Wednesday, August 24, 2016
U.S. Department of the Treasury White Paper, The European Commission's Recent State Aid Investigations of Transfer Pricing Rulings (Aug. 24, 2016):
The U.S. Department of the Treasury (“U.S. Treasury Department”) shares the European Commission’s (“Commission”) concern with tax avoidance by multinational firms. The international community, including the European Union (“EU”) and its Member States, has long recognized the need to address this issue multilaterally. For more than two decades, the U.S. Treasury Department has worked closely as part of the international community to achieve a collective solution to this global problem.
Beginning in June 2014, the Commission announced that certain transfer pricing rulings given by Member States to particular taxpayers may have violated the EU’s restriction on State aid. These investigations, if continued, have considerable implications for the United States— for the U.S. government directly and for U.S. companies—in the form of potential lost tax revenue and increased barriers to cross-border investment. Critically, these investigations also undermine the multilateral progress made towards reducing tax avoidance.
In light of these consequences, U.S. Secretary of the Treasury Jacob J. Lew sent a letter on February 11, 2016, to Commission President Jean-Claude Juncker describing the U.S. Treasury Department’s principal concerns with the Commission’s recent State aid investigations. This White Paper provides additional detail regarding Secretary Lew’s concerns, focusing primarily on the following issues:
- The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions. The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases. Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo.
- The Commission Should Not Seek Retroactive Recoveries Under Its New Approach. The Commission is seeking to recover amounts related to tax years prior to the announcement of this new approach—in effect seeking retroactive recoveries. Because the Commission’s approach departs from prior practice, it should not be applied retroactively. Indeed, it would be inconsistent with EU legal principles to do so. Moreover, imposing retroactive recoveries would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries.The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System. The OECD Transfer Pricing Guidelines (“OECD TP Guidelines”) are widely used by tax authorities to ensure consistent application of the “arm’s length principle,” which generally governs transfer pricing determinations. Rather than adhere to the OECD TP Guidelines, the Commission asserts it is employing a different arm’s length principle that is derived from EU treaty law. The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.
(Hat Tip: Ruth Mason.)