(Bloomberg) -- Fiat Chrysler Automobiles NV and Luxembourg headed to the European Union courts in the first round of a battle pitting the likes of Apple Inc. against EU regulators who singled them out during a crackdown on controversial tax deals for multinationals.
In a hearing at the EU’s second-highest court on Thursday, a Fiat unit and Luxembourg challenged the EU’s order for 30 million euros ($35 million) in back taxes in a closely watched case that may preview the fate of far larger tax bills meted out by the bloc’s regulators since 2015.
The commission’s state-aid investigators started work in 2013 to unearth what they deem to be the most problematic examples of otherwise legal individual tax agreements -- or tax rulings -- doled out to companies. The most startling decisions since the Fiat case was a record-breaking order forcing Ireland to recoup 13 billion euros in back taxes, plus interest from Apple. Appeals have been piling up since 2015 as governments clamor for guidance on state aid to companies from the EU judges.
“We are here to put a stop to the arbitrary nature of this, we are here to put a stop to the complete legal uncertainty that arises from the commission’s approach,” Denis Waelbroeck, a lawyer from Ashurst, which represents Luxembourg, told a five-judge panel at the Luxembourg-based EU General Court.
This is the first case that “is finally going down the road of judicial review to see whether the commission’s policy approach and strategy, and in some ways an extension of the state-aid rules, going one step further in the tax arena than it had previously, will withstand judicial scrutiny,” said Howard Liebman, a tax partner at law firm Jones Day in Brussels, who isn’t involved in the case. “That is why it is critical.”
The EU courts may give clarity on whether the regulator’s findings of a selective economic advantage is justified in such cases. Lawyers for the Fiat unit told the EU judges that the commission is trying to make new law.
The company feels “that their reputation has been unjustly tarnished by the contested decision,” which accuses the unit and all of Fiat Chrysler of unlawful tax avoidance, Juan Rodriguez, a Fiat lawyer, told the court.
The decision to set up the Luxembourg unit in 1997 “had no correlation whatsoever with corporate income tax treatment, either then, or subsequently,” Rodriguez said.
Paul Gallagher, a lawyer for Ireland which is supporting Luxembourg in the case, said the commission’s approach was “very alarming.”
This “has enormous implications for all member states and gives the commission a role in tax administration that is nowhere provided, and would represent a huge expansion of their competence,” he said.
The commission, however, said that its state-aid findings related to Luxembourg don’t criticize the country’s tax system, but only those rulings that give companies preferential treatment.
“The main innovation in this Fiat decision is that it addresses a tax ruling that’s been granted to one company,” commission lawyer Bruno Stromsky said.
Paul-John Loewenthal, a second lawyer for the commission, said the EU had shown that Luxembourg had created a deviation for Fiat allowed for “different treatment than the treatment would be under the ordinary tax system.”
The court’s ruling in this first case, which will come in the next few months, will “set a precedent for the other headline state-aid cases involving tax rulings,” said Nicole Robins, a partner specializing in governmental aid at economics consultancy Oxera in Brussels
Starbucks Corp. was targeted on the same day as Fiat by a similar EU payback order of 30 million euros over its tax arrangements in the Netherlands. The court has fixed July 2 for the hearing in that case. Luxembourg has so far received the brunt of the EU’s decisions. Last year, the EU ordered Luxembourg to recoup 250 million euros from Amazon.com Inc.
An EU probe into Luxembourg tax rulings for McDonald’s Corp. is facing a number of “challenges” of a legal nature specific to that case, EU Competition Commissioner Margrethe Vestager told reporters after a hearing at the European Parliament in Brussels June 18.
On Wednesday, the EU accused Luxembourg of giving French energy utility Engie SA an unfair fiscal arrangement, and demanded 120 million euros in taxes. Concluding a state aid probe into the tax affairs of Engie, the commission said Luxembourg selectively deviated from provisions of national law to help lower the tax bill for France’s former natural-gas monopoly, then known as GDF Suez.
Luxembourg was among the first to be singled out in 2014 over its tax practices, when a group of investigative reporters published thousands of pages from secret arrangements between the tiny nation and companies including Walt Disney Co., Microsoft Corp.’s Skype and PepsiCo Inc. The so-called LuxLeaks publications have been used by the European Commission in its deliberations, but EU officials have since expanded their probes by seeking new information to find more “outliers.”
Luxembourg strongly rejects the commission’s conclusions in the Fiat case and is also challenging the EU’s decision on Amazon’s tax rulings.
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