Global Tax Alert (News from the EU Competency Group) | 19 September 2013

European Commission scrutinizes Member States' tax schemes under State Aid criteria

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Recently a number of media outlets (including The Financial Times (UK), Reuters (UK), The Irish Times (Ireland), Sueddeutsche Zeitung (Germany), Handelsblatt (Germany) and Neue Zuericher Zeitung (Switzerland)) have reported that the European Commission (EC) has asked a number of EU Member States to provide information related to certain tax-reducing measures which were granted by the Member States to corporate taxpayers.

The Member States which are identified as being the subject of the Commission's inquiry are Ireland, Luxembourg and the Netherlands, though other countries may also have been contacted with similar requests for information.

This development, while a preliminary step by the Commission, relates to the ongoing discussion on how multinational companies are taxed and mirrors wider efforts currently being led by the OECD to shed more light on international tax policy issues. This includes a specific action in the OECD Base Erosion and Profit Shifting (BEPS) Action Plan (Action #5) which sets out the desire to “Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.”

It should be noted that the current investigations are still at an early stage and formal proceedings have not (yet) been posted on the EC's Competition website. Despite relating to Member States' tax policies, the current scrutiny comes from the Directorate-General for Competition (DG Competition), led by Commissioner Joaquín Almunia. In general, tax matters are handled by Taxud, the Commission's Taxation and Customs Union Directorate-General, headed by Commissioner Algirdas Šemeta. However, whenever a certain Member State's policy measures may have a relevant impact in relation to competition in the internal market, DG Competition is the relevant competent body.

Many countries provide rulings for taxpayers, including for taxpayers intending to make significant investments in a country, in order to give certainty in advance on how transactions will be taxed. The question here is whether rulings provided by the countries concerned are preferential rulings, giving discretionary incentives, or simply set out for the taxpayer how the generally applicable law applies in their circumstances.

The information requests are probably driven by questions around whether a Member State's tax-reducing measure qualifies as State Aid. The current EU State Aid legal framework allows for the Commission to demand from the Member State a repayment from the recipient of an illegitimately granted tax benefit respectively from the addressee of the illegitimately granted tax advantage, i.e., the ruling. Such a repayment could potentially be demanded with retroactive effect from when the benefit was first granted. Additionally, contingent on the individual case, the EU State Aid legal framework allows for the Commission to impose fines and penalties on the Member State.

Preferential tax treatments will only be considered to be illegitimate State Aid under the Article 107 et seqq. of the Treaty on the Functioning of the EU if the following criteria are fulfilled:

  • The tax advantage under scrutiny effectively lowers the tax burden which normally applies;
  • The tax advantage is granted by the Member State or through the Member State's resources;
  • The tax advantage affects the competition and trade between Member States; and
  • The tax scheme is of a selective character.

At this stage, it remains to be seen whether, based on a case by case examination of the granted rulings, the above-mentioned criteria are fulfilled. Whatever the outcome, these new developments should be considered as significant; at a macro level, they represent a growing focus on the tax policies of individual countries, not just the companies operating under those policies. Moreover, the EU State Aid legal framework provides for a legally binding instrument which directly grants the Commission directly with far reaching influence and competence.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London
  • Alex Postma, Global Director, ITS
    +44 20 7980 0286
  • Chris Sanger, Global Director, Tax Policy Services
    +44 20 7951 0150
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Dr. Klaus von Brocke, EU Direct Tax Leader
    +49 89 14331 12287

EYG no. CM3809