THE NEW WORLD OF STATE AID CHALLENGES BY THE EUROPEAN COMMISSION THE ‘APPLE’ DECISION AND OTHER RECENT CASES

MITCH BLUMENFELD RAFAEL CALVO

AXEL CORDEWENER KEITH O’DONNELL

SESSION OVERVIEW

THE NEW WORLD OF STATE AID CHALLENGES: THE ‘APPLE’ DECISION AND OTHER RECENT CASES

Dr. Axel Cordewener, Professor of tax law at the Katholieke Universiteit Leuven and counsel to

Taxand Germany joined a panel led by Keith O’Donnell of Atoz, Taxand Luxembourg, to discuss the

brave new world of European Commission challenges to tax planning using the EU state aid laws.

This included the Apple case and American and Irish responses to it, and the recent Autogrill and

Banco Santander cases and the Spanish responses to them. Included on the panel were Mitch

Blumenfeld of Packaging Coordinators Inc (PCI), and Rafael Calvo of Garrigues Taxand Spain who

has been directly involved in the litigation in respect of the Spanish cases.

CONTENTS

1. Current context

2. What is State Aid?

3. Apple case

4. Case study: Spanish goodwill case

5. Recovery issues

6. What’s next and how to manage?

CURRENT CONTEXT

CURRENT CONTEXT: APPLE CASE IN THE PRESS

CURRENT CONTEXT: EUROPEAN COMMISSION ON APPLE

“Ireland gave illegal tax benefits to Apple

worth up to €13 billion.”

“If other countries were to require Apple to pay

more tax on profits of the two companies over

the same period under their national taxation

rules, this would reduce the amount to be

recovered by Ireland.”

” “

CURRENT CONTEXT: US REACTION ON APPLE CASE

“US political leaders reacted with anger to an EU

decision to hit Apple with a record-breaking €13 billion

tax penalty, setting the stage for possible US

retribution and highlighting the volatile politics around

international corporate tax issues.” FT, August 2016

EU Commission in danger of becoming a

‘supranational tax authority’. The latest ruling could

“undermine foreign investment, the business climate

in Europe, and the important spirit of economic

partnership between the US and the EU”.

US Treasury, August 2016

” “

WHAT IS STATE AID?

STATE AID: DEFINITION

Any aid granted by a Member State or through State resources in any form

whatsoever which distorts or threatens to distort competition by favouring certain

undertakings or the production of certain goods shall, in so far as it affects trade

between Member States, be incompatible with the internal market.

“ ”

STATE AID: MAIN FEATURES

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State aid is a

competition law matter,

not a tax law matter.

Proceedings take place

between the EU

Commission and the

Member State, meaning

the taxpayer that can

end up footing the bill is

not fully represented.

When a Member State

appeals a state aid

finding in tax matters,

it finds itself in the

unusual position of

contesting its obligation

to collect taxes.

STATE AID: BUILDING BLOCKS

A measure is illegal state aid if:

1. It is granted by state resources

2. It confers an advantage to undertakings

3. It is selective and

4. It affects trade between Member States

and distorts or threatens to distort

competition.

Image credit: taxadvisermagazine.com/Stockphoto/Gajus

STATE AID: EXCEPTIONS

Very limited exceptions to achieve policy objectives: Auto-animation

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slide Social purposes.

1.

Less developed areas/

regions, culture and

heritage conservation.

2.

Remedy a serious

disturbance in a

national economy.

3.

STATE AID: PROCEDURE

Worst case scenario:

1. Negative COM decision + formal illegality

(new aid granted without notification)

2. Recovery decision against Member

State: from each beneficiary (+ interest)

3. Retroactive for (at least) 10 years,

overriding domestic statutory limitations.

APPLE CASE

APPLE CASE: BACKGROUND

11 Jun 2014 COM opens formal investigation

procedures against IRE (Apple) [and

against LUX (Fiat)/NL (Starbucks); later

also LUX (Amazon)]

May 2013 US Senate investigation of

Apple´s [US] corporate tax

avoidance

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New DG COMP 'Task Force Tax Planning

Practices' requests overview of tax rulings

from 7 Member States (B, CYP, IRE, LUX,

MT, NL, UK)

Jun 2013

COM requests info on

rulings (2010-2013) from

all Member States

Dec 2014

21 Nov 2015: Against LUX

(Fiat) and NL (Starbucks)

30 Aug 2016: Against IRE

(Apple)

Negative COM decisions

with recovery orders =

'worst case scenario'

APPLE CASE

APPLE SALES

INTERNATIONAL

2011 Commercial Profit 2011 Tax Result according to Apple

EUR 16 billion EUR 50 million

Apple Ops Europe Apple Sales International

HEAD OFFICE HEAD OFFICE

IRISH OPS

US

IRISH OPS

PROFIT ALLOCATION RULING PROFIT ALLOCATION RULING

8-18%

profit

82-92%

profit

10-20%

profit

80-90%

profit

IRELAND

4,000 Employees

APPLE CASE: PRESENTATION BY THE EUROPEAN COMMISSION (IP/16/2913)

APPLE: NEGATIVE DECISION 30/08/2016

Main reasoning based on broad reference system: Ordinary CIT rules for resident

companies + non-resident companies with IRE-branches = all profits taxable in IRE:

Selective advantage: 'benchmark' for profit allocation is arm´s length principle

enshrined in Art. 107(1) TFEU (ECJ Forum 187) = not respected here:

• Choice of allocation method unacceptable: based on attribution of Apple IP licenses to

(stateless) AOE/ASI 'head offices' which exercise no relevant activities

• Even if choice correct: application methodologically wrong (IRE-branches as 'tested

parties' despite more complex functions; expenses no correct profit level indicator; …).

No justification based on nature/general scheme of reference system.

CASE STUDY: SPANISH GOODWILL CASE

A LONG STORY

Financial goodwill in the

Spanish CIT Law

Only in the acquisition of foreign

holdings… by any Spanish taxpayer

State aid investigation

Following several complaints

Appeals before the GC and

Recovery orders

Not affecting pre-2007 acquisitions

(but DT claims full recovery)

EC Decision #1

State Aid in intra-EU acquisitions

EC Decision #2

State Aid in non-EU acquisitions

Appeals before the GC and

Recovery orders

Not affecting pre-2007 acquisitions

and some other particular cases

2011 2010 2009 2007 2001 2011 2011

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EC Decision #3

State Aid in the acquisition of

holding entities (?)

But no recovery, since…

The General Court annulled

Decisions #1 and #2

T-219/10 Autogrill

T-220/10 Santander

The ECJ annuls the GC

judgments C-20/15P and C-

21/15P World Duty Free

(ex-Autogrill)/Santander

The EC filed a cassation appeal

before the ECJ

The case is back to the

General Court to discuss #1, #2,

#3, the DT appeal…

A LONG STORY

THE END ???

2017 2016 2015 2018 2014

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SELECTIVITY LESSONS

Can a formal exception to the tax system, materially available (de iure and de facto) to

all undertakings be selective?

“Of course not!”, the GC said – the rule is open to all companies and does not benefit a

particular category of undertakings/buyers.

“Why not?”, the ECJ said:

• Selectivity does not require identifying a category of undertakings

• Measures favouring certain behaviours may be selective

• So, even a measure open to all undertakings may be selective if treats differently

two situations (e.g. domestic vs. foreign acquisitions) that are legally and

factually comparable.

SELECTIVITY LESSONS

But now the cases are referred back to the GC:

Did the EC prove that foreign and domestic acquisitions were in a similar situation?

Did it consider other tax provisions offering the same to domestic acquisitions?

The real problem with this ECJ judgement is rather for the State aid system:

Now, even tax measures open to all undertakings may be considered selective

Institutional balance/tax sovereignty seriously in question

Need of a much more realistic definition of the ‘reference system’.

PRACTICAL ASPECTS

A Spanish tax advantage not available in e.g. Germany is not State aid by itself (only if

discriminates other Spanish taxpayers) but can give rise to a State aid complaint by e.g. a

German competitor

The Member State that granted the aid is normally compelled to defend it (not always,

Spain did not appeal against Decisions #1 and #2) but, at the same time, will benefit for

the recovery

Unless legitimate expectations, recovery can go back to 10 years of aid (deductions) plus

interest – what happened here?

Recovery is not suspended by the court appeals, unless very exceptional

circumstances arise.

PRACTICAL ASPECTS

Suspension is probably easier for the State than for the companies: e.g. does it make

sense to devote audit resources to recover the ‘aid’ granted in Decision #3 when it is not

clear – for several reasons – whether it is State aid or not?

According to the current EC’s (and ECJ’s) trend, open-to-all tax measures benefiting

certain activities are in principle selective, so Member States must be ready to:

• Prove that the tax exception is justified; or

• Notify the (supposed) aid to the EC and get a clearance in advance (so avoiding

recovery issues).

Does this make sense?

RECOVERY ISSUES

RECOVERY ISSUES

How much is at stake and how are taxpayers dealing with it?

EXAMPLE SPANISH GOODWILL

‘Legitimate expectations’ in Decisions #1 and #2, so:

No recovery risk (and possibility to complete the deduction in future years) for acquisitions made

before the end of 2007

Limited recovery issue (‘just’ a loss of future tax credits) for acquisitions made on or after 2008

Problem: according to the EC, the above only applies to ‘direct’ acquisitions (i.e. not made in

holding companies).

No ‘legitimate expectations’ in Decision #3, so:

Recovery risk in the acquisition of holding companies (whether EU or not) made from 2002

Amount to be recovered: not public but presumably relevant (several billion).

EXAMPLE APPLE

No ‘legitimate expectations’ as defence against ‘retroactive’ recovery

Recovery period:

• 10 years backwards from first COM request for information (June 2013)

• Until end of 2014 (as of 2015: IRE legislation changed + rulings terminated!)

Amount to be recovered:

• Difference between ‘tax actually paid and amount which should have been paid’

• COM estimate: total tax burden EUR 13 billion (to be reduced if other States start

taxing ‘ocean income’?)

• Plus interest EUR 6 billion.

WHAT’S NEXT AND HOW TO MANAGE?

WHAT’S NEXT AND HOW TO MANAGE?

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TAXAND’S TAKE

Multi-country

planning in EU is

more than the sum

of the parts.

1 Protect by seeking

local clarity, but

don’t just trust local

tax authorities.

2 Will this get worse

before it gets

better?

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SPEAKER PROFILES

SPEAKER PROFILE

Mitch Blumenfeld

PCI Pharma Services

E: mitch.blumenfeld@pciservices.com

Mitch Blumenfeld is the Chief Financial Officer for PCI Pharma Services, the

world’s largest provider of outsourced pharmaceutical services. PCI offers global

services including clinical trial supplies, storage and distribution, commercial

packaging, pharmaceutical manufacturing and analytical services from

16 facilities across North America and Europe. PCI has over 40 years of

healthcare services experience, and is a portfolio company of Partners Group,

a €50 billion private markets investment management firm headquartered in

Zug, Switzerland.

SPEAKER PROFILE

Rafael Calvo

Garrigues, Taxand Spain

T: +34 91 514 52 00 | E: rafael.calvo@garrigues.com

Rafael Calvo is a partner and head of EU taxation at Garrigues, Taxand Spain.

He specialises in advising on international investments, financing and

restructuring. He has acted as a lawyer for various Spanish and international

companies in tax proceedings regarding State aid and the recovery of taxes

incorrectly paid, as well as requests for preliminary rulings from the European

Court of Justice.

SPEAKER PROFILE

Dr. Axel Cordewener

Katholieke Universiteit Leuven

T: +49 228/9594-0 | E: axel.cordewener@fgs.de

Dr. Axel Cordewener is a Professor of tax law at the Katholieke Universiteit

Leuven and counsel to Flick Gocke Schaumburg, Taxand Germany. He has

worked in the Legal Service of the European Commission and has extensive

experience as litigator before the German and the European Courts.

SPEAKER PROFILE

Keith O’Donnell

ATOZ Tax Advisers, Taxand Luxembourg

T: +352 26 940 257 | E: keith.odonnell@atoz.lu

Keith O’Donnell is a member of the Taxand Board and is Managing Partner of

ATOZ Tax Advisers, which is Taxand Luxembourg. Keith has been instrumental

in shaping legislative change through coordination with industry groups. He sits

on a number of key international bodies including the OECD’s CRS business

advisory group.

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