On August 24, 2016 the U.S. Department of the Treasury published a White Paper on the European Commission’s State Aid Investigations into Transfer Pricing Rulings. In the White Paper the U.S. Department of the Treasury expresses several concerns it has regarding the State Aid Investigations into transfer pricing rulings as conducted by the European Commission.

 

The three main concerns of the U.S. Department of the Treasury seem to be:

·  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.

 

In a press release issued by the U.S. Department of Treasury with respect to the publication of the White Paper also the following is stated:

These investigations have major implications for the United States.  In particular, recoveries imposed by the Commission would have an outsized impact on U.S. companies. Furthermore, it is possible that the settlement payments ultimately could be determined to give rise to creditable foreign taxes.  If so, U.S. taxpayers could wind up eventually footing the bill for these State aid recoveries in the form of foreign tax credits that would offset the U.S. tax bills of these companies.  The investigations have global implications as well for the international tax system and the G20’s agenda to combat BEPS while improving tax certainty to fuel growth and investment.

 

The White Paper is divided in 5 sections and discusses a.o. the following subjects:

I.      Introduction

A.      Current Investigations

B.      Implications for the United States

II.    The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions

A.      The Commission’s Newly Adopted Approach Collapses the Requirements of Advantage and Selectivity

B.      Under Prior Decisions an Advantage Available Only to Multinationals Is Not Necessarily Selective

III.  The Commission Should Not Seek Retroactive Recoveries Under Its New Approach

A.      Retroactive Recoveries Are Inconsistent with EU Legal Principles

B.      The Commission Should Decline to Impose Retroactive Recoveries

IV.   The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System

A.      Background on the OECD’s Role in Setting Transfer Pricing Standards

B.      The Commission’s Actions Undermine the International Consensus on Transfer Pricing

C.      The Commission’s Actions Call into Question the Ability of Member States to Honor Bilateral Tax Treaties

D.     The Investigations Undermine Progress Made Under the BEPS Project

V.     Conclusion

 

Click here to be forwarded to the U.S. Department’s White Paper on the European Commission’s State Aid Investigations into Transfer Pricing Rulings as available on the website of the U.S. Department of the Treasury’s webpage, which will open in a new window.

 

Click here to be forwarded to Secretary Lew’s February letter to Commission President Jean-Claude Juncker.

 

Click here to be forwarded to the press release as issued by the U.S. Department of the Treasury on August 24, 2016.

 

 

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