In recent years, the international tax planning strategies of multinationals have become a source of – often heated – debate. This course provides learners with the tools to become fully informed participants in the debate by explaining the foundations and practice of international tax law as well as addressing current developments and the ethical aspects of tax planning.
State aid & tax planning
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From the course by Universiteit Leiden
Rethinking International Tax Law
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From the lesson
European Union law & fiscal state aid
In this fifth module, we will take a look at the developments in the area of corporate tax planning within the EU, focusing on recent developments and the actions which have been taken within the EU to ensure that international tax planning of multinationals does not negatively affect corporate taxation within its territory. Also, we will discuss the limits which EU tax law places on domestic and international measures to counter aggressive tax planning and BEPS.
Meet the Instructors
Prof. Dr. Sjoerd DoumaFaculty of Law
International Tax Center
Hi and welcome to Video 4 of this module on EU law aspects of tax planning.
In this video, we will discuss a few examples which are relevant for
state aid and tax planning.
Before we get to the examples though, I recall the two most important elements for
a tax measure to constitute fiscal aid.
First, there should be an advantage, and secondly the advantage should be
selective, that is, the advantage should favor certain undertakings over others.
In particular, I want to stress again,
the relevance of the objective of a tax measure for a selectivity analysis.
In the Azores case, EU Court of Justice said the following about this, and
I quote.
A measure which creates an exception to the application of the general tax system
may be justified by the nature and
overall structure of the tax system if the Member State concerned can show that that
measure results directly from the basic or guiding principles of its tax system.
In that connection, a distinction must be made between, on the one hand,
the objectives attributed to a particular text scheme which are extrinsic to it and,
on the other, the mechanisms inherent in the text system itself
which are necessary for the achievement of such objectives, end of quote.
So, we should be looking for favorable tax measures with extrinsic objectives,
with an aim to grant aid for instance.
Or for measures with objectives which are intrinsic to the tax system, but which
have spill-over effects which cannot be explained by those intrinsic objectives.
In those cases, we could be dealing with unlawful state aid.
Let's start with the example of IP boxes, widely used by multinationals
to reduce their taxable profits as we saw in modules two and three of the course.
In 2014, the European Commission stated that over the last ten years,
several member states have introduced special tax regimes for IP rights
that are supposed to stimulate innovation and investments in new technologies.
Such regimes include patent boxes, which provide for
tax reductions on income from patents.
In 2008, the Commission reviewed such a regime in Spain, and
concluded that the scheme did not constitute aid.
Since then however, the Commission has received indications
that special tax regimes seem to mainly benefit highly mobile businesses, and
do not trigger significant additional research and development activity.
The Commission is therefore gathering information to assess
whether the regimes grant a selective advantage to a particular
group of companies in breach of EU state aid rules.
What is your view on this question?
First, of course, we should note that the promotion of research and
development is, in principle, an objective which is extrinsic to the tax system, and
therefore problematic in selectivity analysis.
The TFEU, however, regards research and development as something especially
important, so that it might be permissible as a legitimate objective.
The next step would then be to verify whether a certain
IP box can cause spill-over effect, which cannot be explained by the research and
development objective.
These spill-over effects may be state aide.
Companies which use those regimes in their tax splitting activity
may therefore be exposed to retrospective recovery of the tax benefits.
Another relevant case for tax planning and state aide concerns Gibraltar.
In 2013, the European Commission opened a formal investigation in which they
questioned the exemption of interest income in Gibraltar,
where the corresponding interest payments will normally have been deducted
in another country.
A clear case of base erosion and profit shifting, or
BEPS, which you will recognize from our tax planning base case.
The European Commission holds the preliminary view
that the interest exemption results in unlawful state aid,
which must be repaid by the companies which have benefited from it.
Last but not least, we should discuss the issue of tax rulings.
In its 2014 Draft Notice on the Notion of Aid,
the European Commission stated that rulings should only aim
to provide legal certainty to the fiscal treatment of certain transactions.
They should therefore, not have the effect of granting the undertakings concerned
lower taxation than other undertakings in a similar legal and
factual situation, but which were not granted such rulings.
In June 2014, the Commission started a formal investigation
into the transfer pricing arrangements on corporate taxation of Apple in Ireland,
Starbucks in the Netherlands, and Fiat Finance and Trade in Luxembourg.
In October 2014, the Commission extended an in-depth investigation
into the Gibraltar corporate tax regime to include its tax ruling practice.
Moreover, the Commission announced an investigation into the transfer
pricing arrangements and corporate taxation of Amazon in Luxembourg.
And in 2015, the Commission opened an in-depth investigation
into the Belgian excess profit ruling system.
In all of those cases, the European Commission has stated that, and I quote,
where a tax ruling concerns transfer pricing arrangements between related
companies within a corporate group, that arrangement should not depart from
the arrangement or remuneration that a prudent independent operator
acting under normal market conditions would have accepted, end of quote.
It is the key concern of the Commission that the tax rulings
are not in line with the prudent independent operator test, and
provide therefore, a selective advantage to the companies concerned.
This may in particular be the case if the OECD's transfer pricing guidelines have
not been respected.
Of course, if the Commission is right, those companies should repay
the benefits to the state which is granted the aid, with interest.
This concludes our videos in the basic thread on state aid.
An extremely important tool for
the European Commission in the fight against aggressive text planning.
Another success story for the European Commission are the recent changes to
the parent subsidiary directive, to which we will turn in the next video.
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