This week Apple has very publicly found itself at the centre of an adverse State Aid ruling. The tech giant isn’t the only multinational to have faced such a challenge as a result of a favourable tax rulings granted by member states. Last year the Commission found that rulings given to Starbucks by the Netherlands and to Fiat by Luxembourg also breached State Aid rules and launched an investigation into rulings given to McDonald’s by Luxembourg.
State Aid rules prohibit any advantage being granted by public authorities through state resources on a selective basis to any organisations that could potentially distort competition and trade in the European Union. The argument is that a tax ruling can constitute State Aid as it involves a tax authority waiving a right to collect taxes otherwise due. The Commission can impose a requirement that the state recovers the aid in question, with interest from the date of the grant.
The State Aid rules sit awkwardly with the principle that member states have autonomy over their own domestic taxes and in particular raise issues in respect of advanced pricing agreements (“APAs”). In an area such as transfer pricing there is inevitably an element of subjective judgement involved in each individual ruling. It is impossible to adopt a ‘one size fits all’ for companies in a particular market segment or geography as the transactions under review are almost always unique in nature. Currently any business which has secured a favourable APA in the UK could theoretically be at risk of having those arrangements reviewed under the State Aid rules and potentially be faced with having to make significant payments to repay perceived tax benefits received as a result of falling foul of the State Aid rules.
Following the Brexit vote companies with APAs in place with HMRC will be immune from the risk of a State Aid challenge. Much will of course depend on how the UK negotiates its exit as there is always the chance that certain aspects of the State Aid rules could be preserved if the UK seeks to negotiate to retain access to the single market.
- If the UK joins Norway, Iceland and Liechtenstein as a member of the EEA then the UK will be bound by the EEA Agreement which essentially replicates EU rules on competition law. State Aid activities will be governed by the EFTA Surveillance Authority under a framework that is very similar to the European Commission’s existing framework.
- If the UK, like Switzerland, joins the EFTA but not the EEA, then the UK will no longer be bound by the EEA Agreement and therefore will not face equivalent State Aid rules. In this case, the outcome for the State Aid framework will be more uncertain. For example, Switzerland has a bilateral agreement with the EU on State Aid in aviation, but broader State Aid rules that govern the rest of the EU and the EEA are not applicable.
- If the UK does not join either the EEA or the EFTA, but like Canada has a separate free trade agreement with the EU, then the UK would no longer be bound by State Aid rules. For example, Canada’s Comprehensive Economic and Trade Agreement (CETA) with the EU does not contain any specific State Aid provisions.
There is therefore scope to argue that Brexit eliminates at least some of the risk of a State Aid challenge being brought against companies with favourable APAs with the UK.