EU court defeat shows peril in applying ‘selectivity’ to tax regimes

18th December 2015. Matthew Newman

Margrethe Vestager, the EU’s determined Danish antitrust chief, has doubled down on her conviction that national tax sweeteners amount to illegal state aid, opening an investigation into an agreement between McDonald’s and Luxembourg.

But this week’s EU court ruling on a Spanish tax-lease system for shipbuilders brings a sobering reminder: It’s one thing to show that tax incentives give multinationals a leg up, and quite another to prove that they grant a “selective” advantage that harms competitors.

The judgment on the Spanish system marks the third time that the EU’s lower-tier General Court has annulled a state-aid ruling on fiscal measures after concluding that the European Commission failed to show the “selective nature” of those regimes.

When investigating whether governments’ tax measures amount to illegal state aid, commission competition enforcers must establish that a measure gives an advantage to certain companies and distorts competition and trade within the EU.

Selectivity is the key element in Vestager’s probes of Amazon.com, Apple, McDonalds, Starbucks and a finance unit of Fiat Chrysler Automobiles. These probes focus on whether governments’ tax rulings gave them a “selective tax advantage” that wasn’t available to other companies in the same situation.

Another investigation is looking into whether Belgium’s tax breaks for “certain” multinationals gives them an unfair advantage over “stand-alone,” normal companies operating in the country.

Recent court rulings on state aid and tax should prompt Vestager to take a hard look at how EU investigators are establishing selectivity in these tax cases.

Spanish ruling

In a judgment yesterday, the General Court annulled the commission’s state-aid decision against Spain’s tax-lease system for shipbuilders.

The case involved tax breaks granted on the purchase of ships involving leasing and financing. The commission claimed that the measures gave an advantage to certain investors compared with their competitors. The court said the measures didn’t represent a “selective advantage” because they were open to any investor.

This ruling is important for the current tax probes for several reasons.

For starters, it backs up previous EU court rulings that annulled commission decisions on Spanish tax measures. These judgments dealt with tax amortization of financial goodwill when companies acquire foreign shareholdings, either outside the EU — as in the case with Banco Santander — or inside the EU — the case with Autogrill Espana.

Crucially, these rulings raised the standard of proof in state-aid cases for the commission. The court said the commission can’t find that a measure gives a selective advantage just by assuming there is an exception to the general tax rules — such as goodwill amortization on certain transactions. In fact, this exception is available to any company, and is thus non-selective, the court found.

In the Autogrill case, the court ruled that the commission must identify a particular category of companies which are favored by the tax measure. This is crucial in determining that the tax break is selective.

This principle is also backed up in a case involving Hungarian oil company MOL. The commission claimed that an exemption of a mining fee applied only to MOL. But in June, the EU Court of Justice annulled the state-aid decision, saying that even if a measure actually applies just to one company, the key element is that it was open to all companies.

Watchdog’s expansive view 

The commission seems confident that its investigations of individual tax sweetener decisions can prove selectivity.

And it argues that the Spanish tax-lease judgment doesn’t apply because it dealt with the tax treatment on specific financial transactions that the court determined were open to any investor.

But in the Spanish cases, the court is clearly reining in the EU watchdog’s expansive view of state-aid abuses.

The big problem for the commission may lie in the Belgian probe, which is tackling a “system” of granting tax breaks to certain multinationals. The measure allows Belgian units of multinationals to deduct “excess” profit — an advantage unavailable to companies operating solely in Belgium.

The commission will have to prove that the tax regime applies to only certain categories of companies. Here’s where the commission may get into trouble.

Vestager has said that the commission isn’t questioning the general system of countries’ granting tax rulings. But in the Belgian case, the commission is doing just that. It’s concerned about the treatment of certain multinationals compared with “normal” companies that aren’t part of a large multinational group.

If the commission ultimately rules against the Belgian tax measure, EU judges may wonder whether this category is actually specific enough. They could turn to the Spanish and MOL decisions to argue that the category of “certain” multinationals is too broad and not selective.

The commission is bound to find that granting a benefit is selective when it compares the advantage to a normal taxpayer. That’s because only multinationals are faced with the problem of transferring profits between subsidiaries based in different countries.

But why should the commission compare multinationals’ tax treatment to a company that is based in Belgium and operates only in that country?

These questions may dog Vestager as she wraps up the Belgian case and then faces the inevitable appeals at the European courts in Luxembourg.

	Eliot Gao

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