Responding to published reports that prominent multinationals had negotiated sweetheart tax deals with EU member states, two years ago the European Commission began to review those deals. But the commission did not, as might be expected, investigate whether the deals violated tax laws or treaties. Instead, the Directorate General for Competition investigated whether tax rulings granted to specific companies ran afoul of the state aid prohibition of the Treaty on the Functioning of the European Union. In particular, the commission wanted to know whether tax authorities in a few countries issued rulings that conferred a selective advantage on specific multinationals that distorted competition in the open market.
For the first year, not many people paid attention. After all, the commission had never before found that an advance pricing agreement negotiated between a taxpayer and a country's tax administration constituted illegal state aid. And even when it had found that a tax regime improperly conferred state aid, it had never before required a member state to recover that aid from the taxpayer retroactively, if the state aid finding was not reasonably foreseeable. At the outset, the worst anyone might have expected was that some rulings may be struck down prospectively.
That all changed in late 2014, when tax professionals first began to take note of, and express concern about, the investigations. First came the commission's preliminary finding that through a negotiated APA, the Netherlands conferred illegal state aid on Starbucks. Then the commission issued a preliminary finding that Luxembourg had conferred illegal state aid on Fiat through a tax ruling. This year the commission finalized those rulings and ordered the offending states to recover the illegally granted aid, going back 10 years, totaling €40 million to €60 million. Those rulings have been appealed to the European courts.
In the meantime the commission announced investigations and preliminary findings of illegal state aid in other cases involving tax rulings issued to other U.S.-based multinationals. The largest case thus far involves an investigation into two APAs between Ireland and Apple. Some observers expect the commission to issue a final ruling soon determining that Ireland conferred illegal state aid through those APAs and ordering that country to recover as much as $1 billion from Apple, covering the past 10 years.
This has led both the EU and the United States to elevate the controversy beyond just a discussion about the tax ruling practices of a few European countries. The EU views the investigations as critical to maintaining the integrity of its open markets. The United States views them as an assault on its sovereignty, the OECD's base erosion and profit-shifting project, and its bilateral tax and trade treaties, as well as a potential raid on the U.S. fisc. Both sides have defended their views vigorously in public, with the U.S. Treasury recently issuing a white paper outlining all the reasons that the EU should shut down these investigations -- and raising the specter that it could retaliate in a draconian way if Europe does not back down.
One thing is certain -- unless Europe and the U.S. can reach a compromise, a lot of people are going to be extremely upset at whatever new precedents emerge from the controversy.
As the U.S. election season crawls to a conclusion, Mindy Herzfeld examines the international and business tax proposals that might be expected in a possible Hillary Clinton administration, including an exit tax on inverting U.S. companies. Herzfeld also discusses how current Republican tax reform proposals may find their way into legislation supported by a possible Democratic president.
Stuart Gibson is editor of Tax Notes International.