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The European Free Trade Association Surveillance Authority (EFTA Surv) has issued guidance designed to help public authorities and companies identify when public support measures can be granted free of state aid, including with regards to tax legislation and administrative rulings.
EFTA Surv is the equivalent of the European Commission for the EFTA member states, Liechtenstein, Norway, Iceland, and Switzerland.
The guidelines clarify the elements of state aid, such as the notion of economic activity, the origin of public funding, the granting of an advantage, the selective nature of the advantage, and the effects on competition and trade between European Economic Area (EEA) states.
According to EFTA Surv, in the area of taxation, public authorities are free to adopt tax measures concerning economic policy, as long as such legislation does not entail incompatible state aid, nor does it discriminate between comparable operators.
Significantly, the guidelines emphasize that administrative tax rulings between tax authorities and taxpayers must "respect the state aid rules," including in the area of transfer pricing.
"Where a tax ruling endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, that ruling may confer a selective advantage upon the addressee, in so far as that selective treatment results in a lowering of that addressee's tax liability in the EEA State as compared to companies in a similar factual and legal situation," state the guidelines.
Referencing decisions by the European Court of Justice, the guidelines go on to state that intra-group transactions not undertaken at arm's length can be considered illegal state aid, "by virtue of the fact that its tax liability under the ordinary tax system is reduced as compared to independent companies which rely on their actually recorded profit to determine their taxable base."
"Accordingly, a tax ruling which endorses a transfer pricing methodology for determining a corporate group entity's taxable profit that does not result in a reliable approximation of a market-based outcome in line with the arm's length principle confers a selective advantage upon its recipient," say the guidelines.
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