On 9 June 2016, the Commission published the non-confidential version of its decision in its state aid investigation into Fiat's tax arrangements in Luxembourg. As reported previously (see VBB on Competition Law, Volume 2015, No. 10, available at www.vbb.com), the Commission press release issued in October 2015 explained that Luxembourg had breached EU state aid rules when it issued a 2012 tax ruling that approved Fiat's transfer pricing arrangements and artificially lowered the tax to be paid by Fiat. The Commission ordered Luxembourg to recover the unpaid tax.
The detailed 79-page decision now shows that the Commission fundamentally rejects the transfer pricing methodology which was accepted by the Luxembourg tax authorities when issuing its 2012 tax ruling. That ruling approved the transactional net margin method (TNMM) as a means for Fiat to calculate intra-group profit allocation on the basis that it complied with the arm's length principle. TNMM is one of the five methodologies recognised by the OECD to calculate transfer prices.
However, the Commission held that TNMM was an unsuitable method to calculate transfer prices because it is "indirect" and not sufficiently precise; instead, it merely approximates what would be an arm's length profit for an entire activity, rather than for identified transactions. Thus, Fiat enjoyed a selective advantage due to the deviation from the arm's length principle.
The decision is both important and controversial. First, the Commission's reasoning rejects (or at least casts doubt on) rigid reliance on OECD approved transfer pricing methodologies. This presents a significant legal challenge for international tax compliance for a vast range of multi-national companies operating in the European Union, because transfer pricing is an integral part of intra-group financing. Second, the decision is controversial as it represents an apparent intrusion on a competency that was widely considered to lie solely with the Member States: the control of corporate taxation. While it has long been accepted that a Member State could breach state aid rules through selective tax measures, very few decisions of the Commission have directly challenged transfer pricing as a means to grant a company a selective advantage.
In the meantime, both Luxembourg and Fiat have lodged an appeal against the Commission decision with the European General Court. It is noteworthy that the Commission relied on its new powers of investigation under Article 6a(6) of Regulation (EC) No. 659/1999 to directly address Fiat (as the alleged aid beneficiary) during the investigation procedure
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