On May 19, 2016, the European Commission published a Notice on state aid, as referenced in Article 107(1) of the Treaty on the Functioning of the European Union (TFEU). Article 107(1) of the Treaty defines state aid as “… 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.” An advantage, within the meaning of Article 107(1) of the Treaty, is any economic benefit which could not have been obtained under normal market conditions, that is to say in the absence of state intervention.
The concept of state aid, specifically with request to tax rulings, continues to be at the forefront of international tax discussions. See OECD BEPS Action 5. Tax rulings are intended to establish, in advance, the application of the tax system to a particular case in view of its specific facts and circumstances. For reasons of legal certainty, many national tax authorities provide administrative rulings on the future tax treatment of specific transactions. This may be done to establish in advance how the provisions of a bilateral tax treaty or national fiscal provisions will be applied to a particular case or how ‘arm’s-length profits’ will be set for related-party transactions. Member states can provide their taxpayers with legal certainty and predictability on the application of general tax rules.
State aid arises where a tax ruling confers a selective advantage, for example, by lowering tax liability in the member state as compared to companies in a similar factual and legal situation. A reduction in the taxable base that results from a tax measure that enables a taxpayer to employ transfer prices in intra-group transactions that do not resemble prices which would be charged in conditions of free competition between independent parties negotiating under comparable circumstances at arm’s length confers a selective advantage on that taxpayer. Accordingly, a tax ruling which endorses a transfer pricing methodology for determining a corporate group entity’s taxable profit that does not result in a reliable approximation of a market-based outcome in line with the arm’s length principle confers a selective advantage upon its recipient.
In sum, tax rulings confer a selective advantage in particular where: a) the ruling misapplies national tax law and this results in a lower amount of tax; b) the ruling is not available to transactions that have a similar legal and factual situation; or c) the administration applies a more favorable tax treatment compared with other taxpayers in a similar factual and legal situation.
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