EU Investigation Adds New Dimension for APAs

EU Investigation Adds New Dimension for APAs

Nov 21, 2014

A Tax Analysts news analysis by David D. Stewart discusses the European Commission's most recent release on state aid and tax rulings, saying the commission has taken aim at an advance pricing agreement between Starbucks and the Netherlands and raised the stakes on negotiations.

While acknowledging that the commission's primary concern is whether the risks were in fact borne
by parties other than Starbucks Manufacturing, Guy Sanschagrin of WTP Advisors took issue with its
additional assertion that the transfer of risks would not have happened between unrelated parties.

"The commission has qualitatively asserted that the Netherlands tax authority should not have
accepted the transaction because of a general assertion that parties would not shift risks to earn
lower returns," he said. "I disagree with their assertion. Third parties would, and do, accept lower
returns in exchange for lower risk."

Sanschagrin noted that net present value calculations on cash flows would include risk-adjusted
returns, and that it's possible that a reduced, low-risk profit stream is worth more than an increasedprofit,
higher-risk stream.

Stéphane Dupuis of WTP Advisors noted that with the release of the Starbucks letter, the commission
has opened formal investigations into two opposing examples of tax competition. He said that for Fiat,
the commission is arguing that the tax ruling overattributes profits taxed at a lower rate, while for the
Netherlands, the ruling taxes at the normal rate but underattributes earnings to the jurisdiction.

"The fact pattern à la Netherlands is interesting, as it goes against, or is the reverse of, what usually
transfer pricing practitioners will expect the bias of any country should or would tend to be; that is,
over-attributing operating profits in the country," Dupuis said. "In that sense, compared to the practice
à la Luxembourg, it is a counterintuitive or subtler, almost unthought about, form of tax competition."

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