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State Aid and Tax – Understanding the risks 17 November 2016 Dr Totis Kotsonis – State Aid Partner Ben Jones – Tax Partner

State Aid and Tax – Understanding the risks

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Page 1: State Aid and Tax – Understanding the risks

State Aid and Tax – Understanding the risks

17 November 2016

Dr Totis Kotsonis – State Aid Partner

Ben Jones – Tax Partner

Page 2: State Aid and Tax – Understanding the risks

Totis [email protected] 919 0700linkedin.com/in/drtotiskotsonis

Welcome, your presenters today are:

Ben [email protected] 919 4686linkedin.com/in/benjones2

Page 3: State Aid and Tax – Understanding the risks

Overview

Page 4: State Aid and Tax – Understanding the risks

Eversheds LLP | 12/08/2015 |

• EU State aid – A brief introduction

• Tax State aid investigations – The wider context

• Tax rulings investigations

• The European Commission's case

• Arguments against the European Commission's case

• Where next and how do you protect your position?

• Opportunities?

• Brexit and State aid

• Questions

Overview

Page 5: State Aid and Tax – Understanding the risks

State aid rules – A brief introduction

Page 6: State Aid and Tax – Understanding the risks

State aid – A brief introduction

• What are the EU State aid rules all about?

• Why do we need State aid rules?

• Who decides whether State aid is legal?

• What are the key procedural requirements?

• What if State aid has been granted in breach of EU law requirements?

Page 7: State Aid and Tax – Understanding the risks

State aid – A brief introduction

Article 107(1) Treaty on the Functioning of the EU

• Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.

Page 8: State Aid and Tax – Understanding the risks

State aid – A brief introduction

EU State aid rules generally prohibit State aid:

• Granted through State resources in any form

• Confers a selective advantage on undertaking(s)

• Can distort competition

• Affects trade between EU Member States

Page 9: State Aid and Tax – Understanding the risks

State aid – A brief introduction

• Why is State aid generally prohibited?

• Distortion of competition in the single market – inefficient suppliers kept afloat at the expense of more efficient competitors, innovation suffers

• Risk of subsidies race between Member States

• But not all State aid is prohibited

• EU law recognises that certain common/wider goals justify accepting a certain degree of competition distortion (which arises as a result of the grant of State aid) so as to ensure that these goals are attained

Page 10: State Aid and Tax – Understanding the risks

State aid – A brief introduction

• On what grounds will State aid be justified?

• Article 107(2) – e.g. aid:

• having social character granted to individual consumers;

• to make good damage caused by natural disasters

• On what grounds might State aid be justified? • Article 107(3) – e.g. aid:

• aid to promote the execution of an important project of common European interest or

• to remedy a serious disturbance in the economy of a Member State;

• to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

Page 11: State Aid and Tax – Understanding the risks

State aid – A brief introduction

• Who decides whether State aid is compatible with EU law requirements and how?

• European Commission

• “Notification before implementation” requirement• Preliminary investigation• In-depth investigation

• Exemptions from notification if certain conditions met• GBER• De minimis

• Commission decisions appealable to EU Courts (for manifest error or failure to follow due process)

Page 12: State Aid and Tax – Understanding the risks

State aid – A brief introduction

• Commission investigations

• Preliminary investigation (up to 2 months), may lead to decision that:• there is no aid

• there is aid but it is compatible with EU rules• there is aid and the Commission has serious doubts as to the

compatibility of the measure with EU rules (and so it will open an in-depth investigation)

• Formal (in-depth) investigation (may take up to 18 months sometimes longer):• EU countries and interested parties invited to submit comments• EU country concerned invited to respond to those comments

• may lead to: • positive decision• conditional decision

• negative decision

Page 13: State Aid and Tax – Understanding the risks

State aid – A brief introduction

• What if State aid has been granted without notification?• European Commission investigation

• How would the Commission find out?• Information publicly available

• Complaints

• What if Commission concludes that State measure is State aid which cannot be justified under EU rules?• Normally State aid must be recovered (with interest)

• Commission can investigate aid and require its recovery up to 10 years from its grant

Page 14: State Aid and Tax – Understanding the risks

Tax investigations - The wider context

Page 15: State Aid and Tax – Understanding the risks

The wider context

• On what basis can tax arrangements constitute State aid?

• Recent tax rulings and the European Commission's position

• The wider political context – Brexit and all that

Page 16: State Aid and Tax – Understanding the risks

The wider context

• On what basis can tax arrangements constitute State aid?

• When it involves the State foregoing income which it otherwise would have had, as a result of applying (or dis-applying) a tax measure to certain type of companies only (i.e. selectively)

• this would be the case, for example, when the State makes an exemption to the tax rules that would otherwise have applied, in favour of certain type of companies only

• this then leads to a reduction to the State budget (and the income which the State would otherwise have received amounts to the use of “state resources” for EU State aid law purposes)

• it might be possible to justify such “deviation” from the otherwise applicable tax rules. If this is not possible, then the tax arrangement would be problematic for EU State aid rules purposes

Page 17: State Aid and Tax – Understanding the risks

The wider context

• On what basis can a tax ruling constitute State aid?

• Key issue: transfer prices (the prices set for the provision of goods or services by one group company to another)

• Commission considers that tax rulings are in principle legal but not if they are based on transfer prices which do not reflect economic reality in that they endorse artificial and complex methods to establish taxable profits for companies

• In those circumstances the Commission considers that a tax ruling confers unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use

Page 18: State Aid and Tax – Understanding the risks

The wider context

June 2013 Commission commences investigation into the tax rulings practices of seven Member States (including the UK)

June 2014 Commission opens in-depth investigation into transfer pricing arrangements on corporate taxation of Apple (Ireland) Starbucks (Netherlands) and Fiat Finance and Trade (Luxembourg)

October 2014 Commission opens in-depth investigation into transfer pricing arrangements on corporate taxation of Amazon

November 2014 LuxLeaks

December 2014 Commission extends information enquiry on tax rulings practices between 2010 – 2013 to all Member States

February 2015 Commission opens in-depth investigation into the Belgian “excess profit” tax scheme

October 2015 Commission announces decisions on Fiat and Starbucks cases

December 2015 Commission opens in-depth investigation into Luxembourg's tax treatment of McDonald's

January 2016 Commission announces decision on Belgian “excess profit” tax scheme

Page 19: State Aid and Tax – Understanding the risks

The wider context

August 2016 Commission announces decision on Apple case finding that Ireland gave illegal tax benefits to Apple worth up to €13 billion

September 2016 Commission opens an investigation into Luxembourg’s tax arrangements

with Engie, the French utility

November 2016 Ireland launches an appeal against the Commission’s Apple decision

Currently Amazon and McDonald’s investigations still ongoing

Page 20: State Aid and Tax – Understanding the risks

The wider context

“The Commission is looking at the compliance with EU state aid rules of certain tax practices in some Member States in the context of aggressive tax planning by multinationals, with a view to ensure a level playing field. A number of multinational companies are using tax planning strategies to reduce their global tax burden, by taking advantage of the technicalities of tax systems, and substantially reducing their tax liabilities. This aggressive tax planning practice erodes the tax bases of Member States, which are already financially constrained”

Commission press release, June 2014

Page 21: State Aid and Tax – Understanding the risks

The wider context

"In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes. Under the EU's state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way.” (Joaquín Almunia, Commission Vice President in charge of competition policy at the time, June 2014)

"Fair tax competition is essential for the integrity of the Single Market, for the fiscal sustainability of our Member States, and for a level-playing field between our businesses. Our social and economic model relies on it, so we must do all we can to defend it.” (Algirdas Šemeta, Commissioner for Taxation at the time, June 2014)

Page 22: State Aid and Tax – Understanding the risks

The wider context

“Tackling potential distortions of competition through selective tax advantages is another area where I will maintain our efforts. Unlawful reductions of the tax burden for selected companies harm not only competitors in the market, but also every taxpayer… All our efforts converge on meeting the ultimate objective of competition policy: making markets function better for the benefit of the European consumers – both households and businesses.”

Margrethe Vestager, Commissioner for Competition (Forward to the Annual Competition Report 2014)

Page 23: State Aid and Tax – Understanding the risks

The wider context

• National corporation tax rates (whether low or not) do not give rise to any State aid law issues

• Brexit and all that

Page 24: State Aid and Tax – Understanding the risks

Tax rulings investigations

Page 25: State Aid and Tax – Understanding the risks

Why tax rulings?

• What are tax rulings?

• Why are tax rulings being targeted?

• “perfectly legal” and acceptable UNLESS results in lower taxation than for other similar entities in similar circumstances

• Selective treatment

Page 26: State Aid and Tax – Understanding the risks

Why tax rulings?

• Examples:

• significant discretion exercised by tax authority

• ruling not available to similar entities

• “favourable” discretionary tax treatment

• contradicts applicable tax treatment

Page 27: State Aid and Tax – Understanding the risks

Targeting transfer pricing rulings

• Investigations have initially targeted transfer pricing rulings

• Starbucks

• Fiat

• Amazon

• Apple

• “arm’s length principle under EU state aid rules”

Page 28: State Aid and Tax – Understanding the risks

Apple

AppleInternational

IrelandNo jurisdiction

Europe

Internal allocation of

profit to “head office”

Payments for products

Customershead office

Reduced tax liability

Page 29: State Aid and Tax – Understanding the risks

Starbucks

Starbucks Manufacturing

Starbucks Coffee Trading

Alki

NetherlandsUK Switzerland

Royalties for coffee-roasting

know-how

Payments for green coffee

beans

Reduced tax liability

Page 30: State Aid and Tax – Understanding the risks

Fiat

Fiat Finance and Trade

Fiat group companies

Luxembourg

Other European countries

Intra-group loans

Reduced tax liability

Page 31: State Aid and Tax – Understanding the risks

Amazon

Amazon EU

Luxembourg

Non-Lux partners

Royalty payment

Reduced tax liability

Amazon LLP

Tax transparent in Luxembourg

so no tax

Page 32: State Aid and Tax – Understanding the risks

Widening investigations

• Scope of investigations now widening:

• Belgian excess profit regime

• Engie (GDF Suez)

• MacDonald’s

• Targeting:

• entire domestic regime administered through rulings

• rulings on application of double tax treaties

Page 33: State Aid and Tax – Understanding the risks

MacDonald's

MacDonald’s European

Franchising

European / Russian

operations

LuxembourgEurope / Russia

Royalty payments

No tax liability

US branch

Internal allocation of

royalty payments

No tax liability

Page 34: State Aid and Tax – Understanding the risks

Widening investigations

• But are these investigations justifiable and what are the defences?

• Selectivity not proven – no comparable circumstances

• No EU arm’s length principle

• No proof of advantage

• Legal certainty

Page 35: State Aid and Tax – Understanding the risks

Where next and how do you protect your position?

Page 36: State Aid and Tax – Understanding the risks

Where next and how do you protect your position?

• What does all this mean for business?

• What does this mean for tax settlements with EU tax authorities?

• Can business actually rely on tax rulings?

• Can businesses ensure that any ruling is state aid compliant?

• Should businesses get an indemnity from buyers when selling?

Page 37: State Aid and Tax – Understanding the risks

Opportunities?

Page 38: State Aid and Tax – Understanding the risks

Opportunities?

• Damages claim

• Complaints to EU Commission

Page 39: State Aid and Tax – Understanding the risks

Brexit and State aid

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Brexit and State aid

• Will some form of State aid regulation continue to apply in the UK post-Brexit?

• Three main possibilities:• UK continues to comply with WTO anti-subsidy rules (but not

EU state aid rules)• New post-Brexit arrangements with the EU provide for

continued compliance with EU State aid rules in relation to all or certain specific sectors

• Post-Brexit the UK implements a national State aid system similar to that which applies in the EU, CMA becomes State aid regulator• Government’s intention to introduce of Great Repeal Bill

Page 41: State Aid and Tax – Understanding the risks

Questions? Comments!

Page 43: State Aid and Tax – Understanding the risks

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Totis Kotsonis

[email protected] 919 0700

Ben Jones

[email protected] 919 4686