EU: “State aid” and transfer pricing rulings

EU: “State aid” and transfer pricing rulings

The European Commission on 19 May 2016 issued a communication concerning the concept of “state aid” and in particular concerning tax rulings and settlements, and referring specifically to the arm’s length principle and guidance provided in the OECD's transfer pricing guidelines for assessing whether transfer pricing rulings constitute state aid.

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While the EC release explains that the OECD guidelines do not deal with “state aid” per se, the communication captures the international consensus on transfer pricing and finds that rulings in line with the OECD approach are unlikely to give rise to state aid. 

The EC determined that tax rulings confer a selective advantage in particular when: (1) the ruling misapplies national tax law, and this results in a lower amount of tax; (2) the ruling is not available to all undertakings in similar legal and factual situations; or (3) the tax administration applies a more favorable tax treatment compared to other taxpayers in similar legal and factual situations. The latter could be the case if, for example, the tax authorities accept a transfer pricing arrangement that is not arm’s length because the methodology endorsed by that ruling produces an outcome that departs from a reliable approximation of a market-based outcome or the authorities accept indirect methods for calculation of profits when more direct methods are available. 

With respect to tax settlements, in the context of disputes over amounts of tax owed, the EC emphasized that the conclusion of such settlements may involve state aid, especially if the amount of tax due has been reduced without clear justification (such as optimizing the recovery of debt) or in a disproportionate manner to the benefit of the taxpayer. The communication highlights two situations in particular which may represent selective advantages: (1) if, in making disproportionate concessions to a taxpayer, the administration applies a more “favorable” discretionary tax treatment compared to other taxpayers in a similar factual and legal situation; and (2) the settlement is contrary to the applicable tax provisions and has resulted in a lower amount of tax, outside a reasonable range.     

KPMG observation

While the EC has attempted to clarify what is “state aid,” taxpayers need to note that this interpretation is not necessarily shared by EU Member States or the European courts.


Read a May 2016 report prepared by KPMG’s EU Tax Centre: Commission issues notice on the notion of State aid

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