Introduction

Ireland’s sugar sweetened drinks tax has been deemed compatible with EU State aid rules and cleared by the European Commission. The aim of the sugar tax is to tackle obesity and other sugar related diseases by incentivising consumers to switch to healthier alternatives and encouraging producers to reduce added sugar content in their drinks. It imposes levies of 16 cent and 24 cent on drinks with sugar contents in excess of 5g and 8g per 100ml respectively and is expected to generate a total of €40m in Irish tax revenue annually. The tax came into force on 01 May.

The Commission concluded that the Irish tax’s scope and overall design is consistent with legitimate health objectives and does not unduly distort competition in the drinks industry. This decision follows the introduction of the tax by a number of EU Member States, including in the UK just a few weeks ago.

When can a tax measure be illegal State aid?

Although EU Member States have significant autonomy in relation to taxation, the tax system of each Member State must respect the fundamental EU Treaty principles such as free movement and competition law, including the rules on State aid. The European Commission has always had the power to investigate taxation as a matter of State aid, but has been more active in this area in recent years. Illegal State aid does not necessarily always involve a direct grant of money by the State; it can also include forgoing additional costs from the beneficiary company.

The key issue in looking at taxation from a State aid perspective is whether the measure is “selective” in nature. Therefore, if a certain company is exempt from paying a tax that its competitors must pay, that company benefits from a competitive advantage and that tax exemption may amount to illegal State aid. This is the approach taken by the European Commission in its recent enforcement activities against the tax rulings of large multinationals (such as those in the Apple, Amazon, Fiat and Starbucks cases).

On the other hand, where a tax is very general in nature, such as the VAT regime, it will generally not confer a selective advantage on any individual or company and will therefore be compatible with State aid rules.

The sugar tax

While the new sugar tax is certainly closer to a general VAT-style measure, rather than a highly selective Apple-style tax ruling, the State aid risk was that the sugar tax could have been deemed to unduly favour producers of non-sugary drinks who did not have to absorb the tax or pass it on to their consumers.

EU guidance on State aid (to put it simply) suggests that levies to discourage activities for health reasons are less likely to fall foul of this "selectivity" criterion for the purposes of a State aid analysis because of the health policy reasons underpinning such measures. Other objectives, such as regional or industrial policy, do not enjoy this same protection.

Notwithstanding that the sugar tax was quite general and proportionate to its aims, Ireland notified the measure to the Commission in February 2018 to obtain legal certainty of compliance with State aid rules. In this instance, the Commission was satisfied that the tax measure was applied in a non-discriminatory manner so as to not distort competition. The Commission concluded that soft drinks can be assessed differently to other sugary products because they are the main source of calories devoid of any nutritional value and thus raise particular heath issues, such as obesity, compared to other products. For these reasons, the Commission concluded that the sugar tax was proportionate to the health objectives pursued and did not constitute State aid.

Of course, this is not the first time the European Commission has looked at Irish tax practices from a State aid perspective and may be part of an overall cautious approach by Irish authorities, given the recent adverse findings in Ireland's air travel tax case and (infamously) in €14bn the Apple tax ruling case.

Notably, unlike in the UK where the sugar tax proceeds are applied to the promotion and improvement of sport in schools, receipts from the Irish sugar tax will go directly to the Revenue Commissioners. Commentators have also noted that the revenue ultimately derived from the tax may be limited as many producers such as Coca-Cola and Lucozade have already lowered the sugar content of their drinks to avoid it, releasing new zero and low-calorie alternatives. Arguably, this is indicative of its success as a health policy measure.