Tax rulings: From certainty to uncertainty?

Charles Duro, International Tax Law LL.M. candidate, King’s College London

In November 2014, the International Consortium of Investigative Journalists shook up the economical world when the “LuxLeaks[i]” affairs were uncovered. The documents leaked under this investigation revealed tax rulings that had been granted in the past by the Luxembourg tax administration, more precisely its infamous “Bureau VI”. Many of these rulings have been heavily criticised by left-wing press and politics because they prove how international companies pay no or very low taxes, using complicated and sophisticated mechanisms, even though they realise significant profits. The public and the journalists who uncovered the entire mechanics have questioned several of these tax rulings in regards to their legality[ii].

However, LuxLeaks mainly consisted in raising public awareness on these tax rulings were given to companies. The European Commission (Commission) launched investigations into tax rulings granted to Starbucks (in the Netherlands) and Fiat (in Luxembourg). After undertaking a thorough investigation, the Commissions found these rulings to be illegal on 21 October 2015[iii].

The European Commission’s ruling

The Commission reminds us in its publication that tax rulings are completely legal. Indeed, the idea behind tax rulings is to provide certainty to the taxpayer on his situation. However, these tax rulings can be illegal State Aids if the taxpayer in question receives a more favourable treatment than another taxpayer, as prohibited in Article 107 of the TFEU[iv]. In the Fiat and Starbucks cases, the tax rulings were given on Advanced Pricing Agreements (APA). These APA consist in an agreement between the taxpayer and the tax administration on what criteria should be used to assess the former’s transfer prices. Transfer pricing is used to estimate a price for goods or services that are sold between related legal entities. These prices are established by, amongst other methods, comparison to the prices applied by independent companies. Transfer pricing aims to avoid tax evasion by having a company pay a different price than the real market price, which can inflate or deflate the company’s profit, subject to taxation. Indeed, if the company, which is not paying enough for a good or service, is located in a tax haven, it will see its profit increased and taxed at a lower rate. This would not be the case if it had paid the correct amount to the selling company, usually located in a country with a higher taxation rate.

The Commission held that in both Fiat and Starbucks cases, the local tax administration “endorsed artificial and complex” mechanisms that, according to the Commission, “do not correspond to reality and do not reflect real market conditions”. In other words, the Commission is second-guessing the entire transfer pricing process that both companies went through. They used the “transactional net margin method” (TNMM), which is provided in the OECD transfer pricing guidelines. The TNMM resides in examining the “net profit relative to an appropriate basis”[v].

The Starbucks case

In the Starbucks case, this basis was the profit made by the subsidiary that had to pay a fee for coffee-roasting services in the Netherlands to its parent company outside the Netherlands. These fees were paid under the form of a tax-deductible royalty.[vi] It can be argued that these calculations should rather have been made on the basis of turnover, i.e. sales, a term that is also used by the OECD. The problem with criticising the entire method that was used is that transfer pricing is not an exact science. The OECD guidelines often recall that all methods have to be used in a conscientious way to reach an agreement between the taxpayer and the tax administration. While the full decision is impatiently awaited, it seems that the Commission is calling into question most of the TNMM data used.

Since Starbucks is of the opinion that the TNMM was applied correctly as well as having used pertinent information, they will appeal this decision. The Dutch Government shares this opinion and announced on 27th November that they will appeal the Commission’s decision, explaining the Commission failed to “convincingly demonstrate[vii] how state aid rules were violated. An appeal on the Commission’s ruling does not mean that the concerned company does not have to pay its allegedly due taxes. However, it could take up to fifteen months for the European judges to reach a verdict.

The Fiat case

Fiat also used the TNMM to determine its taxable income. Once the TNMM has been applied, the Capital Asset Pricing Model is used to estimate a rate of return. The Commission mainly criticises two aspects of this case, the first being that “economically unjustifiable assumptions and down-ward adjustments” have resulted in a capital base (used for the ruling) considerably lower than the company’s actual capital[viii]. The second one is that the remuneration applied to this lower capital is insufficient. In other words, the capital should have been higher and the remuneration of that capital should have been more significant as well.

The Luxembourg government announced on 4th December that they would appeal against this decision, saying that ‘‘in its decision, the Commission has used unprecedented criteria in establishing the alleged state aid, thus putting into jeopardy the principle of legal certainty’’[ix]. Furthermore, the Luxembourg government is accusing the Commission of not having “established in any way that Fiat received selective advantages within the meaning of Article 107 TFUE[x].


These two first decisions will not be the last. The Commission is investigating tax rulings in all 28 Member States, and decisions regarding Apple and Amazon will be announced in the next few weeks. All of these investigations may have an enormous impact on the structuring of international companies as well as on the application of transfer pricing, if companies are found not to have applied the transfer pricing guidelines correctly, since they would then have to repay tax. Furthermore, it is plausible that companies will appeal the Commission’s decision if they estimate that they applied the guidelines rightfully. This means that the European Union Courts will have to decide whether the Commission’s application of the transfer pricing guidelines or the companies’ and local tax administration’s application of said guidelines are correct.

Other than the potential financial impacts on international companies, the larger problem lies, in the author’s view, in the uncertainty that the Commission is creating. This legal uncertainty is the result of the questioning by the Commission of how the local tax administrations apply the OECD transfer pricing guidelines. As mentioned before, transfer pricing is not an exact science. Tax administrations rarely provide a precise price that has to be applied, but rather tend to validate a range of price that seems admissible in regards to the OECD guidelines.

The outcome of these appeals will change the way companies will in future seek tax rulings, and current APA might have to be adapted. For the sake of legal certainty, the decision from the Commission should be precise, comprehensive and complete.



[ii] The ethics of international companies paying low taxes will not be discussed in this article.


[iv] Treaty on the Functioning of the European Union

[v] OECD Transfer pricing guidelines 2010

[vi] The entire mechanism has been deeply simplified here, since the mechanism itself is not the subject of the article. The more complex mechanism can be found online at

[vii]Dutch government press release – Reuters


[ix] Luxembourg government press release – Reuters

[x] Id.