18 January 2016 Considerations of the European Commission ruling in Belgium state aid matter On January 10, 2016, the European Commission (the Commission or EC) announced that it has ruled that Belgium's so-called "excess profit" ruling system is illegal under European Union (EU) state aid rules. According to the Commission, the system allowed a group of companies receiving special rulings from Belgium to substantially reduce their corporation tax liability in Belgium on the basis of so-called "excess profit" tax rulings. Under this system, multinational entities in Belgium could reduce their corporate tax liability by those "excess profits" that the Belgian Government believes result from the advantages of being part of a multinational group. In its announcement, the Commission stated that it had determined the Belgian "excess profit" tax rulings to be against EU state aid rules for two reasons: first, because it gives multinationals who were granted the rulings the ability to pay less taxes than their competitors under normal Belgian tax laws, and second, it distorts economic reality by not allocating profits under an "arms-length principle" between members of the combined related party group. In its ruling, the EC ordered Belgium to recover approximately 700 million Euro in back taxes from the companies deemed to have benefitted from the "excess profit" rulings. The order to recover back taxes from the effected companies allows those companies to now appeal the case separately through the EC court system in addition to any appeal Belgium itself may pursue. The EC stated in its announcement that it also intends to continue its inquiries into the tax ruling practices of all 28 EU Member States to identify and address other perceived violations of the EU competition rules and treaty principles. To be considered unlawful state aid, an arrangement needs to have the following features: an advantage or benefit (e.g., relief of tax basis, tax rate or collection of tax), be granted through state resources, affect the competition between member states, and be selective in that it favors certain taxpayers in comparison with other taxpayers in a legal and factually comparable situation. If an arrangement constitutes unlawful state aid, the advantage or benefit should in principle be paid back, including interest, although some exceptions may exist. Multinational companies worldwide are evaluating the effect of the EU State Aid investigations on their existing tax positions and future tax planning, and the latest ruling in Belgium is just one additional factor to be considered. These evaluations include assessments of not only the current ruling but also the likelihood and results of any appeal as well as potential changes in tax law. Companies operating within the EU should carefully consider on-going EU State Aid matters and continue to monitor these developments and any related changes in tax laws in the EU member states. Under Accounting Standards Codification (ASC) 740, changes in tax law are accounted for when enacted. Changes in judgment that result in the subsequent recognition, derecognition or changes in measurement of a tax position are considered discrete events that are recognized in earnings in the period in which the change in judgment occurs. ASC 740 does not permit a tax position to be recognized, derecognized or remeasured due to changes subsequent to the balance sheet date but prior to the issuance of the financial statements. For a more detailed discussion of the EC's decision in the Belgium case, see Tax Alert 2016-89. — For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting
Document ID: 2016-0125 | |||||||||||
