US Treasury Department Issues White Paper Critiquing EU State Aid Investigations of Transfer Pricing Rulings

On August 24, 2016, the U.S. Department of Treasury issued a White Paper titled, “The European Union’s Recent State Aid Investigations of Transfer Pricing Rulings,” explaining United States transfer pricing concerns with the EU Commission.  The state aid investigations of note, include Apple, Starbucks, Fiat/Chrysler and Amazon.  There are indications that there may be more investigations launched.  Notably, the EU Commission’s positions, apparently, mostly involve transfer pricing concerning intellectual property. 

In February of 2016, Treasury Secretary Lew authored an open letter to the President of the Commission, Jean-Claude Juncker, stating:

that the Commission’s “sweeping interpretation” of State aid doctrine “threatens to undermine” the progress made by the international community “to curtail the erosion of our respective corporate tax bases” and described four principal concerns.  First, the Commission has “sought to impose penalties retroactively based on a new and expansive interpretation of state aid rules.”  Second, the investigations appear “to be targeting U.S. companies disproportionately.”  Third, the new enforcement theory “appears to target, in at least several of its investigations, income that Member States have no right to tax under well established international tax standards.”  Fourth, the Commission’s investigations “could undermine U.S. tax treaties with EU Member States."

The White Paper further explains the concerns and in the Executive Summary states:

The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions.  The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases.  Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo.

The Commission Should Not Seek Retroactive Recoveries Under Its New Approach.  The Commission is seeking to recover amounts related to tax years prior to the announcement of this new approach—in effect seeking retroactive recoveries.  Because the Commission’s approach departs from prior practice, it should not be applied retroactively.  Indeed, it would be inconsistent with EU legal principles to do so.  Moreover, imposing retroactive recoveries would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries. 

The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System.  The OECD Transfer Pricing Guidelines (“OECD TP Guidelines”) are widely used by tax authorities to ensure consistent application of the “arm’s length principle,” which generally governs transfer pricing determinations.  Rather than adhere to the OECD TP Guidelines, the Commission asserts it is employing a different arm’s length principle that is derived from EU treaty law.  The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.

[Hat tip to Pepperdine University School of Law Professor Paul Caron's TaxProfBlog]