The European Parliament is currently holding hearings with European Commission (Commission) President-Elect Jean-Claude Juncker’s commissioners-designate. Among those being questioned is Ms. Margrethe Vestager, the Danish official who has been tagged to be the new Competition Commissioner. While Ms. Vestager appears to be a relatively uncontroversial choice for the position, at least one issue that President-Elect Juncker has instructed her to focus the energies of DG Competition (DG COMP) on has drawn a significant amount of publicity.
In his mission letter to Ms. Vestager, President-Elect Juncker instructs the Commissioner-Designate for Competition to inter alia “mobili[ze] competition policy tools and market expertise so that they contribute [to…] the fight against tax evasion.” This fight has already begun, as pointed out by outgoing Competition Commissioner Joaquín Almunia. In addition to the usual suspects – OECD’s Center for Tax Policy and Administration is looking closely at Base Erosion and Profit Shifting (BEPS) and DG Taxation and Customs has its Platform for Tax Good Governance – DG COMP is getting more involved in the matter. As we have seen in other areas of law (e.g., energy and telecoms), EU Competition law permits the Commission to swiftly resolve (unilaterally) what it perceives to be a problem. The tool of choice this time is state aid legislation.
DG COMP’s State Aid arm has a Task Force on Tax Planning Practices. What are these civil servants reviewing? As has been recently noted in the press, they are looking at tax ruling practices in a number of member states. The practices of Ireland, the Netherlands, and Luxembourg are clearly under review as evidenced by the fact that DG COMP has opened formal investigations into their tax rulings for Apple (SA.38373), Starbucks (SA.38374), and Fiat (SA.38375), respectively. However, various sources also mention Belgium, Cyprus, Gibraltar, Malta, and the UK as likely future candidates for investigation. While it is true that member states have the right to set their tax rates at whatever levels they see fit, they may not arbitrarily apply their tax rules in such a way as to provide a specific tax payer with a selective advantage.
At issue in these three investigations are the so-called tax rulings - letters that are issued by the relevant tax authority - which give individual companies advance notice of how their corporate tax will be calculated or how specific tax provisions will be applied. For example, in Ireland’s case, the two rulings at issue concerned transfer pricing agreements, which in turn affected the calculation of the taxable profit allocated to two of Apple’s Irish subsidiaries. Both the Netherlands’s and Luxembourg’s investigations concern tax rulings that addressed Starbuck’s and Fiat’s taxable bases.
In each investigation, in order to determine whether the tax ruling is state aid, the Commission looks at whether: (i) the tax ruling conferred an advantage on the addressee; (ii) the advantage was selective; and (iii) the tax ruling distorts/threatens to distort competition and has the potential to affect trade between member states. If the answer to each of these is yes, then it is state aid. At that point, the Commission must determine whether the State aid is compatible with the EU’s internal market. State aid is considered compatible with the internal market on the basis of the exceptions listed in Article 107(2) and (3) TFEU. If the state aid, in these investigations taxes that the national authorities would have otherwise collected, is not compatible with the internal market the recipients will ultimately need to pay the taxes that they would have been liable for but for the preferential treatment.
It appears that the Commission is just getting warmed up. It is likely that other member states will be in correspondence with DG COMP in the near future. As the heat increases at the EU level, we would imagine that member states’ national authorities (both in investigated member states and otherwise) would also begin to quietly review existing tax rulings in order to ensure that they do not appear to be doing anything untoward.