Tax Analysts Blog

Could EU Probe Signal the End of Sweetheart Tax Deals?

Posted on Jul 8, 2014

Multinationals are constantly pushing the envelope to achieve lower effective tax rates. Although U.S. corporations are not the only companies that do this, they are among the most aggressive and benefit from some of the leakiest transfer pricing rules in the developed world. U.S. tax rules are clearly complicit in multinationals’ ability to lower their tax burden, but the European Union is now examining whether its member states are inappropriately aiding some companies through so-called sweetheart transfer pricing arrangements.

The EU competition commission announced its probe on June 11. It consists of three separate investigations involving Apple’s deals with Ireland, Starbucks in the Netherlands, and Fiat in Luxembourg. The EU has alleged that the three companies received favorable transfer pricing rulings that violated the prohibitions on state aid. At the time, European Commission’s vice president and competition commissioner expressed serious doubts that the rulings were compatible with the EC treaty rules on state aid. The EU also said it was looking at the patent box regimes in several states.

Last week, Amazon was dragged into the investigation as the EU asked Luxembourg for documentation on the company’s tax payments. An EU official told the Financial Times that it was examining a tax deal between Luxembourg and Amazon, and that the investigation might widen into the online retailer’s other tax arrangements. As The Telegraph noted, Amazon has already come under fire in the United Kingdom for paying only £4.2 million in taxes on over £4.3 billion in sales in 2013.

While Ireland and the Netherlands have complied with the EU’s requests, Luxembourg has been resistant. This is no surprise. The Grand Duchy is a well-known tax haven and features prominently in any number of aggressive income-shifting arrangements designed to funnel profits out of high-tax jurisdictions. It’s remarkable how many companies find it most efficient to locate their European headquarters or key subsidiaries in a tiny country with only 530,000 people. Luxembourg’s intransigence isn’t stopping the EU, however, as the commission has explored opening an infringement proceeding against the country if it won’t cooperate with the investigations.

If these deals went away, what would that mean for Apple, Amazon, Starbucks, and Fiat? It’s not entirely clear. Ireland and the Netherlands deny the existence of special deals with either company (even though Apple’s CEO mentioned such an arrangement during his testimony before a Senate subcommittee). In Apple’s case, the EU is challenging Ireland’s calculations of the tax base. If the EU finds that inappropriate state aid was rendered, presumably Apple’s taxable income in Ireland would be higher. That wouldn’t really help the United States or other higher-tax jurisdictions where most of Apple’s sales take place. The EU investigation into Fiat is focused on the calculation of the taxable basis of Fiat Finance and Trade's financing activities. (Using finance industry subsidiaries to lower a consolidated group’s taxable income is a common practice, particularly among larger U.S. corporations.)

The United States has its own version of favorable transfer pricing rulings in the form of advance pricing agreements. APAs are clouded in secrecy, and many, including the Senate Finance Committee at times, have suspected that the IRS might be giving away the store in these deals with U.S. companies. A potential EU crackdown on European versions of APAs is hardly welcome news for U.S. multinationals, who have relied on these arrangements to shift income in ways that lower their overall tax burden.

It’s a long shot, but maybe if the EU can end sweetheart deals in its member states, Treasury can begin to trim APAs and improve transfer pricing enforcement in the United States.

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