EU Official: Most Appropriate Method Overlooked in Rulings

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing. 

May 9 — The European Commission found that some companies that received favorable tax rulings from EU countries appeared to overlook the most appropriate transfer pricing method in favor of a method that produced the desired result, a commission official said.

“Some companies, from what we have seen in the files, have been apparently shopping around and taken a method that suited them in the particular circumstances because it produced a certain result,” Gert-Jan Koopman of the commission's directorate-general for competition said May 6. “That method was not particularly obvious, and under the OECD guidelines, it is not pick and choose—you have to take the most appropriate method.”

Koopman, who is deputy director-general for state aid, spoke during the American Bar Association tax section's May meeting about the ongoing investigation into more than 100 advance transfer pricing tax rulings that multinational companies have signed with European Union countries. EU Competition Commissioner Margrethe Vestager told a European Parliament tax panel in April that a number of the rulings “look at just one side of a transaction,” giving an incomplete picture of the global group's profits (24 Transfer Pricing Report 1583, 4/14/16).

Koopman told the ABA tax section meeting that the commission is considering whether the tax rulings appropriately applied Organization for Economic Cooperation and Development transfer pricing guidelines. “If there is actually a demonstration that this was actually done, that is a very good indication that the arm's-length principle, as a fundamental principle of EU law, had been applied,” he said.

What worries the commission, he said, is that in some jurisdictions, transfer pricing methods were chosen that, at face value, didn't seem to be the most obvious method. Further, he said, some governments appear to have factored in promises of increased investment in the country.

“Our concern is deepened and heightened when in the same file you find extensive traces of discussions with the tax authorities about the amount of employment that was going to be created” if the tax ruling was granted, Koopman said. Some files show companies making the argument, “If we do a bit more in terms of investment and employment, can we have a bit more?” the EU official said. “That's when I ask myself how scientific has this application of the OECD guidelines actually been.”

The commission is taking a common-sense approach, he said, and acting only when a significant deviation from the OECD guidelines has occurred.

Internal Market

Koopman said the commission is examining the tax rulings because “obviously, sweetheart deals—reductions in taxes that are normally due—affect the companies' competitive position in the internal market.”

Robert Stack, deputy assistant secretary for international tax affairs with the U.S. Treasury, meanwhile, said the European Commission appears to have a particular view of the arm's-length price as “the right market price to protect the EU market.”

Stack, speaking on the panel with Koopman, said the commission seems to be concerned about whether local businesses face unfair competition from multinationals. Press releases from the organization take the view that “multinationals get these transfer pricing rules, but the local coffee store, that only has a domestic market, doesn't have transfer pricing” Stack said. Thus, the reasoning goes that “if you play games with the transfer price, you can give a selective advantage to the multinationals over the local companies.”

For the U.S. tax community, this thinking has “opened up a very dangerous space,” the Treasury official said. “The commission is suggesting that a multinational that gets a ruling from a country in Europe needs to double-check its market price against the commission's notion of the market price, which is a standardless notion.”

Transfer pricing practitioners struggle a lot with which party gets the return from intellectual property, Stack said. “Viewed through one lens, taxpayers are not only being told ‘this was always the law,' even though there were no announced standards or guidelines,” and now the commission is “going to come back and impose billions of dollars of fines based on the rules we are now telling you that existed in some Platonic ideal but really unknown to anyone.”

The political atmosphere for U.S. companies in Europe is difficult and challenging, Stack added. “I certainly didn't come at this issue with a great deal of confidence that these issues were going to be looked at as dispassionate issues of the technical application of state aid rules,” he said. “That is the reason the United States started to dig in and pay some attention to these cases.”

‘Exotic' Formulas, No Report

Koopman said he is sympathetic toward “companies who believe that they were acting in good faith and did a very respectable job in getting a transfer pricing report done.” Such companies obtained a tax ruling from an EU country in good faith, and felt that on that basis, without attaching any legal qualification to the term, “they had a legitimate expectation that things would be all right.”

The official said he has “slightly less sympathy” when he sees evidence of a ruling being granted “without there even being a transfer pricing report.” In many cases under investigation, Koopman said, not only was there no transfer pricing report, but the formulas tax authorities used were “so exotic that there is no reference to them in the OECD guidelines.”

Koopman said that when he has asked about these “Byzantine formulas,” he hasn't had “a single convincing answer from the tax authorities of the member states.”

If a company doesn't produce a transfer pricing report, discusses investment and employment with the tax authority and then receives a transfer pricing ruling, “frankly speaking, that comes very close in my mind to a definition of a sweetheart deal,” Koopman said. “For those companies, I have slightly less sympathy if now we say, 'Sorry, guys, you got a sweetheart deal. You were competing in the internal market and weren't paying your fair share of taxes.' ”

The argument that “somehow these companies are victimized by these brutal bureaucrats” is “a little bit over the top.”

Stack, for his part, said the idea that a ruling entered into with a jurisdiction in good faith later could be called into question is a new one for companies.

“It just felt to us that no one expected, in this particular rubric setting, that someone could pick that ruling up later on, and go ‘My goodness there is a state aid in this case.' ”


Koopman said the vast majority of the rulings in the commission's files present “absolutely no problem whatsoever.” It makes no sense for the commission to second-guess rulings that “are well done, and where there is no prima facie indication that there might be something wrong,” he said.

The commission is focusing on rulings outside that bandwidth, Koopman said. Of the 1,000 rulings under review by the commission, “we think maybe 50 or 60 really deserve to be looked at much more carefully. That shows we are not the tax police. We are looking at a specific subset of cases.” Moreover, the EU official added, “they are not all transfer pricing cases.”

Koopman said the commission isn't trying to redo transfer pricing reports. “Once you move beyond a certain point there is a question of judgment, and very respectable transfer pricing experts can arrive at somewhat different results,” he said. Rather than looking at cases where reasonable minds can disagree, the EU team is looking at “more fundamental issues that are problematic.” When the commission decides a case constitutes state aid, he said, “it is because we think there is something badly wrong, rather than something that might be a bit fishy.”

EU Guidance

Koopman said the commission will try to provide guidance on tax rulings over the next few weeks, noting that there is nothing intrinsically wrong with seeking these agreements. “Tax rulings make a lot of sense because they provide certainty,” he said.

The commission is aware that the state aid investigations are creating uncertainty, which is bad for investment, Koopman added.

The forthcoming guidance on rulings will address “the sort of things we think are generally unproblematic, and the sort of things where you may want to be a little bit careful,” Koopman said. “It is also very important that member states know this, and companies should know this.”

Ireland, Luxembourg, Netherlands

Ireland, Luxembourg and the Netherlands gave the bulk of the tax rulings the commission is currently investigating, Koopman said.

The commission had asked all EU countries to provide a list of all of the tax rulings that each country has granted over the past three years, Koopman said. It then asked the EU countries for a sample of the rulings. The 1,000 rulings under review “are a reasonably good comparative sample of tax rulings,” he said.

Because rulings were given to the same companies in many cases, “in fact, we are looking at 300 company files in total, and we are analyzing those files very carefully,” the EU official said, adding, “We are only at the start of this investigation.”

Where to Tax

Stack said U.S. officials decided to speak out early on in the EU's investigation because it was reported that the cases could result in billions of dollars of recovery.

“Treasury put up its hand, because instead of just four U.S. companies, it could end up being 40 U.S. companies,” he said.

For the U.S., he said, the amount of cash trapped offshore is an important issue—and that money might not properly be taxed in Europe.

There is a “huge amount of difference” between saying that a company didn't pay the right price in a particular country under some arm's-length approach and saying that “money that was deferred for U.S. tax purposes—that we call stateless, that is kind of sitting there—necessarily belongs to Europe.” He added, “I think Mr. Koopman and I would agree on that.”

The U.S., Stack said, has been worried that applying the state aid rules will cause a disproportionate amount of the stateless income to be taxed in Europe based on assets, functions, and risks, that occurred in Europe, when “we all know that most of the IP is developed in the U.S.” He said he believes he and Koopman “actually have some understanding of our mutual interest in that space.”

To contact the reporter on this story: Kevin A. Bell in Washington at

To contact the editor responsible for this story: Molly Moses at