State Aid, is it all encompassing?

State Aid, a constant in the headlines these days, arises where four conditions are satisfied:

  • there has been an intervention by the State or through State resources
  • the intervention gives the recipient an advantage on a selective basis
  • competition has been or may be distorted;
  • the intervention is likely to affect trade between Member States.

On 22 July 2015, it was announced that the European Commission was ordering France to recover €1.37 billion from Électricité de France (‘EDF’). The Commission has found that a tax exemption granted to EDF constituted State Aid. The exemption in the EDF case relates to the treatment of reserves which the energy company had built up between 1986 and 1996 with a view to renovating the high voltage transmission network in France. In 1997 when EDF restructured its balance sheet, the French authorities reclassified some of these provisions as a capital injection without levying corporation tax. It is this tax break which is at issue.

This latest order from the Commission comes against the back of in-depth investigations currently ongoing in relation to purported selective treatment provided by the tax authorities in Ireland, Netherlands and Luxembourg to Apple (IRE), Starbucks (NE), Fiat (Lux) and Amazon (Lux) (on these, I’d highly recommend reading my colleague Dimitrios Kyriazis’ posts-here, here and here). Additionally, the Commission has extended its information enquiry on tax rulings practice to all Member States (initially, the investigation was restricted to just seven).

On an even broader level, this current trend underlines a change in direction of the Commission on issues of direct taxation (a competence reserved to Member States, although this is largely accepted as qualified these days). The Commission now sees a role for itself in ensuring fair tax competition:

“In the worst-case scenario, unfair tax competition could create a race to the bottom, in which countries feel compelled to give handouts to multinationals in the form of tax breaks… This is not an issue limited to a small number of EU countries – it is a European problem needing a European solution. That’s why the commission is planning to present new legislation in the area of taxation… We believe tax authorities should know which companies enjoy favourable treatments in another country… At last November’s G20 summit in Brisbane, it was on President Juncker’s initiative that world leaders committed to transparency on tax rulingsWe now have a great opportunity to make tax competition within the EU’s single market fairer and more transparent” (Margrethe Vestager and Pierre Moscovici)

As such, interesting times lay ahead!

But there are two matters which I believe merit further attention.

The first is that there is an implicit assumption in the commentary that the revenue authorities lack independence from Government policy. In each case, it is assumed that the tax collecting bodies are providing selective treatment in order to attract, or keep happy, big businesses. For this reason Vestager and Moscovici fear that “unfair tax competition could create a race to the bottom, in which countries feel compelled to give handouts to multinationals”. Is it necessarily the case that revenue authorities act in accordance with Government initiative on the economy and entreprise? Or might they see themselves as divorced from policy and purely in the business of collecting tax which is due? (Although it is accepted that this is largely a matter of semantics however, as the test is an objective one).

The second is a deeper tension at the heart of the interaction between State Aid law and national tax law. The question is how does the condition of ‘selective advantage’ (the second criterion for State Aid) interact with administrative discretion?

The Commission accepts that there will be a level of discretionary power relating to the “simple management of tax revenue by reference to objective criteria.” It is also accepted that there will have to be the interpretation of general provisions in order to accommodate individual fact scenarios: “as far as administrative rulings merely contain an interpretation of general rules, they do not give rise to a presumption of aid”. The big issue arises in the Commission’s further elaboration on selectivity in relation to discretion:

“If in daily practice tax rules need to be interpreted, they cannot leave room for a discretionary treatment of undertakings. Every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail”

So, the Commission makes a distinction between on the one hand, interpretation of general rules and application to sets of facts (which is decried as legitimate use of simple administrative discretion), and on the other hand, interpretation and application to sets of facts which is decried as illegitimate where there is a departure from the general rules. This essentially pivots on an assumption that there is such thing as mere interpretation.[1] There is no point in rehashing Hart’s ‘vehicles in the park’ analogy, but I think it can be safely said by tax lawyers that it is very difficult to tell whether complex, layered legislation will apply in any complex fact scenario, and so will require some flexible interpretation from the revenue authorities. The point at which something ceases to be ‘mere interpretation’ is very difficult to pin down in practice. Indeed, there is a significant number of cases which require purposive interpretation of legislation, and so would potentially fall within the Commission’s definition of State Aid.

For the author, this presents a confusing dichotomy, made even more perplexing by the prevailing view today that HMRC in the UK ought to apply legislative provisions purposively to counter tax avoidance. So, how exactly are HMRC to interpret the tax provisions? Is there any scope for avoiding the gaze of the Commission?

[1] And indeed in prescriptive civil law systems, there might be!


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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7 Responses to State Aid, is it all encompassing?

  1. I believe this may be the start of an emerging battleground between the EU and the Government, so we ought to think carefully about this decision.
    I promised to throw in a few thoughts from the old British empiricist tradition of kicking stones and distrusting grand theories. We could start with the concept of “tax competition” and then bifurcate into “unfair” and thus presumably “fair” tax competition. I think that “tax competition” must be a close relative to “tax avoidance”, although I have yet to read “aggressive tax competition”. (Maybe that was the UK Patent box?)
    To practitioners the usual conundrum is what do people mean by all these terms and can their understandings get close enough for them to agree they are talking about the same thing? To the Commission the UK Patent Box might be too much competition; to David Gauke it was a reasonable response to the challenge of securing high tech inward investment to support the UK economy and get some employment (and no doubt PAYE). I say “was” because the UK now seems to have accepted that maybe the Patent Box was a touch too competitive – like deflating the football in a match?
    Another difference that I, like Steven, find hard to get to grips with is the possible distinction between the actions of States and those of their Tax authorities. As Steven notes in the context of State aid this may be a distinction without a difference, what matters is the end result. But I do not think it is possible for authorities to operate in the rather idealised manner, of “administrative rulings merely contain an interpretation of general rules.”
    To start with, I think that the conduct of enquiries is at least a semi-judicial function, if not a full blown judicial function, resting as it does on things like the ability to compel the production of papers and documents, charging fiscal and other penalties, accelerated payments, etc. I find it difficult to see how a judicial or quasi-judicial function is expected to be done other than by looking at the facts of each case and interpreting the tax rules.
    If that leads us in to the world of potential State Aid, then we are also entering the world Jolyon Maugham described, where it can be argued ” differential CT rates distort the market”, and even that “a common tax system is a pre-requisite of a true single market. (
    I’m not sure HMRC does actually normally use purposive interpretation but, whether it does or not, the Commission’s decision and its rationale, does seem to raise the possibility for a new battle ground between the theoretical European ideal and old style British (Conservative?) pragmatism. So there might be no place to hide from their gaze.
    This is an issue that deserves to be taken seriously. Many of the adverse ECJ judgements around CFCs, etc were, I suspect, avoidable if the UK had really taken seriously the long run implications of joining the EU. Jolyon’s development of a possible Commission line of thinking is further reason to begin that consideration now, rather than face some adverse rulings in the long-term – the French action took place in 1997, some 18 years ago!

    Liked by 1 person

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