Unilateral Digital Service Taxes and EU State Aid Rules: the elephant in the room

This post originally appeared on the Chillin’Competition blog.

We have always cautioned against the application of different rules and standards only to certain companies. That is a trend that appears to be in vogue these days. In some cases, this approach may threaten the consistency of the law and breach general principles. In other cases, the application of ad hoc rules would be in direct breach of EU Law itself.

Here is a perfect example that affects two areas that are of particular interest to the European Commission and to myself: tech and fiscal state aid. [Disclosure: I have examined these issues following a request from our friends at CCIA, who will also post this piece on their own blog. Below is my reasoning, you can make your own conclusion]

You have probably read on the news about the Commission plans to create a “digital service tax” (“DST”). This is a plan that was reportedly abandoned recently due to the opposition of some Member States (see here). Absent a harmonized EU DST, some Member States (namely France, Italy and Spain) have adopted or announced the adoption of their own unilateral DSTs. The declared objective of these taxes is to ensure that the provision of digital services is taxed in the jurisdictions where users contribute significantly to the process of value creation.

This is not the place to discuss the political opportunity or possible consequences of these initiatives nor to challenge wider proposals to reform tax systems (which may make sense), so let’s assume that these are legitimate policy initiatives. We will focus not on the idea, but on its execution.

As currently designed, it is obvious to me that the different national DST proposals would involve the granting of State aid (which doesn’t necessarily mean they are illegal, only that they need to be notified by the Commission for clearance).  Think about it:

First, the case law makes clear that a specific tax addressed only to certain undertakings may imply a selective advantage to other companies not subject to the tax. The key question is whether all the companies in the same legal and factual situation, having regard to the objective of the system, are treated in the same way. [See e.g. the Court’s recent Judgment in ANGED, where the CJEU considered that regional environmental taxes that applied to supermarkets but exempted commercial malls despite having a similar negative impact on the environment constituted a selective advantage to malls].

This means that one needs to verify whether the scope of the tax at issue is consistent with its declared objective or whether, on the contrary, it exempts other companies that should have been subject to the tax.

In the case of the DSTs, the current proposals do not target all activities where users create value, but only some, namely online advertising services, online intermediation services and data transfer services. This excludes any other services where users may also create value.

Second, the scope of the proposals is further delineated in the light of a high worldwide revenue threshold (both the French, Spanish and Italian proposals set a 750 million worldwide revenue threshold). But the case law also makes clear that crafting objective thresholds in such a way that de facto exempts domestic companies from the application of a tax can also amount to State aid.

The clearest examples are the recent Commission decisions regarding Hungarian and Polish turnover taxes on certain activities, now before the CJEU. In three separate decisions (here, here and here), the Commission considered that these taxes constituted State aid as they were based on particularly high turnover thresholds and were effectively designed to tax almost exclusively large companies (usually foreign companies) and not smaller ones (almost always domestic companies), in a way that was unrelated to the objectives sought by the Member States. [Evidently, the State aid nature of a measure does not depend on whether it is granted by Hungary and Poland or by France, Spain and Italy…]

Third, revenue-based taxes do not appear to be consistent with the declared objective of taxing digital services in the place where users contribute to the process of value creation. This is because users can create value in many ways regardless of the company’s turnover. Actually, this is precisely the reason why many people would like to see a change in merger notification thresholds only based on turnover.

Public statements from national politicians saying that SMEs and national companies have nothing to fear (see e.g. here, here –the French Government actually calls this the “GAFA tax” – or here) would appear to confirm that these initiatives have been crafted with addressees in mind, not just to tax digital services where users contribute to the process of value creation (a tax with a company nickname sounds a tiny bit selective…). This is a sort of Marxist (I mean Groucho) view of fiscal policy: “these are my principles, but to some companies we’ll apply others”. This is not just me saying it: the Danish, Swedish and Finish governments (not known for being soft on taxes) have also spotted the problem and opposed even the EU proposal (see here).

By treating differently companies that are in a comparable situation, unilateral measures such as the French, Italian or Spanish DSTs would, in my view, constitute clear State aid. It’s therefore surprising that none of these pro-European Member States have notified the projects so that the Commission can assess their compatibility.

In the light of the Polish and Hungarian precedents, one could anticipate that –regardless of its political views- the Commission will in any event ultimately intervene, or be forced to intervene.