Although some brief remarks were made here initially on the General Court’s decisions in Starbucks and Fiat, there is a further aspect that needs to be addressed, namely, the constitutional implications of the arm’s length principle being a principle of EU law.
In each case the Commission argued in the published decision that the arm’s length principle was free-standing (Starbucks para 139; Fiat para 149), but at the hearing insisted it formed part of national law (Starbucks para 164; Fiat para 152). The Court in any event accepted the Commission’s approach in both cases (Starbucks para 151; Fiat para 143):
‘Article 107(1) TFEU allows the Commission to check whether that pricing corresponds to pricing under market conditions, in order to determine whether there is, as a result, any mitigation of the burdens normally included in the budget of the undertaking concerned, thus conferring on that undertaking an advantage within the meaning of that article. The arm’s length principle, as described by the Commission in the contested decision, is thus a tool for making that determination in the exercise of the Commission’s powers under Article 107(1) TFEU. The Commission also stated, correctly, in […] the contested decision, that the arm’s length principle was a ‘benchmark’ for establishing whether an integrated company was receiving, pursuant to a tax measure determining its transfer pricing, an advantage within the meaning of Article 107(1) TFEU’ (See also Starbucks paras 137 and 153; Fiat paras 129 and 145 which I read as implying the Court accepted the arm’s length principle was inherent in national law).
If it is a principle of EU law and not national law, or if there is a difference between the principle at the EU level and the national level, there may be constitutional problems. If either of these propositions is correct, then tax would become due as a matter of EU law but this tax would not have received the express sanction of the relevant national Parliament. In other words, the taxpayer would have complied with the obligations imposed by the Member State in its own tax code, but still would have further monies to pay – a sort of ‘State aid levy’. This consequence is difficult to square with the fundamental constitutional principle that taxes are levied with the consent of Parliament (see for instance UK Bill of Rights 1688 Art. 4; Bunreacht na hEireann Art. 22; The Belgian Constitution, Art. 170).
It is not impossible to reconcile national and EU law in this instance of course. It could be said that when a Member State signs up to the EU Treaties, it signs up also to the State aid rules, a consequence of which is that the principle of equal treatment may require taxpayers to pay the State aid levy. In this way it could be said that actually the State aid levy had been sanctioned by the national Parliament.
Politically, some Member States might be reluctant to accept this workaround. Legally, some constitutional courts might reject it. For instance, the UK is a ‘dualist state’ whereby until national legislation gives effect to an international agreement, the international agreement has no effect as a matter of national law. EU law has effect in the UK by virtue of the European Communities Act 1972 (‘ECA 1972’). As EU law is supreme as a matter of EU law, it is only given this status in UK law by virtue of ECA 1972 (and by way of which national legislation must be read in light of the Act). Thus, UK law considers ECA 1972 as the starting point for understanding the effect of EU law in the UK. It has been accepted until now that EU law takes precedence over national legislation on the basis that Parliament is assumed to have intended this to be the case. But does it follow that Parliament intends EU law to take precedence come what may – no matter what the relevant EU law is? The answer to that question is probably no (and this point is explained much better by Prof Mark Elliott here and here).
Lords Neuberger and Mance (with whom Lady Hale, Lord Kerr, Lord Sumption, Lord Reed and Lord Carnwath agreed) put it obiter in the case of HS2 as follows:
‘It is, putting the point at its lowest, certainly arguable (and it is for United Kingdom law and courts to determine) that there may be fundamental principles, whether contained in other constitutional instruments or recognised at common law, of which Parliament when it enacted the European Communities Act 1972 did not either contemplate or authorise the abrogation’ (para 207)
The argument that a State aid levy is not due as a matter of national law then in the case of the UK can be put thusly:
- EU law takes precedence over UK law in so far as it does not seek to undermine fundamental constitutional principles
- That taxes are levied with the consent of Parliament is a fundamental constitutional principle
- Therefore, even if the State aid levy is due as a matter of EU law it does not follow that it is due as a matter of UK law, as the State aid provisions in such an instance are trying to override a fundamental UK constitutional principle
- That this should occur is not what Parliament intended when it enacted ECA 1972
- The State aid levy then is not due in the UK
The UK it should be noted is not the only EU Member State which operates a dualist system – Ireland for instance also is a dualist state.
At any rate, dualism aside, EU lawyers will know well what can happen where there is tension between domestic constitutional law and EU law. Famously where there was a purported conflict between German basic law and the Common Agricultural Policy, the ECJ in Solange I avoided finding a conflict by holding that EU law (though at the time it was EC law) must be read in light of fundamental rights, just as in the case of the domestic law of the Member States (thus paving the way for the EU Charter of Fundamental Rights).
If the goal is to avoid the potential conflict between EU law and national law, then it seems prudent to find that there is no stand-alone EU arm’s length principle, but only the domestic tax laws of the Member State which may include the arm’s length principle. In this way, the Commission’s case in the State aid rulings should be viewed as predicated not on a misapplication of the EU arm’s length principle, but rather of national law.