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The CJEU Fiat ruling paves the way for state assistance conflicts with Apple and Amazon

According to tax experts, the decision should reassure multinational corporations, but it is not the final word on state aid.

According to analysts, the Court of Justice of the EU could be headed for bruising conflicts in transfer pricing-related state aid cases involving big corporations like Amazon and Apple.

It follows a ruling by Europe's highest court on November 8 that the European Commission erroneously determined Luxembourg to have violated EU state assistance standards.

The Commission said that the European nation had incorrectly used the arm's-length principle (ALP) when approving an advance TP agreement with Fiat Chrysler Finance Europe, formerly known as Fiat Finance and Trade.

Niels Baeten, an associate at the legal firm Skadden in Brussels, asserts that the CJEU's decision indicates that the Commission cannot just invent its own version of the ALP and apply it to any case it chooses.

He suggests that the Commission should instead depend on the national tax law of the relevant member state to evaluate whether a tax judgement constitutes state aid.

“If it [the Commission] establishes that the member state has chosen to apply the ALP, the Commission should still prove that the tax ruling is manifestly inconsistent with such a principle, which suggests a higher standard.”

Tax experts saw the Fiat verdict as a significant victory for multinational corporations and national tax policymakers.

Regarding state assistance cases involving TP arrangements, Baeten states, "This is a really devastating blow to the Commission's enforcement capabilities for future tax judgements."

According to Vikram Chand, a law expert at the University of Lausanne in Switzerland, this decision is a significant boost for the legal clarity of EU TP arrangements.

“The key message from this judgment is that the CJEU has upheld the principle of legal certainty and legitimate expectations,” says Chand.

This means that enterprises may trust on the validity of their TP arrangements with national governments without concern that the Commission would overturn them, unless they violate EU state assistance standards.

Differences of opinion

In pursuing state assistance cases utilising TP arrangements, one of the Commission's first objectives was to combat the proliferation of unilateral tax judgements in the EU. Several member nations diverged from ALP.

According to Harmen van Dam, a lawyer and tax advisor at the Rotterdam law firm Loyens and Loeff, the Commission had suggested that it would target so-called "champagne rulings." In these instances, taxpayers were granted substantial tax reductions through unilateral decisions.

“But the Fiat case was not one of these cases, it was merely an attempt by the taxpayer to approach the capital markets in an efficient manner,” says van Dam.

Baeten argues that the Commission attempted to take the path of least resistance by asserting that the ALP is an independent principle of EU law entrenched in Article 107 of the Treaty on the Functioning of the European Union.

“Their argument for that has always been rather doubtful,” he adds.

According to him, the Commission's contention that an independent ALP was embedded in EU law based on a single paragraph of a CJEU ruling from over 15 years ago in the Belgium and Forum 187 case (C-217/03). In that case, the CJEU clarified that Belgium had adopted the OECD cost-plus method into its national law, allowing the Commission to rely on it.

In the Fiat case, the Commission also contended that Luxembourg's national law was incompatible with globally recognised ALP norms.

This reference framework between national and international ALP norms, according to Chand, was one of the most contentious issues.

“In this Fiat case, it should have been the national law rather than principles that are accepted internationally or at an EU-level,” says Chand.

Chand asserts that each member state is responsible for direct taxes. This means that national governments are permitted to give national guidelines regarding how they interpret the ALP in specific circumstances.

This interpretation of the reference framework was the deciding factor in the CJEU's decision.

The focus is on Apple

The Fiat case is anticipated to have a significant impact on ongoing and future case decisions.

The Commission has cases pending before European courts where decisions have not yet been rendered or where enforcement proceedings are ongoing. Apple and Amazon are defendants in legal proceedings.

Nike and IKEA are two such companies whose cases are still in the inquiry phase.

Baeten says that while every pending case will have its own outcome, one of the Commission's primary legal bases for justifying its position has disappeared.

“It remains to be seen if the Commission will be able to salvage a loss before the Court of Justice in these cases,” he adds.

The reference framework, according to Chand, will be one of the most scrutinised aspects in the Apple case, in which the Commission alleges Ireland granted illicit state aid worth more than €13 billion ($13.4 billion) to two Apple group businesses.

This is likely to examine three points: 1) what national (Irish) law says about the ALP; 2) to what extent the government has offered guidance on interpretation of the ALP; and 3) to what extent, if any, the government has departed from domestic regulations to provide Apple with an advantage.

“Extremely important to the analysis is whether Irish law provided discretionary benefits oy to related companies as opposed to independent enterprises,” says Chand.

Due to the nature of the national legislation and the manner in which the ALP is built into that law, he asserts that the outstanding cases, including Apple and Amazon, must be decided on their individual merits despite the Fiat verdict.

Are you evading battle?

According to van Dam, another significant aspect of the Fiat judgement is that it potentially allows member states to further create their own TP standards.

It does not, however, exclude future Commission action.

According to Chand, the CJEU underlined that the Commission has the authority to investigate instances and determine if there has been a departure from a specific national law, including the TP reference framework.

He argues that the Commission will require a high level of technical investigation in situations involving TP agreements and state aid.

Margrethe Vestager, executive vice-president of the Commission, said in a statement, “Even if the Commission's decision was annulled, the judgment gives important guidance on the application of EU state aid rules in the area of taxation.”

The Commission emphasised that it would pursue illicit tax benefits that distort the market without hesitation.

“The court confirmed that action by member states in areas that are not subject to harmonisation by EU law is not excluded from the scope of the treaty provisions on the monitoring of state aid,” said Vestager in the statement.

Some tax authorities feel that one of the implicit purposes of the Commission in the state aid proceedings was to ensure that countries lowered tax policy competition.

Due to the Commission's TP-related proceedings, governments in the EU bloc have curbed aggressive tax planning and accepted a minimal norm of taxation, according to van Dam.

"They may have lost the battle, but they're winning the war," says Chand of the drop in unilateral tax judgments intended to entice taxpayers to establish businesses in multiple EU regions.

According to him, the Commission has persuaded member states to alter their approach to tax legislation.

“By starting these state aid investigations and using TP as a tool to attack, basically, all these practices that were used by countries, like Ireland, Luxembourg, the Netherlands and Belgium, have reduced or probably disappeared by now,” says Chand.

EU member states have been compelled to curtail the practise of issuing unilateral "fancy" tax judgements that offer taxpayers with favourable terms. He states that this has been accomplished through the implementation of BEPS Action Plan Five.

As some believe the Commission has essentially attained its objectives through state assistance lawsuits, there is a sense that this may be a diminishing dispute area.

The focus of the Commission appears to be on other areas, such as big tech, the Digital Markets Operate - rules for platforms that act as gatekeepers in the digital sector – and the implementation of the foreign subsidies legislation.

However, if the past decade of state aid litigation surrounding TP agreements has taught us anything, it is that those next on the Commission's rollercoaster are in for a turbulent trip.


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