State Aid Rulings Decoded: What to Watch Out For
Fans of European competition policy will know that ‘state aid’ rules are a key pillar of ensuring European markets remain open and competitive and are not distorted by government subsidy. Some of the most recent developments in state aid investigations concern whether European government tax rulings for multinationals might constitute state aid, and provide an unfair advantage.
People are speculating about the wider impact from the recent rulings on state aid by Competition Commissioner Margrethe Vestager. Apart from the tax arrangements between Luxembourg and Fiat, and between the Netherlands and Starbucks, do they affect anyone else?
It seems likely these rulings will have a much wider impact on tax and investment policies in Europe, between Europe and its trading partners, and on the business climate. But what might those impacts be?
The first concern is the uncertainty about Europe as a place to invest and do business. Companies may fear retroactive decisions coming back to haunt them years later. After all, no company expects a fresh tax demand of up to €30m years that contradicts what the taxman previously told them to pay.
These rulings also drive straight at the heart of one of the most jealously guarded competences of European Union member states: tax policy.
As Caroline Ramsay from law firm Pinsent Masons says
It is highly likely that these decisions will be appealed but there is already considerable surprise that the Commission has commented so explicitly on national governments’ tax methodologies. This seems at odds with member states’ sovereign right to set their own taxation…
European Union action on tax matters normally requires unanimity. Use of the European Commission’s powers to prevent state aid, and distortions of the single market, bypasses that process in this sensitive area.
Constitutionally, this is uncharted territory, with some arguing the Commission is trying to impose tax harmonization on member states, perhaps out of frustration at the slow pace of reform.
The Commission’s decisions appear to reject tax rulings based on some of the transfer pricing methods laid out in OECD guidance, while legitimising its own preferred method. This step will obviously wrong-foot accountants, tax authorities and businesses who thought they were using settled methods. Is the European Commission validating the most appropriate method? Is this something that member states of the European Union are happy to see the Commission doing? The Luxembourg government for one seems to believe that the European Commission “has used unprecedented criteria in establishing the alleged State aid.”
It is clear that this will reduce member states’ room for manoeuvre. By blessing a particular method over others it also cuts short any debate about what the best methods are, something the OECD and others have been sweating over.
Another possible effect could be that in the future countries will need to notify every advance tax ruling to the European Commission to check compliance.
Lawyer Marc Sanders has described this as the “sword of Damocles” hanging over taxpayers heads, “creating either an extra compliance layer to all future tax matters in the EU or a requirement of advance clearances from EC.”
While the Commission might see this as far-fetched it is difficult to see how a country or a company can be sure that a ruling is ok given that the European Commission has invalidated rulings based on previously settled methodologies. Would countries dare to issue rulings without reassurance that their method will not be invalidated? Would companies dare to accept a ruling not being sure if the country in question is actually competent in the matter? On a more practical note, would the European Commission have the resources to review thousands of advance tax rulings?
Not only will this give governments pause for thought, but it will also have companies thinking. The first interpretation is that companies will think carefully before engaging in any devious practices; that would be a good thing. But the second is less encouraging: might investors question the certainty of tax arrangements in Europe, wonder whether they might ultimately be ruled invalid, and reconsider investing here? That would clearly be damaging to growth and job creation.
Internationally, any retroactive action to recover money from a company, something the European Commission requires in these first two cases, will necessarily have an impact on the tax declarations those companies have made in other countries. In Starbucks’ case this might lead to the Swiss or US treasury needing to return money to the company, something that might not please taxpayers there. The US Treasury has already complained about targeting of US firms and this might add another grievance to its list.
It is not only the possible effects of these rulings which are interesting. It is also worth pondering what comes next, starting with future cases of the same nature.
The first and most obvious question is: will there be cases against large European member states like UK, France and Germany? Until there are some may feel the big states are picking on the little ones. After all, the tax affairs of those countries and their companies have been frequently called in question with the oil company Total not paying any tax on profits according to L’Express and companies like Volkswagen and the Guardian Media Group having tax arrangements in Luxembourg.
Will the floodgates now open and will there be hundreds of cases on advance tax rulings? Will the European Commission be able to review every advance tax ruling in effect in Europe? Surely this would be necessary to establish ‘selectivity’ and to ensure that all parties are treated equally before the law.
Whatever the possible effects, the first rulings on state aid and advance tax arrangements are now out there. The question now is: where this will end? While as yet unconfirmed it seems likely that the countries and companies in question might appeal all the way to the CJEU given the precedents these cases set. We may have to wait years for more clarity with accompanying uncertainty before we get there.
In the meantime the necessary changes to the corporate tax system will keep being made. The European Union’s steps to promote transparency are to be applauded. However, it should be careful not to place European firms at a competitive disadvantage: any obligation in Europe would obviously apply to all European firms, but not to all non-European ones (or only as much as they trade in the EU). With that in mind, working with our partners through the OECD is the best route to a new, fair, international tax system.
The alternative is a work creation scheme for lawyers, accountants and lobbyists, and that won’t be popular with anyone, except lawyers, accountants and lobbyists.