Contact Us


Disruptive Competition Project

655 15th St., NW

Suite 410


Washington, D.C. 20005

Phone: (202) 783-0070
Fax: (202) 783-0534

Contact Us

Please fill out this form and we will get in touch with you shortly.
Close

How Would Hercule Poirot Approach a State Aid Investigation?

· January 16, 2015

Categories

The debate of the last couple of years about corporation tax in Europe resembles a popular ‘whodunnit’: point at an obvious suspect before realising that things are not as they seem. The storyline is still being written, but it risks taking a shortcut by identifying some politically convenient suspects, without uncovering whether any wrongdoing has occurred. This would certainly not please the fictional Belgian detective Mr Hercule Poirot who was insistent that “It is the brain, the little gray cells on which one must rely. One must seek the truth within–not without.”

It is to that standard the European Commission’s competition enforcement teams must live up as they investigate claims that state aid has been granted by certain countries to certain companies.

As we have written previously here on DisCo, there has been much debate about corporation tax in Europe recently. The debate has sometimes assumed that Internet companies pay less corporation tax than other firms while the opposite is true according to the European Commission’s expert group: they pay many times the average effective rate of European firms. In this political climate Europe’s competition enforcers, DG Competition, have opened state aid investigations into some European countries’ tax rulings to see if the arrangements provide firms with an unfair advantage.

Today DG Competition published its initial decision into the possibility that Luxembourg provided state aid to Amazon. The key question here, given that this is a state aid investigation, is whether Luxembourg provided Amazon with an advantage by making a selective tax ruling, i.e. favouring it over rivals in a way that would distort competition within the EU. The Lux Leaks, and the fact that the European Commission recently announced it will look at the tax practices of all member states, show that such rulings are widespread.

The fact that they are so widespread makes it seem less likely that rulings are selective. To establish that, the Commission will need to review thousands of rulings, as without those it cannot know if this is selective and provides an advantage. The countries whose tax rulings and ‘patent box’ regimes are now being looked at include Belgium, Cyprus, France, Hungary, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Spain and the UK.

The wider issue of what to do about tax rulings in a climate where member states’ budgets are under pressure and there is public disapproval of tax planning should not come into this process. Rather, that is something for the democratic process beginning with initiatives such as the Commission’s expert group.

Following pressure for reform, what the European Union needs is to reform the tax system for the knowledge economy in an evenhanded manner. It should not be selective in who it investigates because of political expediency. It also needs to be careful that established international norms in taxation are not re-written after the fact, as this could make investors nervous about setting up in the EU. Clear, enforceable rules that stand the test time are needed and that cannot be done in a hurry.

What could be the consequences of the European Commission interpreting state aid rules as they apply to tax rulings? Could this result in a massive notification by member states of all existing and future tax rulings? Could this result in hundreds or even thousands of investigations into such rulings to check they are not ‘selective’? It would likely need to in order to avoid the charge that a few well-known corporations were singled out.

Globalisation, the single market and technological change all require coherent responses that ensure all parties know the rules and their responsibilities. The Commission’s investigations must be sure to avoid any hint of unfairly targeting famous brands or smaller European countries. To fall into that trap would be to risk creating more uncertainty over what the rules are.

The European Commission must have the patience of Hercule Poirot and not jump to seemingly obvious conclusions because of the political climate. Any future reform of the corporation tax system must be even-handed and look at the knowledge economy broadly. It should not use the competition system for political ends.

James Waterworth is Vice-President, Europe for the Computer & Communications Industry Association (CCIA).

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.