FFT is a Luxembourg company providing financial services, including intra-group loans, to other Fiat group companies. The investigation centred on a 2012 ruling by Luxembourg authorities which, in the Commission’s view, provided a selective tax advantage to FFT by allowing it to significantly reduce its Luxembourg tax base.
As in the Starbucks case, the Luxembourg tax ruling approved FFT’s use of the TNMM to calculate its taxable profit. The Commission’s opening statement did not challenge the use of TNMM (although the Commission suggested that the comparable uncontrolled price method, which consists in observing a comparable transaction between two independent companies and applying the same price for a comparable transaction between group companies, might have been more appropriate), but took issue with how TNMM was applied in that case.
In its press release, the Commission identified the following aspects of the calculation of FFT’s profitability as inconsistent with the arm’s-length principle:
- The use of a number of economically unjustifiable assumptions and downward adjustments to reduce FFT’s capital base. In the Fiat Opening Decision, the Commission argued that the tax ruling allowed FFT to hold insufficient capital aside to cover its intra-group exposure, particularly when compared to finance companies adhering to minimum capital requirements under the Basel II accords. As this “at risk” capital is remunerated at a relatively high interest rate (to reflect the risks involved), its reduction underestimated FFT’s overall profitability.
- The estimated remuneration applied to the already artificially reduced tax base fell below what would be expected under normal market conditions. In particular, the Commission noted in the Fiat Opening Decision that tax advice provided in relation to the Luxembourg ruling compared FFT’s operations against a “list of  comparable companies engaged in financial services.” It placed FFT in the lower 25 percentile of those entities, reflecting the fact (in their view) that FFT “bears limited risks.” The Commission challenged (i) the list of comparators (for example, two of them were central banks), and (ii) the fact that FFT was placed at the lower end of that risk scale. Moreover, the return on the capital backing FFT’s operations was considered to be exceptionally generous (being 0.87%, versus 2.85% which was the “risk-free rate” in 2011 (based on German government bonds)).
As a consequence of the assumptions in the Luxembourg tax ruling, the Commission estimates that FFT’s tax base was only one-twentieth of what it would have been had the arm’s-length principle been applied.
In the Fiat Opening Decision, the Commission also criticized the fact that the Luxembourg authorities fixed FFT’s tax base (within a 10% margin) over the five-year term of the ruling. In other words, FFT’s tax liability would not change appreciably even if there was a significant increase in its activities during that term. This point was not addressed in the Commission’s press release, and it remains to be seen if it was included in the final text of the decision.
Although Luxembourg and FFT have not yet announced their intentions, it seems likely that the Fiat Decision will also be appealed to the Court of Justice.