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Tax Competition And BEPS Of Globalization

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The Dutch authority in a taxation ruling concluded that the amount paid by the Starbucks in Netherland for coffee roasting activity is an arm length transaction. The European Commission examined the ruling of the Dutch authority. The remuneration paid by the Starbucks is determined based on the report of transfer pricing that applied the TNMM. This amount is calculated based on the fixed percentage of cost base that includes all the cost to which star buck manufacturing has added value. The profit earned in excess of the taxable remuneration by the star buck manufacturing is transferred to a group outside Netherland as a tax deductible royalty expenses. This policy of the star bucks was criticized by the commission the two grounds. The first criticism was for inflated price that Starbucks manufacturing paid to the Switzerland Starbucks for the coffee beans. The second criticism was that the royalty paid for the Roasting of coffee beans does not reflect the current market value (Gormsen, 2016).

The arm's length principle is applied based on the comparing the situation of transaction between two independent companies and intra group transactions. The comparison can be useful if the economic entities compared is sufficiently comparable.  As per Article 8b of Dutch Corporate Income Tax Act 1969 and in accordance with international standards, the APS should be used in determining the arm's length remuneration for the purpose of transfer pricing. It is assumed that Starbucks manufacturing will use the arm's length transfer prices in conducting transactions with the related distributors. It should be noted that there is a need to test whether the company in incomparable situations are actually and legally hand equally (Gunn & Luts, 2015). In the system the commission does not apply the noncommissioned OECD convention for model tax but focuses is on the general principles of equal fiscal treatment under the European law. The methodology that has been adopted for providing the report regarding Transfer pricing does not provide an approach that is reliable in determining the market result. Therefore, it can be said that the arm's length principle has not been fulfilled. In the court of Justice, it was confirmed that if in the case of intergroup transfers the method of tax does not comply with the arm's length principle then this would mean that selective advantage is given to the concerned company (Thomson & Hardwick, 2017).


Application of OECD and BEPS guidelines

In this case, OECD guidelines are used for recommending the method for determining the arm's length pricing. There are wide range of OECD guidelines and the application of different guidelines will result in wide range of amount for taxable basis. It has been seen that based on the facts and circumstances of the individual taxpayers not all the approximations made are correct. The OECD guideline in paragraph 6.1 provides that royalty is a recurring payment based on the output of the user and in some cases based on Profit. In this case, the payment of royalty is not based on output, sale or profit. It has been saying that royalty fluctuates from year to year but the sales have not shown the same the fluctuations. Therefore, in this case it can be said that the OECD guidelines has not been followed in this case (González, 2017).

In this case, the European Commission scrutinizes the ruling of the Luxembourg tax authorities. The ruling confirmed the taxable income of the entity Fiat that is based in Luxembourg and the financial services that is provided by entity to other group companies. The company determines the taxable income based on the principle of transactional net margin method. In this case of Fiat taxable income is ascertained by determining the required rate of return on the risk capital by using the method of Capital Asset pricing model (Lyal, 2015). It was argued by the commission that the complex and artificial method used for calculating the taxable profit does not reflect the existing market conditions. The Commissioner further argued that certain unjustifiable assumptions was made in determining the capital base. The estimated remuneration that is used for determining the taxable income is very low compared to the market rate. Therefore, it was concluded that fiat has paid tax only on small portion of their earnings. The policy followed by the company resulted in taxable profit that is 20 times lower than the existing market conditions (Wattel, 2016).

Consideration of ECJ in determining the arm’s length transaction

In the case of Fiat, it is the opinion of the European Commission that due to the unjustifiable economic assumptions in the application of transfer pricing method the capital base is lower than the actual capital. In addition to this in the Fiat case, it is the opinion of the European commission that the remuneration applied to the lower capital base does not reflect the actual market rate (Mason, 2017).

The Fiat finance and trade provided financial services to intragroup car companies. As a result, the company was engaged in different activities which many fiat companies across Europe. On comparing the activities of the Fiat finance with other banks, the income of the Fiat finance could have been determined. However, the ruling suggested a more complex method of determining income.  In accordance with the OECD transfer, pricing guidelines transfer price should be set at the market rate. In this case Fiat Finance services has provided loan to inter group companies at a lower rate. Therefore, it can be said that transfer-pricing guideline of OECD has been violated. In this case, the organization for economic cooperation and development guideline has been be misapplied (Chisholm, 2017).


The OECD transfer pricing guidelines for the multinational companies was first drafted on June 27 1995. This guideline have been developed continuously and updated regularly resulting in the current guideline. In the OECD Guidelines the guidance relating to the implementation of the arm's length principle that is used for valuation for the tax purpose in the cross border transactions are provided. In the globalized economy, it is the responsibility of the governments to ensure that the multinational enterprises does not transfers the profit artificially to other jurisdictions. The government should ensure that the tax base reported by the multinational enterprise should reflect the economic activity undertaken by the enterprise in that country. From the taxpayers prospective the transfer pricing guideline is important to eliminate the double taxation in the cross border transaction between the associated enterprises (Cachia, 2017). The transactional method is given priority by the OECD guidelines as it is considered the most direct method of determining comparability. In case the transactional method is not applicable then transactional net margin method or profit split method is used for establishing comparability. In the OECD guidelines, the CUP is not given priority in the transactional method. If the results of the transactions are comparable then according to the OECD rule, business strategies are considered (Mason, 2017). The strategies includes expansion of market, market penetration, savings of cost and others. In the transactional net margin method, the profitability of a state of transaction is compared with other transactions. This is used to determine whether transfer between inter group companies are in par with other unrelated companies. The BEPS report suggested transfer pricing guidelines this amendments was implemented in the OECD guidelines. On analyzing the cases, it can be seen that the European Commission has found that advance pricing agreement provided by Netherland to Starbucks and Luxembourg to Fiat subsidiaries are illegal state aids. In the preliminary decision, the commission concluded that selective tax advantage was granted by Luxembourg to fiat financing company. In Netherland, selective tax advantage was given to Starbuck coffee roasting company star buck manufacturing. In the case of Starbucks, it was the opinion of the European Commissioner that advance-pricing agreement has sanctioned wrongly the accessories payments made to be related parties. The commission found that because of this sanction most of the profit of the company was shifted abroad where it was not taxed.  The Commissioner held that the service provided by the Fiat finance to other subsidiaries is similar to that of a bank. Therefore, it was unacceptable to calculate the taxable profit based on percentage return on capital employed for the financing activity. Therefore, it can be seen that the commission has considered and implemented the OECD guidelines and BEPS recommendation for determining the arm's length transaction for intra group services (Douma & Kardachaki, 2016).

The Article 107 (1) of the Treaty functioning of the European Union provides that if a member states provides any aid through the resources of the state that distorts the competition among the member states is considered as illegal and incompatible in the trade between inter member states. In determining the state aid the concept of advantage and selectivity are distinctly important (Douma & Kardachaki, 2016). However, in the recent cases of the commission it can be seen that the focus has been the examination of "selective advantage" rather than separately analyzing the requirements. It can be seen that the Commissioner has deviated from its earlier practice where it consistently assessed the presence of selectivity and advantage in a separate manner. In the earlier state aid investigations, the commission did not challenge the application of its own transfer-pricing rule by the member states for specific transfer pricing agreements.  It has been seen that the new approach of the commission has immensely affected the practical applications. In the transfer pricing cases, it can be seen that the commission has disagreed with the application of the principle of arm's length transactions. It should be noted that the commission has not challenged the transfer pricing law that have been implemented on the involved countries instead (Evertsson, 2016). However, the commission has challenged the transfer prices that have been agreed on the tax ruling that are not in consistent with commissions interpretation of the arm’s length transaction.  In these cases, the Commission has arrived at different conclusions that the tax officials and the commission regarded it the absolute truth. The commission concluded that the decision of the tax officials have provided selective tax advantages without considering the fact that weather similar advantages would have been granted to comparable circumstances. The consequences of this conclusion is that any administrative decisions relating to tax is a subject to 10 years uncertainty. The State aid is not a suitable tool to deal with complex transfer price in situation that are covered in the text rulings. Therefore, number of concern is raised in the investigation of the commission (Bauckloh et al., 2017). The fundamental principle of a tax law is that changes are not applied retrospectively but in future. It is necessary that the companies should be able to reliably estimate the tax obligation so that they can appropriately structure their investment. The tax rulings only deals with domestic tax laws and treaty law for specific business activity or investment structure. The changing of the tax rule with retrospective effect for unpaid taxes for up to 10 years questions the certainty of the laws and rules. The BEPS action plan concluded that the premises on which the loopholes in the Global tax system is address is through adoption of legal changes in the Global coherence. It is done by providing the business predictability and certainty. The commission did not respect these basic premises as the decision lacks Global coherence and have increased uncertainty (Morgan, 2016). In the European Union the members sovereign Nations and has the right to design their own tax rules. It can be said that state aid cannot be used as a tool to undermine the sovereignty of the member states. The investigation of the commission currently seems to be violating the sovereignty of the member states. The organization for economic cooperation and development has voice concerned in its BEPS Action Plan. The concern was that the consensus-based framework is replaced with the unilateral measures. This could lead to chaos and uncertainty in the Global tax system. In addition to this, it could also lead to the emergence of double taxation system. In providing its recommendations, OECD adheres to ambitious schedule in order to combat the perception of tax avoidance by the multinational Enterprises. The action of the commission undermine the effort of the organization for economic cooperation and development for establishing a conscious based framework post BEPS.


In selecting the appropriate method for transfer, pricing the OECD guideline has provided five methods to approximate the arm's length transaction between two companies of the same group. These methods are comparable uncontrolled price method, cost plus method, the transaction net margin method, the resale minus method and the transactional profit split method. In the OECD guidelines, there is a distinction between transactional profit method and traditional transaction methods (Campbell & Helleloid, 2016). The guidelines have declared a preference for traditional method of transactions like CUP over the transactional methods such as TNMM. It is explain in the guideline that multinational corporations should retain the freedom to apply the method that is described in the guidelines for establishing the transfer price if the methods satisfies the consulate principal.

The European Court of Justice has earlier examined the issue of transfer pricing rule in the cases of direct taxation. In recent years, the European Court of Justice provides a more substantial judicial discussion on the applicability and liability of transfer pricing rules particularly the arm’s length transactions. The cases have shown that European Court of Justice wants more reconciliation between the traditional Transfer pricing rule and the requirements related to fundamental freedoms (Hassan, 2016). The decisions of the European court of Justice has shown that the concept of arm's length transaction is applied in a more general way in the cases. In this background, it can be said that a reconciliation between the European tax law and treaty law is possible. The analysis if the recent decision have shown that European Court of Justice has moved the transfer pricing control in a state that the arm's length standard will gradually be eroded and a new model has to be developed for its replacement. The main reason for the replacement will be that the court does not give importance to the economic consideration of the multinational corporations. Therefore, it can be said that OECD guideline is more desirable than the guideline provided by the European court of Justice (Kavanagh & Robins, 2015).

The decision of case of the commission has huge implications. It is predicted that because of the decision of the commission it has become more troublesome for the European Union States to give favorable tax rulings to the companies. The example of the recent cases are the state aid that is given to Apple by Ireland. In particular, these decisions have shown that any favorable tax rulings is regarded as an illegal favorable benefit to the company (Haslehner, 2016). The European court of Justice by the decision of these cases is sending a clear message that any favorable benefits given to a multinational enterprise by remember state through tax ruling is illegal state aid. It is because this hampers the competition among the markets of the member states. The European Court of Justice argues that justifiable basis should be used for collecting tax. The European Court of Justice states that unjustifiable and complex process should not be used for computing tax that is payable. Therefore, it can be said that European court of Justice have ensured that the tax collection system becomes less Complex and is based on a justifiable ground. Based on this it can be concluded that the above cases and the decision of the European Court of Justice has simplified or improved the taxation system currently prevalent (Honore, 2015).


The European Commission has highlighted the need for supporting the developing countries for utilizing the domestic resources by encouraging development in line with good system of taxation. In this section the transfer pricing as adopted by the developing countries are discussed. The initiative taken by the European Commission has a very favorable outcome in the development and overall business environment of the developing countries. The ECJ has argued that the transfer pricing and the arm’s length principle helps in maintaining the fair market value and thus encourages competition. This has a positive impact on the activities related to international trade and multinational Enterprises. The globalization has encouraged cross border transactions between the related entities as a result the transfer pricing has become important agenda. It can be estimated that among all the business transaction worldwide the two third of them is between inter group companies. It is more important for the developing countries because the economies have recently opened up (Law, 2014). This process of opening the economy have attracted investment from the large multinational enterprises as foreign direct investment. In the absence of any Transfer pricing guideline, it will not be possible for tax administration and the multinational Enterprise to refer to a proper guideline. However, it has been seen that the developing countries face is a lot of trouble dealing with Transfer pricing. The main problem is that the local administration is largely inexperienced with regard to transfer pricing. The organization for economic cooperation and development has initiated many efforts for establishing common grounds in the transfer pricing matters (Blockx, 2016). In order to provide sound recommendations relating to transfer pricing the generally the considerations should be made about the economic and political conditions. The sound recommendations can be made after assessing the legal preconditions and preconditions related to the tax matters. Therefore, it can be said that the consideration of the European Court of Justice has helped the nonmember states or developing countries in understanding the meaning of transfer pricing. The considerations has helped the developed countries to develop a regulation that will not encourage complex on unjustifiable basis for calculating tax. The decision will promote a more simple and justifiable basis of taxation in the developing countries. It is expected that multinational Enterprises operating in the developing countries will transfer products to related enterprises at the market price and not add discount price. Hence, it will help to maintain the competition in the market. Based on the above discussion it can be said that the consideration of the European Court of Justice has helped the developing countries to maintain a more competitive market (Cerioni, 2016).



Bauckloh, T., Hardeck, I., Wittenstein, P. U., & Zwergel, B. (2017). Do Some Multinational Firms Benefit from Competitive Tax Advantages in Europe? Evidence from Stock Price Reactions to EU State Aid Investigations.

Blockx, J. (2016). The Belgian Excess Profit Exemption: Tax Incentives for Multinational Groups as State Aid. Journal of European Competition Law & Practice.

Cachia, F. (2017). Analysing the European Commission’s Final Decisions on Apple, Starbucks, Amazon and Fiat Finance & Trade. EC Tax Review, 26(1), 23-35.

Campbell, K., & Helleloid, D. (2016). Starbucks: Social responsibility and tax avoidance. Journal of Accounting Education, 37, 38-60.

Cerioni, L. (2016). Book Review: Advanced Issues in International and European Tax Law. Intertax, 44(3), 284-287.

Chisholm, B. C. (2017). ICRICT Looking to a Future of Actual Tax Reform: An Organizational Analysis of the Independent Commission for the Reform of International Corporate Taxation. U. Cin. L. Rev., 85, 231-319.

DeNovio, N. J., Righini, E., & Gibbs, N. N. (2016). State Aid: What It Is, and How It May Affect Multinationals and Tax Departments. Tax Executive, 68, 15.

Douma, S., & Kardachaki, A. (2016). The Impact of European Union Law on the Possibilities of European Union Member States to Adapt International Tax Rules to the Business Models of Multinational Enterprises. Intertax, 44(10), 746-754.

Evertsson, N. (2016). Corporate tax avoidance: a crime of globalization. Crime, law and social change, 66(2), 199-216.

González, S. M. (2017). State Aid, Tax Competition and BEPS: Comments on the European Commission's Decisions on Transfer Pricing Rulings.

Gormsen, L. L. (2016). EU State Aid Law and Transfer Pricing: A Critical Introduction to a New Saga. Journal of European Competition Law & Practice, 7(6), 369-382.

Gunn, A., & Luts, J. (2015). Tax Rulings, APAs and State Aid: Legal Issue. EC Tax Review, 24(2), 119-125.

Haslehner, W. (2016). Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law. In State Aid Law and Business Taxation (pp. 133-161). Springer Berlin Heidelberg.

Hassan, M. (2016). Global Tax news. TAXtalk, 2016(57), 14-17.

Honore, M. (2015). State Aid and Taxation-All Clear.

Kavanagh, J., & Robins, N. (2015). Corporate Tax Arrangements Under EU State Aid Scrutiny. Eur. St. Aid LQ, 358.

Law, B. V. (2014). Transfer pricing: A step forward for Albania. changes.

Lyal, R. (2015). Transfer pricing rules and state aid. Fordham Int'l LJ, 38, 1017.

Mason, R. (2017). State Aid Special Report—Part 2: Legitimate Expectations.

Mason, R. (2017). Tax Rulings as State Aid FAQ.

Morgan, J. (2016). Corporation tax as a problem of MNC organisational circuits: The case for unitary taxation. The British Journal of Politics and International Relations, 18(2), 463-481.

Thomson, A., & Hardwick, E. (2017). The European Commission's Application of the State Aid Rules to Tax: Where Are We Now?. Journal of Taxation of Investments, 34(3).

Wattel, P. J. (2016). Stateless Income, State Aid and the (Which?) Arm’s Length Principle. Intertax, 44(11), 791-801.

Wattel, P. J. (2016). The Cat and the Pigeons: Some General Comments on (TP) Tax Rulings and State Aid After the Starbucks and Fiat Decisions. In State Aid Law and Business Taxation (pp. 185-194). Springer Berlin Heidelberg.


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