What to make of the Commission’s decision that Ireland granted State Aid to Apple to the tune of up to €13bn? On the one hand, very little as we are yet to see the full decision and all the relevant details. The decision will be released as soon as there has been agreement as to what parts should be redacted, and in the case of the Starbucks decision earlier this year, that process took just over 8 months.
On the other hand however, some broader points can be made both about the political nature of the State Aid investigation and about the framework for using State Aid to combat perceived abusive tax practices. In order to elaborate upon these points, it is worth revisiting first principles and setting out what actually is State Aid. It arises where:
- there has been an intervention by the State or through State resources
- the intervention gives the recipient an advantage on a selective basis. Two separate questions arise as to whether an advantage has been granted and whether that advantage is selective. This is where the real battle ground will take place in respect of the current State Aid cases generally.
- competition has been or may be distorted;
- the intervention is likely to affect trade between Member States.
The State Aid provisions of the Treaty are found in the Competition Law chapter and as a matter of principle, it is uncontroversial that the EU should seek to prevent Member States from intervening in the market in order to unduly benefit particular undertakings. That the tax system can be utilised as a means of selectively benefiting certain undertakings is similarly uncontroversial. For instance, R&D tax reliefs could be designed so as to de facto discriminate between otherwise similarly placed undertakings, thereby unduly favouring some. The Belgian excess profits scheme, which the Commission found to amount to State Aid, is a good example similarly of a Member State intervening through the tax system so as to selectively benefit certain companies. The effect of this scheme was to reduce the tax payable by 35 Multinationals, thereby advantaging these companies over their competitors. To this end, remarks that the EU and Commission have no competence to intervene in respect of Member State’s tax policy is misconceived. Member States do have a significant degree of autonomy in respect of direct taxes, but this freedom is and always has been subject to the Treaty provisions.
At the core of the Apple decision accordingly is a dispute as to whether rulings issued by the Irish Revenue Commissioners selectively advantaged Apple. The accusation is that the Revenue rubber stamped unduly beneficial advance pricing arrangements. That is the crux. The press release however contains quite a bit more information which on its face is not relevant to the determination of the State Aid issue. However, these can only be understood when viewed in light of the political nature of the dispute. The State Aid provisions are here being used as a means of combating abusive tax practices and to accelerate and buttress international tax reform. This explains why the press release refers generally to Ireland’s tax treatment of Apple enabling the company to record all European sales in Ireland, which itself is recognised as being ‘outside the remit of EU state aid control’. This is a fact which is irrelevant for the legal arguments in the case at hand, but pertinent politically. It similarly explains why the Commission states that the State Aid bill would be reduced if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts.
But a more important point which is often overlooked in the conversations about the Apple et al decisions is whether the State Aid provisions actually provide a suitable framework for dealing with transfer pricing arrangements. Elsewhere, I’ve written about this issue (see: here, here, and a semi-satirical piece here) but did also some time ago express scepticism as to the legality of the Apple rulings under Irish law. There is one further point which ought to be added however. It is uncontroversial that State Aid law should be utilised to prevent Member States intervening through the tax system by introducing legislation which de facto favours selectively. It is right that Member States should refer any dubious looking legislative amendments to the Commission for approval. More controversial however is the application of State Aid law not to legal provisions themselves, but rather to the administration of these general provisions such as the arm’s length principle. Note the difference in frequency. Tax legislation is passed annually, biannually and occasionally triennially. It is entirely feasible for a Member State government to seek prior approval of tax measures with a potential State Aid edge. What is much less feasible is the idea of Member State Revenue authorities seeking Commission approval anytime they agree a transfer pricing arrangement, even if this were to be restricted just to transfer pricing arrangements of large companies in the 28 Member States (however, how this could be restricted in such a manner without itself giving rise to State Aid concerns in respect of the agreements arrived at by the other companies is equally far from clear). The reason that multinationals seek rulings in the first place is as an assurance that their tax affairs are in order. The logical conclusion of the fact that transfer pricing arrangements which administer broad standards and are potentially disputable are subject to State Aid would be that multinationals would first seek rulings from the revenue authorities and would urge the revenue authorities to thereafter seek approval from the Commission.
Presumably the Commission has little intention of becoming a supranational revenue authority and there will doubtlessly be some kind of settlement of the infrastructure for dealing with transfer pricing arrangements if the Commission’s case is successful. But it is a concern which requires some thought.