Band Aid Solution
European Court clarifies EU Commission's powers to police member states' taxation policies under state aid rules
In major state aid news, the General Court, the first instance tribunal of the European Court of Justice issued two judgments on 24th September 2019 which dealt with the power and competence of the European Commission to rule on member state's tax policies. It clarified the circumstances in which transfer pricing arrangements agreed between multi-nationals and the host member state could amount to unlawful state aid in breach of Article 107 of the Treaty for the Functioning of the European Union (TFEU). The consequence of these rulings is that the Commission is likely to increase its state aid enforcement actions against aggressive tax avoidance schemes in the EU.
Two Commission decisions of October 2015 were under review. The first related to certain transfer pricing arrangements agreed between a Dutch subsidiary of Starbucks and the Netherlands, the other related to similar transfer pricing arrangements of Fiat, the Italian motor car manufacturer approved by the Luxembourg Government.
The General Court struck down the Commission's decision against Starbucks and the Netherlands but upheld the Commission's case against Fiat and Luxembourg.
In this article we review the Starbuck and Fiat cases and ask how the different judgments can be reconciled and where this leaves the Commission's jurisdiction and power to enforce the state aid rules against member states.
The Decisions
In October 2015 the European Commission decided that Luxembourg and the Netherlands had granted selective tax advantages to Fiat Finance and Trade and Starbucks, respectively and these were unlawful under EU state aid rules.
Following in-depth investigations, which were launched in June 2014, the Commission concluded that Luxembourg had granted selective tax advantages to Fiat's financing company and the Netherlands to Starbucks' coffee roasting company. In each case, a tax ruling issued by the respective national tax authority artificially lowered the tax paid by the company. These tax rulings are perfectly legal under the tax law of the respective member state. They were issued in the form of comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions.
However, the Commission found that the two tax rulings under investigation endorsed artificial and complex methods to...
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