Episode Transcript
[00:00:00] Speaker A: Foreign.
And welcome to our podcast series where we bring you insights into the latest developments in global tax policy and controversy space.
My name is Bruno Niceto da Silva and I'm a senior advisor at A and M Global Tax Policy and Controversy Group.
And today I have the pleasure to welcome Professor William Barnes, which is the first guest of our podcast series. So, William, maybe introduce yourself in a few words.
[00:00:31] Speaker B: Well, howdy y'.
[00:00:32] Speaker A: All.
[00:00:32] Speaker B: As we say in Texas. I'm an international tax and transfer pricing professor at Texas A and M School of Law. Bruno and I teach two courses on international tax and tax treaties and he also lectures in my transfer pricing course. I'm also the primary author of nine LexisNexis tax treatises that large firms such as Alvarez and Marcel leverage to analyze international tax risk management challenges, for which Bruno has contributed several chapters. And lastly, thank you for Alvarez and Marcel for hiring our students through which the law school has achieved the second year in a row that we're ranked number one for employment outcomes amongst US Law schools. So Bruno, why are we here today?
[00:01:19] Speaker A: Thanks, William. And again, thank you for joining us. So in this episode we will be discussing transfer pricing from UAE state aid lands and in particular the decisions by the Court of Justice of the European Union in a series of landmark cases which were triggered by the European Commission investigations and that concluded that Luxembourg, Netherlands or Ireland had granted illegal state aid.
So we'll be providing some background information and discuss what is state aid, then analyze the outcomes in Starbucks, Fiat, Amazon and ngks. Then look to why did the court reach a different outcome in the Apple case. And finally, William, I will ask you, well, that you predict a little bit what you see, what will be the impact of the cases for the future?
Maybe I'll start a little bit with the background and explaining very briefly what state aid is.
The Treasure pricing state aid saga is quite known to everyone and has more than a decade long.
Between 2013 and 2016, the European Commission opened a wave of investigations into tax rulings that EU member states had granted to multinationals and which in the context of transfer pricing came typically through the form of apa. So advanced pricing agreements or advanced pricing arrangements.
So this related to well known M and Es such as Apple in Ireland, Fiat, Amazon, McDonald's and Angie in Luxembourg and Starbucks in the Netherlands.
So the underlying reasoning on all those cases was that through tax rulings those countries would be providing allegedly tax advantage that would amount to illegal state aid. And there's specific article 107, 107 of the treaty of functioning of the European Union.
So what does these rules say? So this rule prohibits as incompatible with internal market any aid granted by a member State or to state resources that distorts competitions by favoring certain undertakings.
So focusing on the main points and measuring state aid, where four conditions are met, there's an intervention by the state or true state state resources. In this case we are talking about taxes, a selected advantage to certain undertakings, distortion or threat of distortion of competition and then effect on trade between member states. So the decisions the decisive condition when we are talking about tax cases is selected advantage as tax rulings. And we are focusing again mostly on APAs are negotiated individually.
The analysis of the court in regards look to three steps. Identify the reference system. So what are the normal rules of taxation applied in a member state? Ask whether the measure derogates from that system by treating comparable taxpayers differently and finally asking whether any derivation is justified by the logic of the system. Maybe William, I think it will be relevant that you provide some background in terms of U.S. perspective.
[00:04:34] Speaker B: So Bruno, you have aptly described what state aid law and jurisprudence is.
But to understand these cases in particular, we need to first understand the United States multinationals and thus the United States Treasury Departments position.
It is well known that our multinationals and the U.S. treasury under both Democrats and Republicans, consider these state aid investigations to be disproportionately targeting US Headquartered companies.
To understand our perspective, it is important to consider that before implementation of the Tax Cuts and Jobs act that was enacted in 2017 but took effect in 2018 2018, that is well after any of these state aid investigations were started, that Tax Cuts and Job act enacted a 21% flat corporate tax rate from 2018.
But before 2018, the United States had one of the highest corporate tax rates in the OECD in the world, at 35%, much higher than its European trading partners. Additionally, the US states imposed their own independent corporate tax regimes like the German states and the Swiss cantons do, and that increased that 35% headline rate well above 40%.
So that's point number one. In addition, the United States was the first country globally to enact a controlled foreign corporation or company, as most people call it overseas tax regime, a CFC regime, it imposed the US Corporate tax rate, again at least a headline rate of 35% on the underlying profits of foreign subsidiaries by deeming the passive earnings and I'm simplifying it by saying passive, but I'll say deeming the passive earnings of those foreign subsidiaries as having been annually distributed as taxable dividends to the US parent. We call this regime still today Subpart F because that's the section within our Internal Revenue Code under the corporate section of our Internal Revenue Code Subpart F. But anyway, let me bypass the US corporate tax planning strategies that mitigated the consequences of this regime to a substantial extent and turn to our European trading partners.
European countries in general exempt foreign earnings of their headquartered companies from their home country's corporate tax.
Thus, that's like the exemption method. Okay? Thus from a US perspective, US multinationals, we free again pre2018 during the time of all these cases, when they're looking back at audits, we bore at least a third more tax than our European rivals on the same types of earnings.
And that created a competitive disadvantage.
Everybody agrees with this statement.
Europeans may disagree in terms of how the US Regime treated the earnings once received and the games that were played, as we see in these cases.
But we all agree that the United States multinational headquartered companies incurred more tax and that that tax impacted its competitive abilities, which is why the European states countries chose exemption method by example. Anyway, the EU state aid cases that we're discussing today, as we said, they're all pre 2018 in the tax Cuts and Job act when we reverted to a 21% rate.
But with that 21% rate, we also created Guilti and Guilty 2.0 today with the one big beautiful bill act and so on. But I'll stop here. It's important to acknowledge this framing to understand both the US political backlash which is going to play into where I think we're going in the future, but also to understand the US planning strategies that occurred for these cases. So with that, why don't we start looking at the decisions?
[00:09:17] Speaker A: Thanks, William. So let's start with Starbucks, Fiat, Amazon and Angie cases. So what is common in these cases? Well, the Commission lost in all these cases.
So Starbucks is a case that was immediately already dismissed at the level of the General Court of the European Union, which at least in the state aid cases is like the first instance court, while the other cases led to final decisions by the Court of Justice of the European Union itself.
So just to briefly remind the audience of some of the fundamental issues in these cases. So in Starbucks, we are talking about 2008 APA granted by the Netherlands, endorsing the transfer pricing methodology adopted by the Group to determine Starbucks BV's remuneration for its production and distribution activities within the Group.
So the APAA also confirmed the amount of the royalty paid by Starbucks to another group entity and which corresponded to the residual amount after deducting the BV remuneration. So the Commission challenged the ARMS link pricing nature of the methods, considered that the transactional net margin method, the tnmm, provided an advantage to Starbucks. Fiat is again a tax ruling from 2012.
So the Commission challenged the Intergroup payments, which were not Arbitralink priced, again challenged the transfer pricing method, profitability indicator and the selection of comparables. And finally, we have Amazon, another tax ruling where Luxembourg tax authorities had confirmed the arm's length nature of deductible royalty payments paid by a Luxembourg operating company to a Luxembourg partnership, which was treated as tax transparent concerning the use of certain intangibles.
And again, this was questioned by the European Commission considering that the royalty payment was excessive. So, well, maybe to explain as well, what was the core argument for the Court to dismiss these cases.
So was the fact that the Commission, when determining the benchmark of the national tax system, which is the critical element in the terms of state aid analysis, relied in abstract reference rather than relying on the specific country's legislation. So they were talking about arm's length principle, the OECD transfer pricing guidelines, which were not formed part of the reference framework. For instance, there was no specific reference in Luxembourg to the transfer pricing guidelines.
So the Court then concluded, okay, only the domestic law of the member states sets the normal level of taxation, so the benchmark system.
So any external parameters cannot constitute a reference.
But this is just the overview of the decision. So, William, what I'd like to hear from you is more from a more technical transfer pricing analysis, what are your views as to why the Commission lost these cases?
[00:12:35] Speaker B: Okay, so again, you've aptly described what's going on with the state aid rules, as the state aid rules in these cases are all based on was the granted aid, the advanced pricing agreement, or back as they were called, these rulings, were they, were they above what would be normal? And this is where the rubber meets the road in the normal in the context of that national system.
So just to rehash that point and then let me go into explaining Starbucks, it would be for our purposes of the US it would be as if a court was deciding a case, a Louisiana court was deciding under Louisiana law case and said, we're going to contextually reference this case to New York law.
The United States has, I'm sorry, the Louisiana has French law, French civil law, and New York has United States common law.
It would be at best weird, strange from the Louisiana point of view. It would. The, the Lawyers would reject be horrible, like it would just be unfathomable.
And well, that is again the US perspective of what occurred in the EU investigation. Let's start with Starbucks, the Netherlands.
I'm going to give you different rationales, but we're going to use Starbucks because Starbucks, all these rationales are at play and I'll point how it works in the other cases.
The general statement I want to make is the US had this robust controlled foreign corporations tax regime and it deemed a dividend repatriation of foreign income to of these Netherlands operations, if you will, the Netherlands subsidiaries, it deemed that as part of subpart F back to the United States, unless the United States multinational is using certain approved, congressionally approved or Treasury Department approved tax strategies.
And the most known strategy, if you will, the one that everybody could like recite whether they're US or foreign attorney, is our check the box regulations. And check the box regulations simply allow a US corporation to decide from a US perspective, not from a European Union perspective, from a European national, but from a US perspective whether the subsidiary will be treated from a US perspective as a fiscally transparent, that is a pass through like a partnership, or whether it will have fiscal personality like a typical corporation. Okay?
In each of these cases, the US multinational had implemented a strategy of checking the box to have one entity and generally the entity that was being.
We'll talk about Apple next. So it's a little bit different, but it's the same principle to have one entity, if you will be a non taxable entity, be a pass through.
And because of the check the box rules, the subpart F the CFC legislation allowed, and we won't go into the strategies at the different day's discussion, but it allowed back, at least at that time before guilty, the money to be rolled up in a holding vehicle that would escape US annual repatriation under this CFC legislation. Inevitably if it came back to the US it would be taxed unlike European countries.
Okay? So the US foreign subsidiaries had to focus with our high tax rate, had to focus on the local national taxation of the European countries and in these cases, the Netherlands, Luxembourg, Ireland.
That focus came about through check the box and came about through tax rulings.
Now, Bruno and I both completed our tax law studies in the Netherlands and have a deep familiarity with its tax laws. So that's why let me focus on the crux of the issue by explaining the Netherlands Tax Authority's ruling regime.
The Netherlands Tax Authority developed a tax ruling regime that in modern terms, okay, Is known as advanced Pricing agreements. But the regime was, and that was developed, thought of in the 1950s to promote tax, and thus investment certainty and certainty for tax principles and all business principles is like a axiomatic, it doesn't have to be explained. It's truth in itself. And to promote the Netherlands as a financial intermediary capital, it worked. Most other European countries followed suit with a variant of what rulings would cover and what, if you will, tax breaks from a state aid perspective would be offered, including France and Germany.
By the start of the BEPS process, which itself was just a response to the 2008 financial crisis.
The impact of this Netherlands tax ruling policy represented no less than 5% of the Netherlands GDP. And that's based on Netherlands government studies.
Okay. They were presented to Parliament. It was a whole discussion in the Netherlands whether to maintain on how to vote on the EU Commission, if you will. Okay, so let's explain the Starbucks case. On first impression, as Bruno was talking about the residual royalty, if you will, the tax ruling of the Netherlands may appear very aggressive. Stated simply, all the profits, but for a small margin relative to those profits, were allowed to be paid as a deductible license fee to an inevitably non European taxable Starbucks entity in Bermuda. Wait, Bermuda, that's not part. Well, through a UK non taxable entity.
So the money is paid from Starbucks, the, the subsidy, the coffee roasting subsidiary at issue here, it's being paid to the UK entity, which is a pass through.
And that money, because it's a pass through, inevitably is going to Bermuda.
Your first thought is going to be, oh, well, what's the United States have to do with this, is Bermuda? Well, the United States subpart F legislation, plus the United States has a very robust transfer pricing audit regime. And no, not all the money received in Bermuda is untaxable in the United States.
Part of it was repatriated through subpart F. Part of it was they had to pay as a relicense fee to the United States. I just want to state this to say this money was not all untaxable money. It just wasn't taxable in the European Union.
Now, typically license agreements are for a fixed percentage or they're for a combination like a fixed amount, guaranteed amount each year in a scale of a percentage based on the revenues or the underlying earnings on an annual basis, something like that.
Okay.
And from the European Union Commission perspective, they would argue publicly, like what third party would agree to give up all of its earnings above a fixed percentage.
Well, I have responses to that because there are those situations.
But before we give that response, let's understand the valid rationale of the Netherlands and Starbucks based in a pre BEPS world. I'm going to offer two responses.
Pre BEPS for the most part.
Well, pre BAPs and still today post BAPs, transfer pricing analysis is performed on an entity of a group of entities, but it's on a corporation, a subsidiary.
The analysis compares that subsidiary, the one that's called the tested entity if you will, the targeted entity from the United States perspective in these cases, but the tested entity to comparable entities that perform the same types of businesses and operations.
In Starbucks, as with most transfer pricing analysis today, like that undertaken by Alvarez and Marcel, the comparability analysis is performed on a transactional net margin method basis, what we call a comparable profits margin method in the United States. Since we developed it, I'll just refer to it as the CPM method. Comparable profits margin. It's the same thing.
By that definition, a firm like Alvarez and Marcel is hired to undertake a study of the market, in this case coffee roasters, because that's what the tested party in this, in this Netherlands case primarily did in roasted coffee.
Identify comparable companies or subsidiaries that perform the same type of function and operations. That would be coffee roasting or at least roasting of roasting. So coffee and tea and the ancillary activities that aren't too far removed from that kind of function or operation. Again coffee roasting.
And once you've determined what the functions in okay, coffee roasting is, then the Alvarez and Marcel would having chosen operating entities that are similar, comparable to the Starbucks entity. So same size or same kind of like premium coffee versus I don't want to use any corporate names, but we'll just say the typical like you know, coffee that nobody likes to drink. That's, that's put into your office coffee room.
The so they identify these comparable companies and then they determine based on their public accounts what kind of profit margins that they earn from these functions.
Obviously these companies need to be performing the coffee roasting or roasting operations for third parties as well, because otherwise it would all be transfer pricing, that is intra group transactions. And you would just have five or six comparables, but each one would be its own interrelated entity that had synergies. And so it'd be really hard to pull out the comparability, if you will, to decide whether the comparability analysis was accurate or not. So that already establishes a pretty high hurdle, a very hard hurdle to overcome. Starbucks Netherlands was characterized by Starbucks as performing routine coffee Roasting functions.
And that's correct, it was performing routine coffee roasting because the value added, the alpha, if you will, for that subsidiary was the use of the Starbucks intellectual property in the form of coffee roasting patents. Those are filed patents in the United States and worldwide. They're valid legal rights and also intangibles in the form of trade secrets. So trade secrets different from intellectual property aren't filed, they're secret, but they're just, even if not more valuable.
Think of Coke as a secret formula of Coke.
They're more valuable than by example, the coffee roasting patent.
Those intellectual property rights and those intangibles, they belong to Starbucks United States where they originally developed and they've been licensed to Starbucks Bermuda, who in turn licensed them to the uk in turn license them to Starbucks Netherlands.
Okay? The Netherlands and Starbucks performed a study from their perspective and they agreed in their ruling, this advanced pricing agreement that from a routine, they call it toll to L L toll manufacturing, but from a routine services point of view, you could call it low value added services today, but they're not low value added. They're just, they're just not high value added, if you will. Okay?
So on this routine services that they should have a routine rate of return, anything not that routine rate of return wasn't economically attachable to the Netherlands subsidiary. And thus that must constitute the value that attaches to the intangibles in the intellectual property of Starbucks. And that belonged to, for the purposes of our tested parties, that being the Netherlands and the UK that belonged to the UK and it was paid as a deductible license fee. And thus, as Bruno said, it was kind of all the residual earnings above that amount were non taxable. They just simply got paid away. Like if, you know, finance a sweep on an account.
So the rubber meets the road. When the EU commission stated that the Netherlands should have transfer pricing tested, the United Kingdom's pass through entity instead of the Netherlands coffee roaster. And this is the crux of the matter.
Which party is the tested party? The commission argued that in transfer pricing, the tested party should be the simplest party.
To summarize, because the UK pass through had no actual employees working for it directly, then that would be the simplest party and the correct party to test.
Now I'm not going to go into the whole transfer pricing rules of the OECD pre and post beps, but it's easiest just to summarize and say before BEPS and before DEMPI existed this acronym on how to analyze intangibles before that legal ownership of intellectual property and legal ownership of intangibles.
Intellectual property is a form of intangible.
The legal ownership mattered and that. And because it was in the UK and intangibles are very difficult to, to value yesterday, today, tomorrow. They're difficult to value because of if you have six groups, but all six groups are totally integrated, it's hard to know from the routine what makes the routine so valuable. That is the tangibles that make that company more competitive than everybody else in the market, that make Eli Eli that make Lavazza, Lavazza, Starbucks Starbucks and so on.
Because it can't be just the performance of the roasting operation because you can hire third party roasters who. That's all they do. They just roast.
So it has to be something more. Now, I'm going to stop here with that with going into the case specifics. The EU attempted, so the United States thinks so I think to impose the post beps Dempi analysis by contextually, when they examined the Netherlands apa, they examined it from a perspective of the oecd and at least for the Netherlands, I wouldn't have a problem with that. But it's which oecd and that's the rubber meets the road.
And that's what Bruno also brought up.
They're using the OECD as we know the OECD today and that's the post baps oecd the Netherlands. If one was to go outside the state aid jurisprudence as it actually exists, which says you have to look at
[00:29:54] Speaker A: the local,
[00:29:57] Speaker B: at the local tax law and if you go outside of that, you still at least need to look at the context in this case, the OECD of the rules that existed at that time period.
And the OECD rules didn't have this sophisticated Dempi analysis, this, well, you know, it doesn't have employees and thus it, it doesn't really have intangibles, it doesn't really have value added. It doesn't know. But that wasn't free beps. That wasn't.
Yeah, okay, I won't make that point any further.
And, and then I think let me finalize with this statement and then let's go on to, to the other cases or ask me about Starbucks. Bruno. I'll finalize saying in the context of state aid, for aid to be given by a state or country, it has to be that the court is correct in state aid cases that you have to refer to the local country's tax laws. Because the local country, that is the parliament, the revenue authority, the treasury as we call has to be that its reference points for its granting the nap is it's its own laws.
It's like back to my Louisiana example. Louisiana's state government isn't referring to New York law when it discusses with local circumstances.
So the Netherlands is not referring to at that time, certainly not to oecd. But even if it's referring to oecd, it's not referring to a future OECD that had not yet even been discussed.
And it's referring to its own rules. And in the context of its own rules, it's making third party negotiated decisions.
And it may be, as I said, the principal policy was to promote Netherlands as an intermediary, as a financial intermediary, as an operational intermediary.
But it was in the context of its own rules to do that.
And.
Okay, I'll stop with that and let's think about some of the other cases maybe or if you want to go further into Starbucks, let's discuss.
[00:32:16] Speaker A: Yeah, yeah. Well, I mean I think you made pretty good points and it's a good trigger now to talk about the Apple case. I mean the Apple case. We have a decision September 2024.
What's interesting, the court apparently went into a different direction and consider, well, we have state issue here, so the facts are straightforward. So Ireland issues two tax rulings confirming that almost all the profits from sales recorded by two Apple Group subsidiaries which were incorporated but not tax resident in Ireland were attributable to head offices outside Ireland rather than to their Irish trading branches.
So considering the effect of the tax resident mismatch, because we have incorporation in Ireland with central management and control in the US those profits were not taxed either in the US or the island because of the corporate tax resident mismatch between the two countries. So Ireland only taxed the limited profits attributable to the branches. So the Commission said, well, there is an issue with the profit allocation to Ireland which is not consistent with the arms land principle.
So what happens here?
The Court of Justice of the European Union confirmed the Commission view that there is illegal state aid. So with the consequence that Ireland needs to recover the tax advantage granted, which is pretty significant, around 13 billion euro.
I think there are several issues here that deserve your comments, but probably start by highlighting that the quorum seems to have accepted the Commission's use of the arm's length principle and in particular the use of the authorized OECD approach aoa, which was not enforced in Ireland at the time of the events and it's even subsequent to the tax rulings themselves.
So William? Well, I think almost no one agrees with the court's decision or at least consider that the reasoning is flawed.
So what are your view on this or why do you think there was a different outcome in this case?
[00:34:33] Speaker B: Okay, so first of all, like with Starbucks, from the United States perspective, the European Commission is retroactively using a correct OECD approach that did not exist until 2010. The OECD's 2010 report on Branch attribution, so usually called the accepted OECD approach or AOA.
The OECD's 2010 report is issued like the transfer pricing guidelines relevant for, particularly relevant for Starbucks, two decades after the first disputed ruling of 1991 between Ireland and Apple and three years after the second ruling had been have been agreed in 2007.
So applying 2010, and let's just assume for sake of argument that the OECD 2010 report is the absolute correct way to do it. And let's just assume that the European Union had adopted a directive that every European Union country was mandated to adopt as European Union law, transfer pricing law and tax treaty dispute law. The OECD approach it does, but let's assume still applying Those rulings using 2010 and after on those rulings, I want to say that there is an underlying theme in these cases that the European Union Commission is arguing, and they did specifically argue this in Starbucks in particular, that there is a European Union arm's length stamp.
The European Union has its own kind of not talking about state aid, I'm talking about tax jurisprudence.
And that was innovative.
And I don't mean innovative in a good way, but that was innovative.
And again, the European Union, if the countries want to come together and unanimously pass a directive and yada yada, but that's not the situation. Okay, number one, number two, the Apple decision is irreconcilable with the fiat decision because on the fiat they're leaning the courts.
The Commission said in Apple its peace and the court agrees with it to the tune of multiple billions of dollars.
The Commission says it's peace and fiat and the course in the court disagreed with it for the exact same reasons, but found oppositely leaning on the oecd. Guidance for Luxembourg, the court said was not allowed because you had to restrict it to the domestic law of the member state concerned. So in fiat Luxembourg, the court says we have to look at the domestic law only.
What was the reference points to the domestic law. What's the context of this ruling for the domestic law?
And in Apple, Ireland we need to reference the OECD Future Report, 2010 report and totally irreconcilable.
And from a U.S. perspective, is Fiat a U.S. company or is it a European country company? I know, but it was Italian and it could be Italian friend. It could be whatever. It was not United States company.
Apple United States company from the US Perspective.
That was the difference in this situation.
And okay, and then you get to the.
Applying it backwards. As I said, that's like that retroactivity.
It would be okay if the European Union said going forward from 2000, you know, whatever from BAPS, but did reverse in the Apple case. It does this reverse and it starts with the profits booked by the legal entity and then it takes those profits and looking only at the activity within the entity, that is, they ignored that one particular legal entity they're looking at. They're not looking at Apple. And everybody accepts that Apple's ip, its intangibles like Starbucks is based back in Cupertino. It's California. I'll call it San Francisco. It's back. It's based back in San Francisco. That's where it's doing its development and all that. It's owned by San Francisco. Clearly it's owned by San Francisco.
The court's reversed is by, by using the 2010 study, the court is now isolating only looking at this entity and then only.
But the whole entity. Right. Of Apple. The, the, this, the subsidiary of Apple in question and then applying really a Dempi analysis.
Let's look at Labor.
Oh, wait, there's no employees of the entity other than in the branch who are doing, from Apple's point of view, again, routine kind of services, routine operations that received a, from the Irish government's perspective, a routine return.
And we're going to just default all the earnings, all the revenue, we're just defaulted to the branch.
The AOA's own text I.e. this accepted OECD analysis, their own text of 2010 refutes the court.
Under the AOA, the profit attribution tracks branch activity, not entity profit.
And if we track the branch activity, like with Starbucks, on the actual routine services that were performed at the subsidiary level of coffee roasting, we can only attribute value relative to those branch services. And those branch services are, again, from the perspective of both the government of Ireland and Apple, routine. You do not, you do not take the profit of the entity and just default. It all belongs to the branch.
So just to finalize that, you can't start from all profits booked by the entity belong to a branch. At least not before BEPS and BEPS really incorporating this 2010 OECD report.
So the Commission's method, this allocation by exclusion, inferred that the profits belong to the branches, again because the head offices were empty.
Rather than proving affirmatively what did the branches do and what should they be compensated for? That same analysis of Starbucks just applied within a company branch instead of between these two subsidiaries.
And what's the procedural issue here? Does that explain it? The court excused itself from the benchmark question.
Why would they have to benchmark if they've already allocated the entire branch?
Profits, revenue, everything has been allocated to the branch.
And by saying that the 2010 OECD report that hadn't been cross appealed, why would the court even need to consider it?
But in Amazon, the Amazon decision, the exact same similar procedural posture arose and the court reached the opposite practical result.
So fiat Amazon, the court, same issue, opposite result.
Fiat Apple, same type of issue with the retroactive application. Do we use the local law? Do we use international law, OECD soft law? Is there a new European Union transfer pricing law that just they forgot to make a directive about?
Did it take a place through some kind of jurisprudential principles within the EU legal system, which Bruno is an expert on, not myself. But again, the court reached an opposite conclusion. And now you can truly understand the United States perspective on these. When I say the us, I mean the US treasury and of course the US multinationals. Why don't we look at the future cases, Bruno?
[00:44:21] Speaker A: Yeah, so maybe let's enter in our concluding part. So. Well, you already pointed there is a contradiction and we still have three investigations which are open. They are somehow dormant, apparently, but they are open. Ikea, Nike and Utamaki case.
And I think the one thing we are for sure, it creates uncertainty. And the other thing, what I think is interesting to refer and that you pointed a lot to the absence of an arm's leak principle in the EU is the fact that the Commission in 2023 came out with a proposal for a directive, so a transfer pricing directive, which would include specifically the ARMS link principle, transfer pricing methods, clarify the role of the transfer pricing guidelines. But ultimately this was withdrawn by October 2025. So, William, maybe in five minutes to ask you what you think is going to happen in the future for these pending cases.
Do you think that the Commission will use the same tool again of state date to scrutinize tax cases and in particular transfer pricing? What do you think lies ahead in terms of transfer pricing Forum AU perspective?
[00:45:39] Speaker B: Okay, so first Matt, you brought it up. The TP directive of 2023 that was withdrawn.
The European Commission has been trying to, through these cases, through the jurisprudence arguments, to impose a tax rule, the arm's length principle, as the European Commission sees the arm's length principle, has been trying to impose that where it could not do it by unanimity within the European Union itself, because Europe unanimity is necessary to enact tax legislation within your union.
So here you have the European Commission couldn't get it through, and so they are through its own countries. And so it's arguing in the case law, and that has not yet been, let's say, accepted either jurisprudentially or in the context of a direction.
So where are we going?
Well, Ikea, Nike, and I'm talking about Maki.
It's of those cases, the one that's most interesting for me from a US perspective, of course, is Nike. And Nike again is somewhat clear. From a US Perspective, the value added of Nike is its branding, it's intangibles, it's intellectual property on manufacture and so on. And Nikes are not manufactured in Netherlands for European in general, they're, you know, okay, so we don't have that kind of low value out of service. But from the Nike perspective, the true value is Portland, Oregon. That's where Nike's headquartered. And the swoosh and all that was developed and belongs to, to the United States through Portland, Oregon, the parent company.
Now, the European Commission has made a argument based on current understanding of transfer pricing rules post beps that state, well, the local European subsidiary that received a tax rule should have considered that it has some valuable locally created marketing intangibles. And the brand only has value if people are buying it and those consumers are in Europe and you get into the whole digital services tax conversation then.
But the point is that they're applying today's rules to rulings of 20 to 10 years ago. Okay, so what's going to happen?
Well, what do we know at this moment? What we know at this moment is that there is no public press releases and in conferences, the European Commission state aid authorities have not commented when asked about progress on these cases. And the reason is in the context of a geopolitical situation where the United States has imposed tariffs and withdrawn tariffs and digital services taxation and there's a trade war about that and you all have an internal fight on tobacco taxes. I don't understand. But okay, you have all of this stuff going on and the state aid cases are really at first, 10 years ago they were an inflection point. Today, they're a distraction. And the Starbucks case, even if the European Union had won, it was not even an accounting error from the point of view of Starbucks. Apple, that is, I clearly and Bruno clearly stated, was at odds with the European Court's own decisions. And even the OECD's approach was the big ticket case. And I'll just call Apple the $12 billion decision.
And the reason that the United States, you know, our perspective, why the court went against Apple, and this is going to go to what's going to happen today is because it was a big ticket case. Because in Starbucks, we're talking about less than 100, like literally about 10 to 15 million euro at issue a year for a multibillion dollar company.
It's not a rounding, I mean, okay, rounding error, but it's not an accounting error. It's not something you'd have to put on your public accounts and say, oh, we made a mistake.
But for Apple, where obviously when you get into the billions, it becomes a shareholder issue as well, like, hey, you didn't make a reserve for this.
Is this going to affect our future dividends? Is this going to affect your future ability to invest in a, this, these kind of challenges? That's when. But it was a big ticket item. That's when the court found against us.
So in the context of this, what's going to happen? The, the European Commission has said nothing. So the court can't have said something. Right. Because the European Commission has to bring this to a, you know, has to bring the controversy to a four. They have to bring us into decisions and so forth.
They have to, they have to, you know, proactively bring these cases. Yep. So what we do know is that the European Commission has said these are all state aid cases until the other geopolitical issues are sorted out. We in the United States do not believe that the European Commission will do anything. They're sitting on their hands to see what happens.
If the United States was, and we already know we had a Supreme Court ruling, we can't do it.
We can't have 50% or 100%. We can't do it. These big tariffs, digital services taxation, has not been worked out yet.
But in the context where those are worked out in a way that, you know, both sides aren't, you know, benefit, if you will, or whatever, they come to a negotiated settlement on digital services taxation and everything else going on, these cases will be dropped. Because at the end of the day, they're, they're retroactive they don't say anything about the future.
And the actual amounts at stake aren't relevant. In Apple it was relevant. It was relevant because the big amount. But it was also relevant to Ireland's budget and Ireland didn't want the money.
They literally stated over and over again, we don't need this. But regardless, on receiving it, it made actually a difference to their budget.
And for Nike and Netherlands, it just wouldn't make a difference. So it would behoove the European Union to step back and just drop this.
But to win its point, lose the battle, win the war on a go forward basis, we've made clear what the European Union Commission's assessment tools are and it would of course behoove the European Union to keep pushing forward with a transfer pricing directive and get some unanimity amongst its own nation members of what the rules are. What is, but what doesn't work is creating the rules retroactively on a fly that disproportionately affect the United States and in the decisions conflict so that the US Companies end up paying Apple billions and the European or other non US multinational headquarter companies don't.
That's what's not allowed from a geopolitical perspective that will induce the United States to continue a trade war perspective. And who knows what the next administration is going to do. Donald Trump has a limit, a timer limit. So there will be a new president in approximately a little over two years, three years let's call it.
And there may be different attitudes. And then they're not going to. They're not going to. They're going to have to formally drop these cases, but they're going to formally drop them by saying that they're like basically not significant anymore, something to this effect.
And then on a go, but they'll have a statement go forward.
We're going to be applying what we did apply in those cases that we believe was correctly applied in those cases. We're going to apply it going forward, but retroactively.
We don't accept what the countries did, but we're not going to spend resources fighting them either. And that'll be the end of it. And do you have different perspective from your European perspective, Bruno, on that? I'm curious.
[00:54:28] Speaker A: Yeah, I think that the commission is going to drop this.
So I don't know if they're going to formally close the investigations or just like they're going to let it dormant, but they're going to let it go.
There is no appetite for this in the same way that there was no appetite, at least for now, on a transfer pricing directive. That's why they withdrew the proposal. So I think it's not going to go forward. They're not going to challenge again based on these grounds. Pending cases are just going to go away, formally or informally.
Yeah.
[00:55:05] Speaker B: I'll just say in the end, the European Commission had a big win. It had its Apple win, but at least because they had this big win, big dollar win in Apple, they'll be able to say, look, it was all worth it. We got billions of dollars clawed back to Ireland. How does that help the European Union? But whatever, it had a win.
For resource purposes, we're going to focus on today's problems, not yesterday's.
[00:55:29] Speaker A: Yeah.
[00:55:29] Speaker B: Yeah.
[00:55:30] Speaker A: Well, William, well, first of all, thank you very much for joining us in this episode. I mean, we really appreciate all your comments and perspectives. And also thanks everyone for joining us today.
And stay with us as we continue this journey in our upcoming podcasts. We'll have more guests in the future episodes.
And also please check out our monthly newsletter, which will bring you the latest key updates around selected editorial pieces from our Global Tax Network.
Thank you.
[00:56:00] Speaker B: Thank you kindly, Bruno, for inviting me.
[00:56:03] Speaker A: Thank you.
