 1995 OECD Guidelines 2010 Most appropriate method BEPS amendments Accurately delineate the transaction www.dlapiper.com Wednesday, December 7, 2016 13
EU State Aid from a US Perspective
US perspectives US organizations critical of Commission activities US Chamber of Commerce letters in 2014 and 2015 that Commission actions retroactively call into question thousands of tax arrangements that were previously understood to be legal and appropriate. US government quite concerned and critical December 2015: Deputy Assistant for Tax Policy provides Congressional testimony that actions undermine our rights under our tax treaties. January 2016: Group of senators write to US Treasury, alarms us [that the Commission] target U.S. firms essentially to force its member states to impose taxes in a manner inconsistent with internationally accepted standards in place at the time. Senators ask Treasury to consider invoking existing IRC Section 891, doubling tax rates on citizens and residents of discriminatory countries. January 2016 letter from Secretary of Treasury to Commissioner Jean-Claude Juncker: Creates disturbing international precedents Respectfully urge you to reconsider (attaching copy of Congressional testimony) www.dlapiper.com Wednesday, December 7, 2016 15
US Treasury white paper on EC state aid investigations into transfer pricing (August 2016) States three major areas of concern: Commission actions are new and depart from status quo, second guessing country tax authorities Inappropriately collapsing advantage with selectivity simply due to MNE status Should not be retroactive Notes prior similar rulings were made prospective only Actions depart from OECD arm s length norms, thereby undermining international consensus, MAP procedures, and BEPS initiatives Notes Commission s analysis does not take place under OECD TP Guidelines, but rather equal treatment under TFEU. Concern re: Commission s competency to rule on arm s length norms. Seems to reject TNMM in favor of profit split Notes that US Treasury s impacted by US foreign tax credit provisions, but leaves open whether such required assessments are creditable Are the assessments valid taxes? Did the taxpayer pursue all practical remedies to reduce or eliminate the assessment? www.dlapiper.com Wednesday, December 7, 2016 16
US perspectives - MNE taxpayers US MNE taxpayers directly affected: Those with final decisions have appealed to EU General Court Those with initial assessment determinations will likely appeal once their final decisions are issued Other US MNEs Given the relatively new developments, highly unlikely any other US MNEs have established a specific tax exposure reserve (FIN 48). But likely to be a FYE 2016 issue probed by financial statement auditors US MNEs with APAs or other tax rulings might issue general cautions in public financial statement discussions Those with APAs or other tax rulings should ensure that all provisions and documentation follow the arm s length standard Work within established groups or separate lobbying critical of EC actions Calls for EU retaliation taxes seem unlikely. Rather, may be another impetus for US international tax reform with the new President / Congress www.dlapiper.com Wednesday, December 7, 2016 17
Impact and Next Steps
Potential impact of EU state aid rules Accounting and Disclosure M&A Investments Due Diligence Business Operations Reputation and brand EC Investigation Materiality (including damages) FIN48 Positioning Paper for uncertain tax positions in financial statements Consideration of EU State aid risk during due diligence Existing business models Restructuring of transactions (planning) Economic substance (people, functions, and risks) Public perception if investigations are on-going or finalised Mainstream media coverage Reimbursement requested by national Courts Negative decision requiring payment of back-taxes and compound taxes, for up to 10 years No suspensive effect of an appeal www.dlapiper.com Wednesday, December 7, 2016 19
What do you need to do? Assess vulnerability of international business model and tax structure to EU state aid concept Determine FIN48 financial accounting position and discuss with auditors Prepare EU State Aid Positioning Paper (FIN48 or other stakeholders) Consider solutions that will help you manage and mitigate state aid risk Plan for uncertainty and increased levels of controversy If the EC has already started to investigate, cooperate and provide with robust evidence against state aid allegations In case of a claim before a national court against your company due to alleged unlawful state aid granted by virtue of a tax arrangement, seek state aid assistance to defend your company in a way that would preserve your group s rights in potential upcoming procedures at EU level www.dlapiper.com Wednesday, December 7, 2016 20
Joel Cooper Co-Head, International Transfer Pricing Practice T: +44 (0) 207 796 6929 F: +44 (0) 207 796 6666 joel.cooper@dlapiper.com Bob Martens Global Co-Leader, International Trade, Regulatory and Government Affairs T: +32 (0) 2 500 15 03 F: +32 (0) 2 500 16 00 bob.martens@dlapiper.com Carole Maczkovics Lead Lawyer T: +32 (0)2 500 65 20 F: +32 (0)2 500 16 01 carole.maczkovics@dlapiper.com Pie Geelen Dutch Tax Advisor Head, European Tax Desk T: +1 212 335 4905 F: +1 212 884 8505 pie.geelen@dlapiper.com Eric Ryan Of Counsel, Co-Chair Global Transfer Pricing Practice T: +1 650 833 2118 F: +1 650 687 11 92 eric.ryan@dlapiper.com DLA Piper is a global law firm operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com. This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as "Lawyer Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Copyright 2016 DLA Piper. All rights reserved. www.dlapiper.com Wednesday, December 7, 2016 21