In a further reminder of the teeth the European Commission ("Commission") has under its state aid powers to tackle unduly favourable tax treatment of large companies, on 11 January 2016 the Commission announced that the Belgian tax authority's rulings on various schemes exempting significant proportions of the profits generated by up to 35 multinational companies, were illegal under EU law.
This is particularly topical at present as major multinationals such as Google and Amazon are under scrutiny for their preferential treatment by member state authorities, including the UK and Irish governments. Many citizens are dismayed that whilst these high-profile companies are benefiting from tax breaks other companies which pay their normal, fair share of taxation suffer from the competitive advantage the favoured multinationals enjoy.
In previous editions of Compliance Inform we have reported on other cases the Commission has targeted. The EU state aid regime empowers the Commission to investigate financial or other support (e.g. grants, subsidies and loans) that confer an unfair advantage on certain undertakings (or businesses) and, as a consequence, distort competition in the marketplace.
The Commission's recent surge of interest in Member State tax rulings emphasises how favourable tax treatment can constitute such undue advantage as much as other more 'direct' forms. It also, more significantly, serves to reiterate the message that just because a taxation or revenue body authorises a particular scheme does not necessarily mean it is safe from scrutiny.
If the Commission learns of a ruling (more likely where the values are very great and the beneficiary a high profile corporate), then it can commission expert legal and accounting analysis of its own to assess its fairness and legality. If the treatment is found to be extraordinary and does not meet any of the exceptions (e.g. for aid in research and development or rescue and restructuring of companies in certain industries), then the recipient could be liable to repay the underpayment with substantial interest. As this case demonstrates, the Commission does not have to investigate the specific treatment afforded under relevant tax law by each individual ruling. Rather, as here, it can declare an entire programme or scheme of tax treatment incompatible with EU law if it infringes the principles of State aid.
In this particular case re Belgian Tax office was found to have exempted so-called "excess profit" of a company from taxation in Belgium. This treatment assumes that a multinational generates levels of profit that a hypothetical stand-alone company in a comparable situation would not make, which supposedly derive from being part of a multinational group of entities, notably 'synergies' and economies of scale. The result is that these organisations have ended up benefiting from 'double non-taxation, whereby such "excess profit" is actual recorded profit but ends up not being taxed within any jurisdiction.
In practice, Belgium's tax scheme for multinationals usually meant that these companies did not pay taxes on more than 50% of their actual profits and, in some cases, up to 90% of their profits were cleared free of tax.
The Commission found this to infringe the EU state aid rules, a finding it described as being based on three counts:
- Firstly, the rulings deviate from normal Belgian corporate taxation practice, by enabling the beneficiary multinationals to enjoy, in effect, a preferential, selective subsidy compared with their competitors who are liable to pay taxes in accordance with regular Belgian company tax treatment;
- Secondly, even assuming that multinationals do generate what might be termed "excess profit", this ought in any event to distributed across its corporate group in a manner reflective of "economic reality", in line with the so-called "arm's length principle" of allocating profits between group companies at market terms. Instead, under Belgium's scheme, alleged "excess profit" is simply discounted unilaterally from the tax base of a single group company.
- Finally, despite Belgium's insistence to the contrary, the Commission also refused to accept that the scheme could be justified by the need to prevent double taxation. The profits discounted from assessment are not taxed elsewhere and the Belgian authority did not even require companies to demonstrate any evidence that they were even at any risk of double taxation. Indeed, rather than preventing double taxation, the scheme actually gives a 'green light' double non-taxation.
The Commission's decision provides a stark reminder of its powers under the EU state aid rules and, specifically, their powers to target preferential tax rulings which amount to effective subsidies distorting competition in markets.