Hypothetical regulatory capital; TNMM versus CUP method; the OECD Guidelines versus an EU arm’s length principle; the value of roasting IP; cost-base adjustments; determining the most complex entity: these are just a few examples of topics in the Starbucks and FIAT judgments. They are hardly topics that many people will deal with on a daily basis. And even if you do, you should reach out to other specialists to fully grasp the meaning of the decisions. Any meaningful analysis requires at least tax, state aid and IP expertise, and these must be looked at from an integrated vantage point. This doesn’t make the detailed technical issues any less important (see our analysis here), but you also need to see the bigger picture. A general counsel can play a key role in this respect.
In terms of the bigger picture it is easy to assume these cases are only relevant for the major brand and other IP-heavy multinationals, mainly those located in the US. Indeed, many of the state aid / tax ruling cases regard those types of companies. But there are other cases that have not received as much attention in the press. We are not only talking about Apple or Amazon; companies like Huhtamäki and Nomacorc are also on the European Commission’s radar. And once the Commission has dealt with the current big ticket cases, it may well move on to others. Margrethe Verstager – the European Commissioner for Competition – recently confirmed that new information on tax rulings has been requested from EU member states and that the Commission will continue to fight what it considers, unfair tax practices. This is especially relevant for countries like the Netherlands, Ireland and Luxembourg.
The Dutch tax authorities have entered into many tax rulings with taxpayers that have used strategies similar to those in the pending cases, including the well-known CV/BV structures and informal capital rulings. Again, general counsel may not know the details of a company’s tax arrangements, but it is good to at least check to see if there are reasons for concern.
This brings us to one of the key takeaways from the General Court’s judgments: the burden of proof. The General Court dismissed all formal or general arguments brought by member states and companies involved. Instead, it focused on whether the Commission had met the burden of proof. It conducted an in-depth analysis of the facts and evidence. As in many other cases, for the member state/company the specific evidence was the decisive factor between losing (FIAT) and winning (Starbucks). There is no doubt that the legal debate on the more general and conceptual issues will continue before the European Court of Justice (see here). In the meantime, it is clear what companies that have APAs with an EU member state should do: check whether relevant arrangements are well documented and, where gaps are identified, prepare a defence team and build up a file, including:
– a comprehensive record of relevant rulings, correspondence with the tax authorities, relevant intra-group legal documentation and transfer pricing reports;
– a comprehensive analysis of relevant governance and legal arrangements, and whether there may be gaps between: (i) the legal arrangements and the transfer pricing analysis, or (ii) the transfer pricing analysis and the actual conduct of the group entities and staff involved;
– a back-up economic and benchmarking analysis, possibly applying alternative methodologies;
– governance and communication strategies;
– an analysis of possible disclosure requirements, for example, in annual reports and in the prospectus; and
– an outline of possible mitigating action.