European Commission Rules the Belgian Excess Profit Tax Exemption Illegal; Multinational Corporations Must Pay €700 Million in Back Taxes
January 11, 2016
The European Commission handed down a ruling to Belgium on their excess profit tax exemption today. The Commission concluded that the tax rule under article 185§2 of the Belgian tax code violates state aid rules under article 107(1) of the Treaty on the Functioning of the European Union (TFEU). The ruling requires the Belgian tax authority to discontinue the excess profit tax exemption and collect the approximately €700 million in back taxes from the 35 multinational corporations who benefited from the exemption.
The excess profit tax exemption is a rule that allows multinational companies to exempt income that is above the average revenue-adjusted profit of their stand-alone counterparts. The rule was originally meant to capture the implicit costs to an affiliate for the use of a parent’s intangible and difficult-to-price assets, such as a brand or reputation. The rule assumed that any supernormal profits gained by an affiliate is due to a parent’s intangible assets and should be implicitly deducted from income as a cost.
However, the Commission argues that the excess profit exemption violates arm’s length principles set forth by the OECD’s Model Tax Convention. If the excess profit exemption was compensating for an affiliate’s use of the parent’s intangible assets, then the exempted income of the affiliate should have been passed to the parent through the transfer pricing mechanism. Since the income was not passed back to the parents, the affiliate’s exempted income was not taxed by any jurisdiction resulting in “double non-taxation.” Thus, the excess profit exemption was a subsidy and not a correction for difficult-to-price intangible assets.
Moreover, the Commission argues that the exemption was not universally applied. Companies seeking the exemption had to apply to the Belgian tax authority to receive the exemption, and the exemption was only granted for four years. The commission noted that many of the companies granted the exemption had made substantial investments into Belgium in years prior to applying for the exemption. Thus, the exemption was rewarded as quid pro quo for the investment in the country.
The commission concluded that the excess profit tax exemption was a hidden subsidy that violated state aid rules and stifled competition within the European Union. As stated by Margrethe Vestager, the commissioner in charge of competition policy:
Belgium has given a select number of multinationals substantial tax advantages that break EU state aid rules. It distorts competition on the merits by putting smaller competitors who are not multinational on an unequal footing.
There are many legal ways for EU countries to subsidise investment and many good reasons to invest in the EU. However, if a country gives certain multinationals illegal tax benefits that allow them to avoid paying taxes on the majority of their actual profits, it seriously harms fair competition in the EU, ultimately at the expense of EU citizens.
The Commission has ordered the Belgian tax authorities to stop granting new excess profit tax exemption and remove the current exemptions. In addition, all exemption granted since 2006, when the measure was enacted, to the 35 multinational corporations should be retroactively rescinded, and the estimated €700 million in tax relief granted to those companies should be collected by the Belgian tax authorities.
The Commission has three more ongoing investigation concerning violations of the state aid principle. Tax rulings for Apple in Ireland, Amazon in Luxembourg, and McDonald’s in Luxembourg are all expected to be handed down over the next year. With strong pressure on the Commission to punish tax evaders after the Luxleaks, it is likely the Commission will rule in a similar fashion as today’s ruling. As such, the three prominent American companies named in the remaining cases should start preparing for the worst rather than hoping for the best.