The Commission and Illegal State Aid Rules

Jim Stewart: The EU has been investigating five cases of potential illegal granting of State aid via favourable tax rulings. The Commission means by favorable tax rulings “letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or in the use of special provisions” (Commission Press Statement, 21, Oct. 2015)

The Commission’s recent decision confirms earlier preliminary findings in the case of two firms Starbucks and Fiat Finance and Trade. Three cases remain to be decided one of which is Amazon and a case that is very important for Ireland, Apple.


The Apple case is potentially the largest in terms of taxes to be repaid. Apple (Form 10K 2014 p. 19) states that the European Commission could require a change to ‘existing tax rulings’ leading to an increase in future taxes and recovery of past taxes. These have been estimated as being in excess of $2.5 billion (Tim Bradshaw and Christian Oliver, Financial Times April 29 2015).

The fundamental point about both decisions is that tax policies of both Luxembourg and the Netherlands have been found to be anti-competitive. They resulted in an “unfair competitive advantage over other companies” (Commission Press Statement, 21, Oct. 2015).

Commissioner Vestager stated:- “The decisions send a clear message: National tax authorities cannot give any company, however large and powerful, an unfair competitive advantage compared to others. For most companies, especially the small and medium sized, I hope this is a reassuring message – for those who have paid their fair share of tax”

The Commission views “competition policy as a vital part of the internal market”. At the core of EU treaties are fundamental freedoms of movement of:- goods, capital, services and people – a single market. The EU has developed rules and policies to oppose anti-trust behaviour, market dominance, excessive concentration and State aid. Interpreting tax regimes as an integral part of State aid has become a key part of the work of the Competition Directorate. Fines can be very large for example, up to 10% of the annual turnover of a company.

Reaction
The Irish Government announced after the preliminary investigation and decision last year that any unfavorable ruling would be appealed. But both the Dutch and Luxembourg Governments have now indicated they may appeal. The Dutch Government stated they were “surprised” at the decision and that the decision would be analysed “carefully before making a decision”

Their position is that transfer pricing policies are fully in line with EU requirements. The Luxembourg Government has voiced even greater criticism of the decisions. Finally Starbucks has also announced it will appeal the decision

Implications
In both the Starbucks and the Fiat Finance and Trade case the fines amounted to between €20 and €30 million. Although a relatively small amount, which may have already been largely spent on legal fees, it has implications in thousands of other cases, particularly for those firms using a Luxembourg Holding company strategy (Tom Fairless, Wall St. Journal Oct. 21 2015).

A key point is that in both cases the Commission used powers to collect information from “any other member state as well as companies”. Commissioner Vestiger stated “Since 2014, we have a new market investigation tool that requires companies suspected of receiving state support , and their competitors, to hand over information relevant to our inquiries – this tool has been helpful in today’s cases” (European Commission press release, 21 October, 2015).

Although the Competition Commissioner was careful to state that “each case is assessed on its merits, so today’s decisions do not prejudge the outcome of these [other] ongoing probes”. It is likely that the Commission will find against Ireland. There are likely to be few companies apart from Apple in Ireland affected by the decision and Ireland may receive substantial tax revenues, yet the Irish Minister for Finance has stated:- “.. in the unlikely event that the European Commission does find against Ireland in this matter we will use every legal avenue open to defend our position” (speech given at IIEA Tax Conference, 2nd December 2014).

Before any appeals are made, the Commission itself could seek clarification from the European Court of Justice (ECJ). The ECJ has a track record of supporting the Commission in cases involving the “four freedoms” and the Single Market.

Changes to existing tax regimes
The Commission has stated that one of the top priorities for the Commission is “to tackle tax avoidance, secure sustainable tax revenues and strengthen the Single market for business”. This involves ensuring a framework “to ensure effective taxation where profits are generated and a strategy to re-launch the Common Consolidated Tax Base (CCCTB)”.

A common consolidated tax base would help ensure the stated EU goal of ensuring “effective taxation where profits are generated”, and the OECD BEPS goal of ensuring “profits are taxed where economic activity and value creation occurs” (OECD, 2015, Explanatory Statement, p. 9). This EU policy although supported by several EU countries is strongly opposed by the Governments of Ireland and the UK.

While tax rates will not change, some countries tax regimes will become less attractive, which could have implications for attracting additional MNE investment and ensuring the continuing presence of existing MNE’s. It will become more difficult to grant favourable tax rulings, especially given recent decisions on exchange of tax rulings with the EU.

These decisions together with exchange of information on rulings should be seen as part of a process of movement towards a Common Consolidated Corporate Tax base.

The Commission decision refers to royalty payments to a Starbucks based company (Alki) in the UK “which is nether liable to tax in the UK, nor in the Netherlands”. As in the Apple case, this is another example of ‘double non-taxation’. The New York Times refers to this company as “mysterious, opaque box” yet “served a vital role” (Liz Alderman, New York Times Oct. 21, 2015).

The full version of the EU decisions when published in a few weeks may reveal further details of surprising and what many would consider unacceptable tax strategies.

Prof Jim Stewart

Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.

He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).