Wednesday, February 3, 2016

EU Report: give fiscal state aid recoveries to tax competition victims; sanction the culprits

In an annual report to the European Parliament on EU Competition Policy, MEP Werner Langen has proposed that the fiscal state aid rules be changed so that other EU states receive any recoveries. Thus, if Ireland loses in its investigation by the EC, it will have to recover some billions from Apple as punishment, and Langen proposes that Ireland--the "culprit"--not be allowed to keep the money. The Report:
Calls on the Commission to modify the existing rules without delay, in order to allow the amounts recovered following an infringement of EU tax-related State aid rules to be returned to the Member States which have suffered from an erosion of their tax bases, or to the EU budget, and not to the Member State which granted the illegal tax-related State aid, as is currently the case, as this rule provides an additional incentive for tax dodging;
Even if the proposal goes nowhere, one can understand why the sentiment would arise. When I first started looking at the fiscal state aid investigations, this element struck me as counter-intuitive: where a state has foregone revenue in order to lure business in contravention of the antitrust rules in the TFEU, the punishment is then to collect the revenues foregone. The narrative thus is that the state successfully cheated its EU neighbours of an opportunity to attract foreign investment and the punishment is a cash windfall.

This looks more like a punishment if you think the collection of revenues by the state will cause the investment to flee to other jurisdictions because the targeted state is not competitive but for the state aid. That might not seem likely for Ireland, both because Ireland's general corporate tax rate is still lower than much of Europe even without the extra padding of the state aid, and because the successful luring of Apple arguably had its intended effect, creating spillover effects that gave Ireland a first-mover advantage which now extends its attractiveness beyond the favourable tax climate. In that case the MEP's position on the cash windfall is sympathetic.

Even if it is sympathetic, it is hard to imagine redistributing Apple's foregone tax revenue to other EU members, when it is at least debatable whether any of the recipients hold out clean hands. Tax competition is so ubiquitous, so multifaceted, every victim is a culprit, too.

In a potentially even more problematic move, the report "[c]alls on the Commission to consider the introduction of sanctions, either against the state or the company involved, for serious cases of illegal State aid". The array of issues involved in sorting out that kind of power structure is vast.

On a side note, the report contains a long list of tax harmonization goals, and it includes an interesting call for the EC to get in on the multilateral exchange of tax rulings, which, via the OECD BEPS initiative, are to be automatically shared among countries under conditions of confidentiality, including restrictions as to their use for non-tax purposes. The report "Emphasises that the Commission must, as a matter of course, have access to data exchanged between tax authorities which are relevant in the context of competition law." I am not sure whether sharing tax rulings with the EC would be compatible with the OECD confidentiality framework.

A very provocative report that signals a growing amount of frustration with ongoing tax competition, and an increasing desire of some to use the fiscal state aid rules to stop it. Will be interesting to see where this takes the field.

1 comment:

  1. The report seems aligned with the more public and media friendly position that the European Commission has been taking: of ensuring the enterprises pay their fair share of tax. As you point out, State Aid does not assure that in any way. Frankly, they weren't ever meant to serve that purpose as they are, first and foremost, EU Competition Law. State Aid is, arguably, one of the most powerful mechanisms the EC has at his disposal and Margrethe Vestager is not shying away from using it. So what the EC, in practice, advocates for in the pending proceedings is merely that the country that provided the alleged benefit shall recover the aid. It is not possible to aim for more at this point in time, hence the report.

    The 'fair share' is a cynical argument given the shortcomings of the instrument.
    A further irony of the 'fair share of tax' argument is that, while there is an obligation to recover the amounts, the aid will not necessarily be recovered as tax (e.g. statute of limitations) and there would be cross-border tax relief consequences, leading to double taxation. Empiracly, the 'fair share' argument almost only seems to apply to non-EU multinationals at this point in time.

    It's hard to see tax competition going away with any of the current measures. Malta, for instance, has a tax system where you have a headline CIT of 35%, yet you can easily reduced the liability to 5% or less. All approved when they acceded to the EU and, for that reason, bullet proof when it comes to State Aid. Estonia has also an interesting system. They have a flat tax of 20%, but they do not tax corporate income when it is earned, rather when it is distributed. If it is distributed and the only the distributed portion. Thus providing an enormous cash-flow advantage. Would the to-be-relaunched CCCTB solve this? The CCCTB will only cover how to calculate profits (not when and how much to tax) and, even so, it has failed once before.

    On a final note, I share your confidentiality concerns. I believe there will be some backlash from Data Protection authorities (you may be interested in reading the reports of Article 29 Working Party on CRS, FATCA and exchange of information). The EU has a rather strong data protection framework in place and no actual compatibility work has been done to cater the interaction of tax measures with data protection. The only EU voice expression concerns is the said Working Party. I suspect, for instance, that the ECJ's Schrems decision may yet have implications regarding FATCA and exchange of information with non-EU Member States (although primarily for individuals).

    Yet ironically, while there may be issues with outgoing information, the EU cannot even assure that intra-EU information remains protected. I suggest you read this blog post about previously secret fiscal state aid studies that were released through a EU document discovery procedure: