January 30, 2023

Volume XIII, Number 30


January 27, 2023

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The European Commission Opens an Investigation into Transfer Pricing Practices

On Tuesday, September 30, 2014, the European Commission (the Commission) published its decision to open an investigation into Ireland’s transfer pricing practices.  The Commission is also reviewing the transfer pricing practices of other EU Member States, including the Netherlands and Luxembourg.  Any advanced pricing agreement (APA) or other tax ruling within the EU could potentially be subject to this review process, which could lead to increased tax liabilities for the relevant taxpayer for prior periods of up to ten years.

Transfer pricing relates to the prices charged for commercial transactions between parts of the same corporate group (intra-group commercial transactions), i.e., the prices set for goods sold or services provided by one member of a related group to another.  APAs are arrangements that determine, before any intra-group transaction takes place, an appropriate set of criteria for setting the pricing for those transactions.

In the decision published on Tuesday, the Commission announced that it will investigate whether Ireland followed transfer pricing guidelines promulgated by the Organization for Economic Cooperation and Development (the OECD) in reaching transfer pricing agreements with Apple Computer.  After requesting that Ireland provide additional information on the practice of tax rulings, and in particular, on the tax rulings negotiated with Apple in 1990 and 2007, the Commission concluded that the rulings constitute “State aid” by allowing Apple to understate its profits in Ireland. The Commission stated that the tax ruling of 1991 was not substantiated by either a reference to comparable transactions or by a reference to a pricing method accepted by the OECD.

More to Come

The Commission has stated that “the fight against tax evasion” should be one of the main priorities of the EU’s Directorate-General for Competition. This increased attention likely means additional challenges for multinational corporations with a presence in the EU.

Responding to the Commission’s Initiative

Multinational corporations that have entered into APAs or other similar arrangements with EU Member States should reassess their positions, including negotiations in process, and prepare to respond to potential State aid claims.  Expertise in dealing with State aid issues and EC personnel and procedures is critical to an understanding of the risks and potential responsive measures. Technical tax expertise in transfer pricing and tax residence issues is essential in formulating the best possible responses to claims that tax rulings run afoul of standards applied by the Commission. For example, if it can be demonstrated that the income reported by the company under an APA corresponds to the level of economic activity in the jurisdiction, then a claim of inappropriate State aid can be refuted.

Sophia Dipla contributed to this article.

© 2023 Covington & Burling LLPNational Law Review, Volume IV, Number 276

About this Author

Michael Caballero, Tax Practice Attorney, Covington & Burling Law Firm

Michael Caballero is a partner in the Washington office and a vice chair of the Tax Practice Group.  His practice focuses on international tax matters, including structural and transactional tax planning, tax controversy and other government relations and tax policy work.

Mr. Caballero recently served as International Tax Counsel in the U.S. Treasury's Office of Tax Policy.  While at the Treasury, he participated in the development of legislation, regulations and administrative guidance concerning international tax matters; oversaw the U.S. tax treaty program; and...

Lee Kelley, Corporate tax attorney, Covington & Burling Law Firm

Lee Kelley is a partner in the Washington office and a member of the Tax Practice Group.  Her practice focuses on corporate tax matters, including structural and transactional planning.

Ms. Kelley recently served as Deputy Tax Legislative Counsel at the U.S. Department of the Treasury.  While at the Treasury, she participated in the development of legislation, regulations and administrative guidance concerning corporations and their shareholders, partnerships, exempt organizations, and tax credits, including guidance related to recent cases.

Samuel Maruca, Corporate tax lawyer, Covington

Sam Maruca has practiced exclusively in the area of federal income tax since 1983, focusing in recent years on large-case controversies, including complex transfer pricing disputes. He has represented both U.S. and foreign-based multinational companies in the biopharmaceutical, information technology, internet commerce, communications and media, consulting services, heavy manufacturing, and retail sectors, in matters at the audit level, in IRS Appeals, in mediation, in competent authority, and in the courts.

His expertise includes the preparation of opinion...

Reeves Westbrook, Covington, Corporate tax attorney
Senior Counsel

Reeves Westbrook is the co-chair of the firm's tax practice group.  His practice concentrates on the needs of large corporate taxpayers, including both counseling and tax controversies.

Mr. Westbrook has provided counseling on international asset transfers and tax optimal corporate structures, acquisitions and dispositions, cross-border transfer pricing, cross-border financings, tax credit planning, foreign and domestic joint ventures and partnerships.  Mr. Westbrook also counsels clients on regulatory and legislative issues and matters before the national office...

Johan Ysewyn, Covington, Antitrust lawyer

Johan Ysewyn advises on all aspects of EC, international and Belgian antitrust law, including merger control, compliance, cartel and leniency issues and abuse of dominance cases.  He acts as the head of the firm’s EU Competition group, working from our Brussels and London offices.

Mr. Ysewyn's practice has a strong focus on global and European cartel investigations and he has represented companies from a range of sectors.  He is also one of the leading experts on EU state aid issues, working both...