The Commission is acting for the first time in the tax field under EU state aid rules, seeking to establish the principle that exceptional tax treatment for a specific company is equivalent to a subsidy and thus within the state aid jurisdiction of EU competition law.
Many international corporate groups could ultimately be subject to investigations of this kind, though at present Fiat Finance is the only one named within the asset finance sector.
Last week EU Competition Commissioner Margarethe Verstager issued rulings against Luxembourg in respect of Fiat Finance and against the Netherlands in respect of Starbucks. Other investigations at an advanced stage involve the tax treatment of Amazon, also in Luxembourg, and that of Apple in Ireland.
In these cases the Commission is seeking to set aside the effect of “comfort letters” or prior clearances given in the past to the relevant taxpayers by national tax authorities. Applying the state aid rules, the Commission would have the power to order the recovery of underpaid taxes with interest over periods of up to 10 years from the time of a ruling. In Fiat's case the Commission estimates that an amount within the range of €20-30 million will be payable for the period since 2012.
Appeals to the European Court of Justice seem likely in these cases, and could take a considerable time to resolve. The corporate taxpayer and the member state each have the standing to make or join such an appeal.
Both Fiat and Luxembourg have disputed the basis for the Commission's ruling, and it seems likely that both these parties will join in an appeal. For reasons of its international competitiveness as a tax base, Luxembourg will wish to uphold the integrity of its comfort letters even though in fiscal terms that state would be the sole beneficiary of the EU ruling.
Within the initial rulings the details of the tax assessments challenged by the Commission are entirely different as between Fiat and Starbucks. In terms of first reactions among tax advisers the Starbucks ruling has seemed to cause the more concern of the two, not because of the detailed differences but because the prior tax ruling process in the Netherlands is longer established than that of Luxembourg and has always been generally well regarded.
The latest EU action follows a wider agreement earlier this month among the finance ministers of all OECD countries designed to tackle international corporate tax avoidance. Though non-binding on individual countries, the OECD agreement gives broad endorsement to a wide range of specific tax law initiatives recommended by inter-governmental working parties.
On the EU cases Liesl Fichardt, London tax partner at Clifford Chance, said: “These show that the Commission is increasingly willing to scrutinize the grounds on which tax rulings have been agreed by national authorities. Relevant factors include the information provided to the member state in advance of the tax ruling; the factual and legal circumstances of the arrangements in question; whether the ruling corresponds to economic reality; and the quality and consistency of a member state's practice in providing such rulings.
“The Commission's state aid investigations are likely to increase in number significantly; and where state aid can be shown, the financial and reputational consequences for the recipients of tax rulings may be severe. Companies and groups that have received tax rulings should review them carefully and take steps to mitigate their risk.”
The Fiat case
The Fiat case involves the group's main arm for captive motor finance, Luxembourg based Fiat Finance and Trade. Potentially the kind of tax clearances given to the company could be relevant to other manufacturer-captives, in the sense that their global and/or European HQ domiciles are variable and could be subject to special rulings from tax authorities in their potential locations.
For the wider asset finance industry, however, the relatively good news is that the case does not concern corporate tax attributes common to transactions seen across the industry, such as fiscal depreciation as applied to leased assets.
Under the tax ruling given in Luxembourg, Fiat Finance was not taxed according to a conventional tax computation, where the taxable profit of a finance arm would be based on an aggregate not far removed from the accounting definition of pre-tax profit (and of course subject to arm's length pricing of asset purchases and other intra-group transactions).
Instead the tax liability was based on an assumed rate of return on the capital deemed to be employed in the finance arm. However, the Commission argues that the amount of capital was assessed at well below the actual level, and that in addition the assumed rate of return was assessed at below a market rate. It commented that the arrangement involved “artificial and extremely complex methodology ... not appropriate for the calculation of taxable profits reflecting market conditions.”
Verstager said: “ As a matter of principle, if the taxable profits are calculated based on capital, the level of capitalization in the company has to be adequate compared to financial industry standards. Additionally, the remuneration applied has to correspond to market conditions.
“Our assessment showed that in the case of Fiat Finance and Trade, if the estimations of capital and remuneration applied had corresponded to market conditions, the taxable profits declared in Luxembourg would have been 20 times higher.”
Fiat Chrysler Group
There has been some speculation that if the Commission is ultimately successful in requiring Fiat Finance to pay additional tax in Luxembourg, this could result in the Fiat Chrysler Group paying less tax in the US as a result of double taxation relief. However, that does not seem certain and could depend on several other factors.
It is clear that the Commission does not object in principle to the use of yardsticks such as measures of shareholders' capital and deemed rates of return as a proxy for normal tax computation rules. Nor do any of the current investigations represent an attack on low national corporate tax rates across the board, as adopted by Ireland and more recently the UK. The focus is on special arrangements that may arguably cause a footloose international company to be taxed at more favourable rates than other companies within the same jurisdictions.
Fichardt said: “Tax rulings do not necessarily constitute state aid if they merely give certainty as to how the relevant laws are to be applied in practice. However, in the Commission's view the tax rulings provided to Fiat and Starbucks went beyond this, giving the companies a selective advantage over their competitors.”