Why this state aid decision?
Over the course of the last few years, interest in the field of international taxation has grown steadily. The topic has found its way into the heart of public debate where it is often subjected to oversimplification and political spin. The European Commission has amplified its activity, publicly denouncing a number of tax practices that it has judged to be illegal state aid. The Amazon case is one such case which (like the Apple, Starbucks, McDonald’s or Fiat case) has catapulted EU state aid rules into the headlines.
Why this sudden increase of activity? The commission is using, or in our view, abusing, a competition law mechanism to pursue tax objectives. The tax objectives are deeply political, responding firstly, to public pressure on tax fairness and secondly, member state pressure on tax competition among states. While pursuing the objectives may be legitimate, the choice of mechanism is, at best opportunistic, at worst cynical, and in our view, damaging to the EU’s credibility.
Don’t multinationals which avoid taxes deserve to be taxed?
It can be tempting to apply a moral filter to the issue at the expense of respect for due process of law. However, the fact remains that there are vastly different beliefs of what a fair level of tax really is. Many of these beliefs are closely intertwined with each individual’s deep-seated sense of right and wrong.
No amount of debate will be able to reconcile these views into a single definition of what is “fair”. Differing views are balanced through a democratic process that leads to laws that must be respected by all. Any attempt to settle tax matters on moral grounds is therefore doomed to be subjective and anti-democratic.
However, when commenting the decision, EU competition commissioner Margrethe Vestager, said: “Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU state aid rules”. How did she calculate “four times less” and isn’t she implying that this situation is unfair?
Did the commission get it wrong?
The commission disagrees about the transfer pricing (TP) method--as approved by Luxembourg in its tax ruling--used by the Amazon group to compute the amount of tax deductible royalty payments made by one of its operating company to another group company. These payments reduced the taxable basis of the Luxembourg operating company and in turn, its effective taxation.
But what was Luxembourg/Amazon investigated for? Applying OECD principles that don’t meet the commission’s approval? TP is not an exact science--it seeks to determine a hypothetical third-party price for a transaction occurring within the same group (arm’s length principal) but due to its nature it will always be a “best guess”. So, how is the commission able to know which TP method is the right one and which transfer price is the only right price?
Last but not least, it appears that the commission has ruled on a case which is more than 10 years old, applying the TP rules currently applicable. TP rules have been quickly and constantly evolving over the last decade. Is the commission blaming Luxembourg for not having followed the standards of the future?
What does the decision mean for Luxembourg?
We do not anticipate any direct negative impact, except maybe some bad publicity channelled through the media. The Amazon case deals with the TP rules as they existed and were applied more than 10 years ago. Since then, both the international and the Luxembourg TP legislation have evolved considerably. Following the adoption of a new TP legislation in 2015, Luxembourg implemented a new article into its Income Tax Law on the arm’s length principle as early as 1 January 2017, anticipating the 2017 update of the OECD TP Guidelines.
In addition, the Luxembourg tax authorities have released a new circular on the tax treatment of finance companies, setting out a TP regime that is consistent with the 2017 revision of the OECD Guidelines. This burst of activity is a practical demonstration of the increasingly important role played by TP and its related documentation for Luxembourg tax and risk management purposes, and a good clue as to future trends in transfer pricing worldwide.