Daily Tax Update - October 21, 2015: European Commission Rules Advanced Pricing Agreements Not at Arm's-Length are Illegal State Aid

European Commission Rules Advanced Pricing Agreements Not at Arm’s-Length are Illegal State Aid:  The European Commission announced two decisions today relating to Advanced Pricing Agreements (APAs) entered into between Luxembourg and Fiat and the Netherlands and Starbucks.  The decisions conclude that the APAs do not comply with the arm’s-length principle and, accordingly, are selective state aid.  Selective state aid generally is prohibited by Article 107(1) of the Treaty on the Functioning of the European Union, unless it is “compatible with the internal [European] market” under Article 107(2) or (3).  Because the Luxembourgish and Dutch authorities had not presented any arguments to indicate compatibility of the APAs at issue with the internal European market, the Commission initiated procedures under Article 108 that would require Luxembourg and the Netherlands to abolish or alter the aid within a period of time to be determined by the Commission.  The Commission also specifically drew attention to Article 14 of Council Regulation (EC) No 659/199967, which provides that a member state found to have provided unlawful aid “shall take all necessary measures to recover the aid from the beneficiary.”  In its announcement of the decisions, the Commission also noted that these decisions were part of a larger investigation into the tax rulings practices of EU member states.

Basket Options Listing Notices Modified:  Notice 2015-73 and Notice 2015-74 revoke Notice 2015-47 and Notice 2015-48, respectively, and provide additional details on the types of transactions, referred to as “basket option contracts” and “basket contracts,” that are listed transactions or transactions of interest for purposes of Treas. Reg. § 1.6011-4 and sections 6111 and 6112 of the Code.

These new notices narrow the scope of the original guidance by specifically describing the tax benefits that identify a transaction as a transaction of interest.  Robert Kovacev, partner in Steptoe’s Washington office, commented, “By issuing these notices, the IRS is admitting that the previous notices were overbroad.”  For more information, please contact Rob Kovacev at rkovacev@steptoe.com or +1 202 429 6462.