The European Commission recently announced updates to two in-depth state aid investigations.
The Commission concluded that Luxembourg granted a taxpayer (Amazon) undue tax benefits of up to €250 million, plus interest. This is illegal under EU state aid rules, because in the Commission's view, Luxembourg granted transfer pricing rulings to the Amazon group that deviated from the arm's length principle. Luxembourg must now recover the illegal aid. The Commission also announced its decision to refer Ireland to the Court of Justice of the European Union (CJEU) for failing to recover up to €13 billion in tax benefits that it had conferred on a taxpayer (Apple), which the Commission concluded constituted illegal state aid in a 2016 decision. The deadline for Ireland to implement the Commission's decision passed on January 3, 2017, notwithstanding that both Ireland and Apple have filed appeals with the General Court of the EU.
The Amazon decision follows a three-year investigation and comes on the heels of several other similar inquiries into possible state aid granted by the Netherlands, Luxembourg and Ireland to other multinational companies (such as FIAT, Starbucks, McDonalds, Apple and GDF Suez).
Although state aid rules are not new, the current investigations into various EU tax rulings began in 2013 after 500 Luxembourg tax rulings were leaked to the public. The Commission requested information from all EU Member States on tax ruling practices and tax rulings issued between 2010 and 2013, with a particular focus on tax rulings endorsing transfer pricing arrangements.
The Commission's investigation and decision addressed a Luxembourg tax ruling that allowed a Luxembourg-resident operating company within the Amazon group to use a specific method to calculate its taxable base. The Commission concluded that the tax ruling endorsed an unjustified method to calculate the operating company's taxable profits. The operating company paid royalties to a Luxembourg-incorporated limited partnership. The royalties related to the right to use Amazon intellectual property, which was held by the limited partnership under a cost-sharing agreement with Amazon in the United States. The limited partnership was not subject to corporate taxation in Luxembourg.
According to the Commission, the level of the payments, particularly in proportion to what the limited partnership paid to the U.S. parent company under the group cost-sharing agreement, did not reflect economic reality, because the payments reduced the profits of the operating company to "a quarter of what they were in reality". Therefore, the Commission considered that the rulings enabled the company to pay less tax than other companies, which is illegal under EU State aid rules. The Commission made it clear that its investigation did not challenge the limited partnership's ownership of the intellectual property nor did it concern the wider group structure, but only focused on the tax treatment of the operating company and the limited partnership established in Luxembourg.
Luxembourg acknowledges the Commission's decision and notes that "Luxembourg will use appropriate due diligence to analyze the decision and reserves all its rights." Luxembourg notes that Amazon was taxed according to tax rules that were in force at the time.
As a result of this ruling, Luxembourg must now recover up to €250 million, plus interest—the estimated difference between what the operating company paid in taxes and what it would have been liable for without the disputed tax ruling.
In its 2016 decision, the Commission decided that two tax rulings issued by Ireland "substantially and artificially" lowered the tax paid by Apple's Irish companies in Ireland since 1991, resulting in estimated state aid of up to €13 billion. The deadline for Ireland to implement the Commission's decision and recover this amount (plus interest) from Apple was January 3, 2017 (four months after being official notified of the decision).
Apple and Ireland appealed the Commission's findings of illegal state aid to the General Court of the EU. However, the appeal did not suspend the recovery payment. Even though Ireland has taken steps to determine the exact amount to be recovered and set up an escrow account in which to place the funds pending the outcome of the appeal, the Commission is referring the case to the CJEU because of Ireland's failure to recover payments.
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Information is current to October 17, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500