State Aid and Transfer Pricing: The Different Perspectives of the European Commission and Multinational Entities

Abstract

Transfer pricing has become an integral part of the strategies of multinational entities due to the increasing volume of intercompany transactions. MNEs have recognized transfer pricing as an effective tool for allocating profits and as advantageous from a taxation perspective. In recent years, the European Commission has been more aggressive in reviewing the transfer pricing arrangements of multinational entities operating within the Union in order to curb agreements that unlawfully levy the tax liability of those entities. The purpose of this thesis is to examine how the Commission regards the legislation surrounding transfer pricing and compare that to the perspective of the MNEs.

This thesis studies transfer pricing from a legal point of view. Concepts like comparability and the arm’s length principle that form the basis for transfer pricing are explained and examined. The relevant transfer pricing methods are presented with the purpose of providing understand- ing for the choices made by the MNEs and the Commission. EU law, specifically State aid rules, are described and clarified.

The empirical research was conducted through analysing two EU General Court cases involving Starbucks and Fiat. The notable differences in perspective between the Commission and the MNEs concerned, among other things, the definition of selective aid, the content of the arm’s length principle and disguised tax harmonization. The key finding was that the fundamental difference in perspective was whether or not the Commission was entitled, under Article 107 TFEU, to question the tax rulings of national authorities.