EU tax probes could threaten international agreements, US warns

The US Treasury Department "shares the European Commission's concern with tax avoidance by multinational firms. The international community, including the EU and its member states, has long recognised the need to address this issue multilaterally", it said in a report on the EU's recent state aid investigations of transfer pricing.

However, EU state aid investigations into particular taxpayers since 2014 have implications for the US government and US companies, and also undermine multilateral progress towards reducing tax avoidance, the report said.

The Commission's recent approach in dealing with member states' transfer pricing decisions appears to expand the role of the Commission's Directorate-General for Competition into a supra-national tax authority, the US said.

The Commission has been challenging the substance of member states' rulings based on its own arm's length standard, which it has never articulated "except for inchoate references to 'the market'", rather than that of a member state's own law, the US report said. Taxpayers and member states could not have foreseen that the Commission would do this, it said.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com said: "We share the US Treasury Department's concern that the Commission is encroaching on national sovereignty, and could cause significant uncertainty for major companies. As we said last year, there is also a risk that the EU competition authorities may end up creating outcomes that are at odds with the current OECD initiative that looks at transfer pricing: the Base Erosion and Profit Shifting (BEPS) project." 

The US Treasury Department will "consider potential responses" if the Commission continues on its present course, but would strongly prefer a return to the "system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU member states", it said.

The Commission is currently investigating two advance pricing arrangements (APAs) that Ireland granted to Apple in 1991 and 2007.

An APA is an agreement between a taxpayer and a taxing authority that amounts to be charged for goods or services supplied intra group, and usually cross-border, will not fall foul of transfer pricing legislation.

In September 2014 the European Commission published a letter setting out its preliminary findings in relation to its investigations into the rulings given to Apple. It said that the APAs agreed between the Irish tax authorities and Apple may have given the company unfair advantages incompatible with EU state aid laws. It said that tax margins appeared to have been "reverse engineered" without economic basis and tied to concerns about local jobs. It also criticised the length of the 1991 agreement which lasted 16 years, compared to arrangements in other European countries that the Commission said typically lasted for no more than five years. The Commission's decision in the Apple case is expected soon.

The Commission has also investigated rulings given by the Netherlands to Starbucks and by Luxembourg to Fiat Finance and Trade and McDonald's.

If the Commission rules that member states have given unlawful state aid, it can require the member state to make any company pay back any illegal reliefs granted over a period usually covering up to 10 years.

Self said: "The US clearly feels aggrieved by what it sees as a disproportionate targeting of its multinationals. However, the Commission appears to be standing firm and it seems likely that the battle will continue - with dangers for the BEPS process, and a risk of retaliation by the US.  If that ultimately leads to double taxation, that will be bad news for taxpayers and economic recovery alike."