EU Competition Commissioner Answers Queries on State Aid Probes
The European Union (EU) Commissioner for Competition, Margrethe Vestager, answered questions about the European Commission’s investigations of illegal state aid to certain multinational enterprises (MNEs), including Apple and McDonald’s.
She told the European Parliament’s TAXE 2 committee that her office has reviewed approximately 1,000 rulings, of which around 600 were related to the so-called “Luxleaks.” The Luxleaks disclosures showed that tax rulings by Luxembourg allowed more than 300 MNEs to reduce their tax bills.
Vestager stressed the importance of these investigations to restoring competition in the EU so that all businesses would be able to operate on a level playing field.
Probes into Several Rulings
The European Commission (EC) has been probing alleged illegal state aid granted by Ireland to Apple, the Netherlands to Starbucks and Luxembourg to Fiat Finance & Trade, Amazon and McDonald’s. The panel determined that tax benefits granted to Amazon in a transfer pricing ruling amounted to illegal EU state aid.
It also ruled against Starbucks and Fiat Finance & Trade and ordered those companies to pay back taxes. The Dutch and Luxembourg Ministries of Finance have said they will appeal. The EC hasn’t made its final decisions in the Apple and Amazon cases.
Asked when the EC might reach an Apple decision, Vestager responded that Ireland recently requested additional information. “The first priority is the quality of the case work . . . therefore it is very difficult to make predictions as to when the case will be ready for a decision,” she said.
She also said that her team is in contact with the U.K. tax authorities on the recent Google tax settlement, following a complaint from the Scottish National Party.
The state aid investigations have led U.S. Treasury Deputy Assistant Secretary of International Tax Affairs Robert Stack, among others, to express concerns about U.S. MNEs being disproportionately targeted by the EC. In early 2016, U.S. Secretary of the Treasury Jack Lew wrote a letter to EC President Jean-Claude Juncker objecting to the use of the aid inquiries as a way to retroactively tax earnings that rightfully belong to the United States.
Handful of Recoveries from U.S. Firms
Such allegations have been denied by Vestager. And in response to questions about the alleged bias toward U.S. MNEs, Vestager retorted that the United States is part of the Organisation for Economic Co-operation and Development (OECD).The United States endorsed the G20/OECD final recommendations under the base erosion and profit shifting (BEPS) project, she added, to ensure that profits are taxed where the value is created. Vestager emphasized that the issue is not a U.S. one because, in the past 15 years, only a handful of recoveries have involved U.S. MNEs.
According to Vestager, most of the tax rulings her team has examined were confirmatory, which are simple rulings that don’t contain any calculation of profits and are thus much less likely to raise state aid concerns. Approximately 200 of those rulings relate to transfer pricing, she said, adding that they aren’t problematic if the transfer price is arm’s length and matches economic realities.
However, she said she’s found examples that are “much more worrying” in that they favor particular companies or particular types of companies. Examples include:
According to Vestager, intercompany transactions are the most common in the Luxleaks. She said the EC will publish a working paper with more detailed information on the thousands of documents that have been reviewed. At this point, it is premature to provide guidelines, she said.
Delphi Wins IRS Inversion Challenge, Pfizer Calls Off Merger
Delphi Automotive PLC won an appeal with the IRS allowing the company to be treated as a U.K. tax resident for U.S. federal tax purposes. The tax agency had claimed in 2014 that Delphi, whose top executives are in Troy, Mich., should be treated as a U.S. corporation for income tax purposes even after it reincorporated in the U.K.
In its filing with the Securities and Exchange Commission (SEC), Delphi said the IRS concluded that the company won’t have to adjust its 2009 and 2010 tax returns. Delphi was a part of General Motors Co. until 1999. It emerged from bankruptcy proceedings in 2009 and formed a limited liability partnership registered in Gillingham, England.
Delphi’s SEC filing doesn’t mention any adverse tax consequences under the anti-inversion rules (for example, limiting the use of certain tax attributes). However, even if the U.S. tax law respects the foreign status of the foreign acquiring corporation, other potentially adverse tax consequences may follow if the continuing ownership stake of the shareholders of the former U.S. entity is at least 60%.
Pfizer, Allergen Call Off Deal
The announcement came in a filing with the SEC just days after Pfizer abandoned its merger plans with Ireland-based Allergan, which in turn came only days after the IRS and the U.S. Department of the Treasury announced new temporary U.S. regulations aimed at slowing corporate inversions.
A corporate inversion may take many forms, but has been generally described as a transaction that results in a U.S. parent corporation of a multinational group being replaced with a foreign parent. An inversion is typically accompanied or followed by certain transactions that are intended to remove foreign operation income from the U.S. taxing jurisdiction. In addition, the corporate group may derive further advantage from the inverted structure by reducing U.S. tax on U.S.-source income through earnings stripping or other transactions.
Allergan’s CEO Brent Saunders said he felt that “for the rules to be changed after the game has started . . . is a bit un-American, but that’s the situation we’re in.” But, in announcing the new regulations, Treasury Secretary Jacob Lew said, “Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping. This’ll have an important effect, but we can’t stop these transactions without new legislation. … Ultimately, the best way to address inversions is to reform our business tax system.”
Just Closing a Loophole
White House press secretary Josh Earnest said the Treasury wasn’t focusing on any specific transaction, but rather closing loopholes that allow companies to lower tax bills by changing their address.
European Parliament Plans Inquiry into Panama Papers
The European Parliament Conference of Presidents unanimously backed setting up a committee to investigate the so-called Panama Papers.
More than 11 million documents from a Panamanian law firm were leaked to a German newspaper and subsequently shared with more than 100 other international news outlets, including the International Consortium of Investigative Journalists (ICIJ). The documents allegedly reveal how the world’s politicians and other powerful figures hide their assets offshore and evade taxes. The law firm has denied any wrongdoing.
After the leak, the ICIJ collaborated with other media outlets, spending a year sifting through the leaked files that included emails, financial spreadsheets, passports, and corporate records. The documents revealed the names of the secret owners of bank accounts and companies in 21 offshore jurisdictions.
“I think the leak will prove to be probably the biggest blow the offshore world has ever taken because of the extent of the documents,” said ICIJ director Gerard Ryle. The leak put the spotlight on tax evasion by world leaders, from friends of Russian President Vladimir Putin to relatives of the prime ministers of Britain, Iceland and Pakistan, as well as the president of Ukraine.
On April 12, the European Parliament hosted a meeting with European Taxation Commissioner Pierre Moscovici to discuss those revelations. Some members of parliament called for additional measures to fight tax fraud, tax evasion, and money laundering in the European Union (EU).
Following one suggestion, the parliament decided to set up a committee to investigate the Panama Papers. The resulting committee is required to report back to Parliament within 12 months, although Parliament can extend the period of inquiry.
The full scope of the inquiry into the use of offshore shell companies will not be determined until a European Parliament vote scheduled for May 4.
Separately, on April 13, in light of the Panama Papers revelations, the Organisation for Economic Co-operation and Development (OECD) convened a special project meeting of the Joint International Tax Shelter Information and Collaboration (JITSIC) Network to explore possibilities of cooperation and information-sharing, identify tax compliance risks, and agree on collaborative action. The meeting brought together senior tax officials from a number of countries, including members of the OECD and G20.