TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, October 4, 2017

Mason Presents Whose Arm's-Length Standard? Today At Northwestern

Mason (2016)Ruth Mason (Virginia) presents Tax Rulings as State Aid — Part 4: Whose Arm's-Length Standard?, 155 Tax Notes 947 (May 15, 2017), at Northwestern as part of its Advanced Topics in Taxation Workshop Series hosted by Sarah Lawsky:

In this fourth part in a series of reports on state aid, Mason focuses on the element of “advantage” in EU state aid law, and she criticizes the European Commission’s doctrinal approach to identifying advantages for state aid purposes. In particular, this article addresses the divergence between the EC’s and OECD’s conceptions of the arm’s-length principle. ...

The EU courts have shown the commission deference in the state aid area, but expansion of the scope of state aid doctrine to require income to be allocated according to the commission’s sui generis arm’s-length standard has not been adequately explained by the commission, and it serves no clear state aid goal. At the same time, the commission’s new approach generates unprecedented legal uncertainty — potentially calling into question every transfer price and profit allocation reported by every multinational for at least the last 10 years, whether under a tax ruling or self-assessment without a ruling. After all, if a member state cannot avoid state aid scrutiny by following the OECD guidelines as incorporated into domestic law, taxpayers’ selfdeclared prices even outside the ruling context also should be suspect.

Still in its infancy, business tax state aid doctrine is in a state of flux. I hope the CJEU will clarify that if the member state’s own law points to the OECD guidelines, those guidelines represent the reference baseline, so that the state’s adherence to them averts conferral of advantages and thereby averts state aid.

If the court does not so clarify, a unanimous EU Council, possibly under article 107(3)(e) of the TFEU, could declare application of the OECD guidelines as compatible with the internal market. This could limit the commission’s state aid review to tax rulings that confer advantages that are inconsistent with the guidelines. A problem with the legislative approach is that the council can act only upon a proposal by the commission. It seems unlikely that a commission that has so resolutely proclaimed its authority to superimpose its own arm’s-length allocation rule on the member states would make the required proposal. For this reason, it is incumbent on the EU courts to clarify the limits on commission control over member states’ discretion to divide income among themselves and between themselves and non-EU states.

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