The fact that transfer pricing is more of an art than a science generates a good deal of uncertainty for multinational corporate groups with regard to their future tax liabilities. A group may decide on a transfer pricing methodology which it considers reasonable, and which its tax advisers agree is acceptable. But the risk remains that a national tax authority will disallow the methodology, possibly years after the event.
One way for a group to reduce uncertainty is to try to obtain a "tax ruling". This is a written clarification, issued by a tax authority to a taxpayer, about how tax law will be interpreted in a particular situation. Such rulings often last for a number of years, protecting taxpayers from the risk that an authority will unexpectedly change its interpretation.
Tax rulings are used in areas such as transfer pricing where there is uncertainty about how authorities will apply taxation provisions. They facilitate businesses' efforts to engage in long-term planning, and so tend to promote economic efficiency.
According to the European Commission, tax rulings could be used to provide covert subsidies to businesses, by providing abnormally favourable interpretations of tax law. However, even if in principle tax rulings fall under the remit of state aid law, there are obvious reasons why the Commission should stay clear of this area. State aid legislation is already at odds with the rule of law:
• it violates legitimate expectations by allowing one government authority to overrule the prior commitments of another government authority, to the detriment of individuals; and
• it requires the overruling to have retrospective effect.
To extend application of this to areas where there is already uncertainty about interpretation of the law is to compound existing wrongs. Whenever a tax ruling is issued, there would be the possibility that the Commission subsequently argues in favour of a different interpretation of the law, and demands retrospective adjustment of tax liabilities. Apart from violating the rule of law, this destroys the purpose of rulings which is to reduce uncertainty.
'EC v Apple: collusion of powers' will be published on the website on 29 October.
