EU ruling on Spanish tax breaks spells trouble for probes into Luxembourg

10th November 2014. By Matthew Newman

The European Commission’s court defeat in a case involving Spanish tax breaks could spell trouble for the regulator’s high-profile probes into sweeteners granted to multinational corporations in Luxembourg, Ireland and the Netherlands.

At issue in all these cases is the question of whether tax preferences extended to some companies break EU rules on illegal state support by giving them a “selective advantage” over competitors.

But this advantage may be impossible to prove in cases where a country grants the same special tax treatment to all comers, as last week’s EU ruling on Spain suggests.

The lower-tier General Court on Friday annulled two commission decisions that said Spanish tax breaks for shareholdings in foreign companies broke state-aid rules, saying the regulator failed to prove the regime was “selective”.

The ruling followed disclosures that Luxembourg has helped hundreds of multinationals to shield their profits from taxes. The leaks have put European Commission President Jean-Claude Juncker, a former Luxembourg prime minister, on the defensive.

Before Juncker took office on Nov. 1, the commission opened investigations into suspected unfair tax breaks in Luxembourg granted to Amazon.com and to Fiat Finance and Trade, or FFT, as well as to Starbucks in the Netherlands and to Apple in Ireland. These probes see the commission examining whether tax rulings may involve state aid because they gave “selective advantages” to a specific company or group of companies.

Although the Spanish investigations and the more recent probes differ on a number of points, there are enough similarities that officials may reconsider their approach, or be obliged to dig deeper for evidence that Amazon, FFT, Starbucks and Apple really benefited from special treatment that amounted to illegal state aid.

The first problem is how the commission approached selectivity in the Spanish cases. Selectivity is one of the bedrock criteria for determining if a company or group of companies received illegal aid. If the commission can’t prove that a tax authority used “discriminatory” treatment toward a company or group of companies, the case falls apart.

That’s exactly what happened in the Spanish cases. General Court judges rejected the commission’s argument about selectivity in Spain’s tax regime, saying that the regulator used the wrong comparison criteria to judge whether there was an advantage for companies that bought foreign shares.

The EU regulator compared the tax treatment on goodwill to what would be available under the normal Spanish corporate tax regime. But that wasn’t the appropriate comparison, the court said, because the tax advantage was “not aimed at any particular category of undertakings or the production of goods, but a category of economic transactions.”

Moreover, the measure was available to any company, meaning there was no grounds for establishing selective treatment.

The judges also criticized the commission for comparing the Spanish tax break with what was available in other countries.

“A finding of the selectivity of a measure must be based, inter alia, on a difference of treatment between categories of undertakings under the legislation of the same member state, not a difference in treatment between companies of a member state and those of other member states,” the court said.

The Luxembourg probe has some similarities. In this case, the commission is comparing the alleged “selective advantage” from tax rulings for Amazon and FFT to what other companies “in a similar legal and factual situation” received. The commission has stressed that it’s not calling into question the legislation that allows Luxembourg or the other countries to grant such tax rulings.

The problem the commission could face lies in the benchmark the regulator uses to compare this alleged advantageous treatment. In the 30-page decision in which it expressed “serious doubts” about the Luxembourg authority’s treatment of FFT, the commission said it was comparing the tax ruling of a corporate group — such as FFT — to what would be available to a “prudent independent operator acting under normal market conditions.”

The EU regulator then explains that it’s using criteria to assess the alleged advantage under the nonbinding “transfer pricing” guidelines from the Organization for Economic Cooperation and Development.

Transfers pricing occurs when a company sets the prices for goods and services sold between entities that it controls. The method is often used for landing profits in low-tax jurisdictions, reducing the parent company’s overall tax burden.

The commission said that the appropriate comparison is the OECD’s arm’s-length transfer-pricing guidelines. These call for companies to treat intragroup transactions in the same way as they handle those with independent companies.

The comparison raises a problem. The commission is comparing treatment of FFT with the behavior of hypothetical companies under nonbinding guidelines.

But Friday’s court ruling suggests that the commission should be looking at how Luxembourg treated FFT and Amazon in comparison with how it treated other companies. Did the duchy grant better deals — such as a lower tax base — to them compared with how they treated other companies in the same legal and factual condition?

The commission doesn’t think the two cases are similar.*

“We are carefully assessing the judgments and their implications,” commission spokesman Riccardo Cardoso said in an e-mailed statement.

“We continue to pursue with full force our ongoing four in-depth investigations into tax rulings granted by Ireland, the Netherlands and Luxembourg. These investigations involve tax rulings granted to individual, specific companies. The facts can therefore be clearly differentiated from the Spanish goodwill tax scheme and the legal issues ruled upon by the General Court.”

The regulator might argue that the Spanish probe involved a probe of tax benefits available to groups of companies that invest abroad while the Luxembourg investigations focus on individual companies. That may be an important difference if the commission finds enough evidence that individual companies were treated differently compared to companies in similar situations.

The lesson from Friday’s ruling is that commission should be wary of using an expanded approach to “selectivity” when it reviews the Luxembourg tax rulings, particularly after the court’s annulments in the Spanish cases.

The commission would be wise to compare the tax rulings to the measures available to all companies, not just to a theoretical tax regime covering how companies shift profits from one country to another to avoid taxes.

If the commission decides to use criteria for “transfer pricing” from the OECD it may end up with the same problem it had with the Spanish cases.

	Eliot Gao

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