Legal experts: National digital taxes constitute state aid that must be pre-cleared by the EU
Some EU countries are rushing ahead with national digital taxes targeted at so-called “tech giants”. However, do these national digital services taxes (“DST”), as proposed by France and Italy, constitute state aid that must be notified to the EU prior to implementation? We asked a leading European law firm, Garrigues, and here’s a summary of their analysis:
State aid is under EU law defined as a Member State measure financed with public funds that confer a selective advantage upon certain firms, thereby creating distortions of competition within the EU internal market. The form of the measure is irrelevant and EU case law makes clear that a specific tax addressed to certain undertakings may be a selective advantage to other companies not subject to the tax.
However do the DST proposals involve the granting of state aid? The answers to the following questions would indicate that they do.
Has the Member State set out the scope of the tax in such a way as to be coherent with its declared objectives or has it exempted certain companies or sectors that should have normally been subject to the tax? The governments argue that local users create value through their participation and this should be taxed. Yet clearly not all online services, where users may create a value, fall within the scope of the taxes. This suggests the presence of a selective advantage favouring certain firms exempted from the tax.
Do the high revenue thresholds constitute a selective advantage to domestic firms? Firms need to have global revenues above 750 million Euros to fall under the tax. Conveniently, this means that only one French company falls within the scope of the French DST. This indicates a selective advantage.
These elements, and others, are indicative of de jure and de facto selectivity, since they would clearly produce a discriminatory effect against foreign companies. Statements made by different politicians at the national level (the French Finance Minister keeps calling it a “GAFA” tax referring to Google, Amazon, Facebook and Apple). This all suggests that the DST may have been designed so as to exclusively apply to very specific multinationals.
The lawyers conclude “that unilateral DSTs, such as the Spanish, Italian or French DST, can be considered to be ‘selective’ measures, as they clearly treat differently companies that are in comparable situations.” “…the DSTs would distort competition since they would be releasing non-taxed companies from the normal fiscal burden that they would have to bear under usual conditions, thereby distorting the level playing field.”
The French Conseil d’Etat recently issued an opinion which implicitly recognizes the significant impact that state aid rules have in the analysis of the DST measures. Though it expresses some unsubstantiated doubts as to the selective character of the DST, it also acknowledges that the European Commission itself has recently declared that other taxes, with striking similarities with the DST, constitute unlawful state aid. The French opinion therefore implicitly recognizes that there is a serious risk that the DST is considered by the European Commission to be state aid.
EU rules obliges a Member State, that is planning to grant state aid, to notify the measure in advance to the European Commission and to wait for its formal authorization. If a Member State does not notify the Commission then any aid granted would automatically be considered as “unlawful aid” and the DST measure could be suspended and revoked.
The legal experts conclude that “…a unilateral DST, such as the Spanish, Italian or French DST, can be considered State aid, since it clearly treats differently companies that are in comparable situations. Its implementation would therefore clearly be in breach of the EU State aid rules unless it is previously notified to and approved by the Commission.”
Read the summary of the legal analysis here.