Politics, not complaints, will play in any Google tax probe

3 February 2016. By Lewis Crofts.

The mantra that politics has no place in competition law is looking shaky, particularly when it comes to EU probes into tax sweeteners.

With British opposition politicians up in arms, EU antitrust chief Margrethe Vestager must decide whether to review Google’s UK tax deal. But any decision to open a probe could have profound political and administrative consequences.

Investigating the UK at time when a referendum on the country’s EU membership looms would be tricky enough. But scrutinizing Google’s brand of tax dealing could also open a whole new front in Brussels’ battle to ensure that companies pay their fair share.

On Jan. 23, UK Chancellor of the Exchequer George Osborne trumpeted a deal under which Google would pay 130 million pounds (about $190 million) in back taxes. The announcement soon turned toxic, as opposition parliamentarians said it was nowhere near enough. They demanded details on how the deal was struck.

Given the EU’s scrutiny of tax sweeteners to Apple, Starbuck’s, Amazon.com and others, Vestager was asked if she would open an investigation into Google. She said she would “if asked.”

This appeared out of step with previous probes — such as the scrutiny of a Belgian system of sweeteners for multinationals — which were launched following press reports, not complaints.

And criticism of the deal voiced by UK political parties — such as the Scottish Nationalists or the Labour Party — at first sight wouldn’t count for much in Brussels. Scottish politicians are unlikely to have the necessary status to have their grievances classified as a formal complaint.

The same may go for the 140,000 people who have signed an online petition for Vestager to investigate.

But all that may be moot. Vestager told journalists this week that she had received a “formal complaint,” without saying from whom. She added that it was too early to say what action she would take.

Nevertheless, if Vestager wants to investigate, she can. There’s no need to wait. While a formal complaint may provide some cover, there’s nothing holding her back.

Politics

And then comes the political calculation.

It’s not just American lawmakers and Treasury officials who will be riled, as they have been by Vestager’s tax probes into Amazon, Apple, Starbuck’s. This probe threatens to aggravate a European government at a fragile moment.

Relations between the EU and UK are delicate — given the current talks over renegotiating the EU’s main treaty — and her staff members have been treading carefully as far as British concerns go.

The commission has already put on hold a probe into “patent-box” tax breaks for intellectual-property assets, an investigation that would likely have affected UK interests.

The EU regulator has also held off on publishing details of a probe into the UK over tax sweeteners in Gibraltar, 14 months after opening the case. This contrasts with the speed and willingness of commission officials to get details of probes into Starbuck’s, Apple and others into the public domain weeks after those probes were opened.

Furthermore, the UK is deeply skeptical of the creeping powers of Brussels. If EU officials start sniffing around its sovereign tax powers, expect outrage.

Still, Google is doubtless an easy target for Vestager. Her staff has been crawling over the company’s business for six years or so, and another investigation would be welcomed in many countries and constituencies.

But subsidy probes target states, and Vestager must decide if her administration is ready to investigate George Osborne at this sensitive time. Such tensions haven’t stopped her in the past. Luxembourg, the duchy formerly run by her current boss Jean-Claude Juncker, has been the target of much of her attention.

Tax settlements

Politics, though, isn’t the only calculation. There is also the substance.

To date, the EU investigations focus on tax rulings — comfort letters that assure a company of its future tax exposure. This allows them to bring their business to a country in the knowledge that their taxes won’t exceed a certain level.

The UK deal with Google is different. It looks back.

The 130 million pound payment came after years of negotiation and covers tax unpaid in the past. If Vestager were to scrutinize this category of tax arrangements, some companies fear it could cast doubt over tens of thousands of negotiated settlements.

In the eyes of the commission and EU lawmakers, the two phenomena — tax rulings and settlements — could amount to the same thing: unfair and selective fiscal treatment. If one can be illegal, then so can the other, they might argue.

But companies will see this as a new front against their tax-planning practices, calling into question legitimate talks with a government on back taxes.

Concerns over Google’s UK tax deal appear to focus on whether the government’s deal was legal. Usually, state-aid cases start with funds granted lawfully — under national legislation — and then assess whether the payments was lawful under EU antitrust legislation, which prohibits subsidies that distort competition.

In this case, some complain that the Google deal was unlawful under UK law. This would imply that court action by rivals before English courts would be the remedy, rather than EU scrutiny from Brussels.

There is, perhaps, nothing to keep Vestager from digging into such settlements. But it would be a mammoth task for the EU to start policing infringements of national law for their state-aid implications.

Would the EU also look into France’s looming decision on Google’s taxes in that country to see if that, too, was legal?

In short, any Google case would feature more than a sensitive political calculation. EU enforcers will also have to assess whether they want to embark on a whole new category of tax treatment when they’ve barely gotten started on the first one.

	Eliot Gao