Testing the limits of competition law
We expect the phenomenon of competition authorities making an expansive interpretation of their competition law remit to continue in 2018. National competition authorities are increasingly investigating policy areas more traditionally addressed by legislative efforts, demonstrating a willingness to use competition law tools to investigate areas where regulation is lacking or inadequate.
Nowhere is this trend more obvious than in the European Commission’s continued State aid investigations into the taxation of multinational companies. Events such as the leak of the ‘Paradise Papers’ have only served to increase the spotlight already being shone on the tax affairs of multinationals.
While tax legislative reform at the international and European level is ongoing, the Commission wants to see results more quickly. Commissioner Vestager has in particular highlighted the taxation of digital companies, noting that European tax systems based on a company’s physical assets are not well designed for modern ways of doing business. Claiming that domestic digital businesses pay less than half the effective tax rate of their offline equivalents, the Commissioner recognised that competition rules alone could not fix the issue. However, it is clearly an important part of her agenda.
The Commission has continued apace in relation to its fiscal State aid investigations with: (i) the conclusion of its investigation into Luxembourg’s tax treatment of Amazon, resulting in recovery amounting to around €250m; (ii) the announcement of enforcement action against Ireland for failure to recover monies in relation to the Commission’s August 2016 final decision in the Apple investigation; and (iii) the opening of a new investigation into certain UK tax rules.
The UK provisions subject to scrutiny allow certain exemptions from the application of the UK Controlled Foreign Company (CFC) rules, targeting tax avoidance for certain financing income (ie interest payments received on intercompany loans). The Commission is investigating whether these rules allow multinationals to pay less UK tax, in breach of EU State aid rules.
The Commission’s launch of the UK CFC investigation shows that Brexit has not dampened the Commission’s enforcement appetite vis-à-vis the UK. Moreover, it shows that the Commission is examining a wider range of tax scenarios for potential State aid than ever before.
It is also clear from the UK CFC investigation and the ongoing McDonald’s and GDF Suez/Engie investigations that the Commission has broader concerns than transfer pricing rules. Wider taxation issues such as double taxation treaties, exemptions from anti-avoidance rules and the qualification of certain hybrid debt instruments are of interest to the Commission.
In addition, public statements from Commission officials on the Amazon decision highlight that the Commission believes it does not need a formal tax ruling to be in place in order to investigate the tax treatment of a multinational company. Rather, it claims that the mere agreement of a tax situation through the acceptance of a tax return may be sufficient for a finding of State aid.
The uncertainty for companies and their tax advisers continues. It is now more important than ever that companies focus on not only the results of legislative reform and their structures going forward, but also analyse past structures and identify any potential risks. Adherence to black letter tax law may not be enough to avoid State aid investigations.
Eelco van der Stok, Tax Partner, Amsterdam
While the use of State aid to achieve wider reform goals is currently most apparent in relation to taxation, the European Commission has used State aid as a tool of reform in other key focus areas – energy and banking. The Commission has used State aid rules, in the absence of (comprehensive) legislation on the financing of renewable energy projects, to diversify the EU’s energy mix and to facilitate energy market liberalisation. In banking, State aid rules were used as a crisis management tool paving the way for extensive legislation leading to the Banking Union.
In 2017, the European Commission approved an aid package for an orderly wind-down of Italy’s Veneto Banca and Banca Popolare di Vicenza, and allowed a state-backed rescue to bail out Banca Monte dei Paschi di Siena. This use of the Commission’s State aid arsenal notwithstanding the existence of far-reaching banking legislation is a clear indication that State aid rules are seen as a fallback if concerns are perceived, in these cases regarding the consequences of the bail-in of creditors. The key takeaway from this is that even when legislation is adopted, companies should not discount the possible impact of State aid rules.
The Commission is continuing to see State aid as a flexible tool to be used where legislation is absent, or is in the Commission’s eyes insufficient, particularly in areas important to wider Commission policy drivers.
Andreas von Bonin, Antitrust Partner, Brussels
This expansive view and use of State aid can be seen as part of a general trend to push the boundaries of what competition law has achieved in the past. Other examples include how privacy and data protection issues may drive larger scrutiny of data in merger control. In addition, the ongoing investigation by Germany’s Bundeskartellamt into Facebook’s user privacy terms shows a willingness to use all competition tools available to drive a broader agenda – endorsed openly by Commissioner Vestager.
The Commission’s expansive view of its competition law remit will likely face its first big test in 2018 with the General Court expecting to hear the first of the appeals in the fiscal State aid investigations. It is impossible to predict which way the General Court will go but the Court of Justice’s judgment in the Intel case and the General Court’s overturning of the Commission’s prohibition of the UPS/TNT merger may be a sign that the European Courts are willing to apply a more critical eye to the Commission’s activities.
While State aid is a European concept, we are increasingly seeing State aid-like arguments in a world displaying more protectionist tendencies. As discussed in theme 2, EU foreign investment proposals single out purchasers benefiting from government funding. In addition, as seen in 2017 in the Boeing/Bombardier case, WTO rules are being used to combat potentially problematic state funding and we would expect to see more cases like this.
2018 will shed more light on the shape of any State aid regime in the UK post-Brexit. So far the UK government has been tellingly quiet on this. State aid rules are included among the list of treaty provisions that regulators envisage would continue to have direct effect and therefore still apply post-Brexit pursuant to the European Union (Withdrawal) Bill. While the exact shape of any regime is yet unknown, the UK will at a minimum have to comply with WTO rules and will more likely have a more advanced regime if recent EU trade agreements are to serve as an indication. The Ukraine–European Union Association Agreement contains nearly identical State aid provisions to those in the EU, and the EU–Singapore Free Trade Agreement extends WTO subsidy rules to cover services and not just goods.
2018 will bring more clarity as to what a post-Brexit State aid regime will look like in the UK. Current signs point to State aid being a part of any post- Brexit UK competition regime and the EU will not want the UK to be able to skew the playing field post-Brexit as demonstrated by the Commission’s new State aid investigation into UK CFC rules.
Looking ahead in 2018
In 2018, companies will need to consider:
- New areas of uncertainty – companies should continue to review their tax affairs to identify possible State aid issues, especially in relation to tax avoidance schemes. It is clear that adherence to the black letter rules of tax law may not be enough to escape State aid scrutiny. We have yet to witness the fallout from the most recent Paradise Paper leaks and the Commission may seek to investigate new areas. Therefore, while 2018 hopefully will deliver some guidance in the form of new legislation and potential court decisions, uncertainty will persist.
- US and international reaction – the current US administration’s tax reform plan may ease some State aid concerns by removing the aspect of ‘untaxed’ income. However, the global reach of the State aid rules and the Commission’s willingness to open investigations against high-profile multinationals mean that reactions and retaliatory actions from the US in particular may be more likely. State aid-like cases such as disputes under WTO subsidy rules are set to grow in importance, as seen by the Boeing/Bombardier dispute.
- Brexit – no matter the shape of the UK’s post-Brexit State aid regime, the EU will not want the UK to be able to grant advantages to companies operating there and so State aid will remain an important topic post-Brexit.
- Ongoing legislative reforms – 2018 and beyond will see further progress on a European Common Consolidated Corporate Tax Base (CCCTB), the implementation of the second Anti-Tax Avoidance Directive, country-by-country reporting and likely legislative proposals on taxing the digital economy. Therefore, digital companies in particular should actively monitor any developments and audit their existing structures.