The Scope of the State Aid Selectivity Criterion and
Member States’ Fiscal Autonomy to Agree on Tax Rulings
How does the interpretation of the selectivity criterion of the concept of State aid regarding tax rulings relate to EU Member States’ fiscal autonomy?
Esmée Meyer
International and European Law: European Competition Law and Regulation
Supervisor: Mr. C. Dekker 26 July 2018
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Abstract
The European Commission recently took several negative Decisions after State aid investigations into national tax rulings by which several multinationals, such as Starbucks and Apple, were granted excessive tax benefits. The Member States concerned asked for annulment of those Decisions, so they are currently pending before the Court of Justice of the European Union.
It is argued that one of the criteria, the selectivity criterion, to assess whether there is incompatible State aid under Art. 107(1) TFEU is interpreted too broadly by the CJEU in its case-law and in the Commission Decisions. Member States however, enjoy fiscal autonomy in setting their tax systems and thus national tax rulings. The CJEU repeatedly held that Member States must exercise that exclusive competence on fiscal matters consistently with EU law. Those issues thus seem to be conflicting. Therefore, this thesis investigates how the interpretation of the selectivity criterion of the concept of State aid regarding tax rulings relates to EU Member States’ fiscal autonomy.
The method followed for this analysis is mainly descriptive and analytical. This thesis covers an analysis of CJEU case-law, soft law of the Commission, and literature by experts on EU tax law.
The main conclusion is that the interpretation of the selectivity criterion of State aid under Art. 107(1) TFEU infringes the fiscal autonomy of Member States. On the one hand, the CJEU interprets the selectivity criterion quite broad in cases on direct tax measures. On the other hand, the Commission in its recent Decisions even takes it a step further and it could be argued that it acts beyond its competences. It must be seen whether the CJEU will follow the Commission’s reasoning in the tax rulings cases currently pending.
This conclusion is based on findings such as that tax measures, which are open to all undertakings, can be selective according to the CJEU. Tax measures are assessed with regard to their effect. Besides that, the reference system, which is the benchmark for assessing whether a measure is selective, decided on by the Commission and CJEU, is often determined to be the corporate income tax system. Since this is a broad benchmark, tax rulings are more likely to derogate from that. Also, the selectivity criterion is for its assessment often mixed with the economic advantage criterion of Art. 107(1) TFEU by both the CJEU and Commission.
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The Commission argues that APAs, a form of tax rulings, should include transfer prices which are calculated in line with market-based conditions, and thus should be in line with the arm’s length principle. According to the Commission, that principle is inherent to the assessment of selectivity in tax measures, and Member States are therefore bound by it. The CJEU, however, never explicitly referred to that principle in its case-law and there is no legal basis in EU law which describes what that arm’s length principle exactly would entail. It is only referred to in the non-binding OECD Transfer Pricing Guidelines. It must be seen whether the CJEU will follow the Commission’s reasoning.
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TABLE OF CONTENTS
Abbreviations ... 6
Introduction ... 7
Methodology ... 8
1 State Aid in the European Union ... 9
1.1 State Aid and the Competition Policy ... 9
1.2 Four Criteria to Establish State Aid under Art. 107(1) TFEU ... 10
1.2.1 Intervention by the Member State or through State resources ... 11
1.2.2 Economic advantage ... 12
1.2.3 Selectivity ... 13
1.2.4 Effect on competition and trade ... 14
1.3 Conclusion ... 14
2 Tax Rulings and Fiscal Autonomy ... 16
2.1 What Are Tax Rulings? ... 16
2.1.1 Advance Pricing Agreement ... 17
2.1.2 Advance Tax Ruling ... 18
2.1.3 Other tax ‘arrangements’ ... 19
2.2 Member States’ Fiscal Autonomy Regarding Tax Rulings ... 19
2.3 Tax Rulings in the Member States ... 21
2.4 Conclusion ... 22
3 The Selectivity Criterion and its Interpretation Regarding Tax Rulings ... 24
3.1 Interpretation by the Court of Justice of the European Union ... 24
3.1.1 Material selectivity ... 25
3.1.2 Three-step derogation test ... 27
3.1.3 De facto and de jure selectivity ... 28
3.1.4 Belgium and Forum 182 v Commission ... 29
3.2 Interpretation by the European Commission ... 30
3.2.1 Commission Notice on the Notion on State Aid ... 30
3.2.2 Commission Decisions on Tax Rulings ... 33
3.3 Conclusion ... 37
4 Analysis: The Interpretation of the Selectivity Criterion with regard to Tax Rulings vs Member States’ Fiscal Autonomy ... 39
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4.2 Determination of the reference system ... 40
4.3 ‘Selectivity’ versus ‘economic advantage’ ... 41
4.4 The arm’s length principle ... 41
4.5 The Commission’s policy for tax avoidance and Member States’ consent ... 43
5 Conclusion ... 45
Bibliography ... 47
Literature ... 47
Legislation ... 48
Case law of the Court of Justice of the European Union ... 49
Commission Documents ... 50
Internet references ... 50
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ABBREVIATIONS
APA Advance Pricing Agreement
ATR Advance Tax Ruling
CJEU Court of Justice of the European Union
EU European Union
MEO Market Economy Operator
OECD Organisation for Economic Co-operation and Development
OECD TP Guidelines OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
TEU Treaty on European Union
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INTRODUCTION
During the past years, the debate on tax avoidance by multinationals has increased significantly because of the publication of documents such as the Panama Papers (2016) and Paradise Papers (2017), and press releases of the European Commission (hereafter: Commission).1 An often-heard criticism is that every undertaking, thus also big multinationals, is supposed to pay the same amount of tax and should not be treated more favourably through special agreements by tax authorities.2 The Commission repeatedly emphasised that it wants to combat tax avoidance, and during the past few years it issued several negative Decisions on national tax rulings granted by the EU Member States. Reason for this is that the rulings were considered to be State aid under EU law, and thereby harmful for the effective functioning of the internal market.
Regarding the Commission’s State aid investigations and case-law of the Court of Justice of the European Union (hereafter: CJEU) the ‘selectivity criterion’ of Art. 107(1) TFEU is argued to have been interpreted increasingly broad and therefore tax measures are easily covered by that notion.3 The right to grant tax rulings, however, falls within the Member States´ exclusive competence for fiscal matters. These developments thus, seem somewhat contradictory. Therefore, this thesis investigates what the interpretation of the selectivity criterion of Art. 107(1) TFEU regarding tax rulings means for the Member States’ fiscal autonomy. The research question is: ‘How does the interpretation of the selectivity criterion of the concept of State aid regarding tax rulings relate to EU Member States’ fiscal autonomy?’.
To accurately answer that question, chapter 1 establishes what EU State aid law entails by outlining the general framework. Chapter 2 defines what tax rulings are and under what different systems they are granted by the Member States. Besides that, it is discussed what it means that Member States enjoy fiscal autonomy. Chapter 3 embraces an in-depth analysis on the interpretation of the selectivity criterion of Art. 107(1) TFEU regarding tax rulings. On the
1 Europa-Nu, ‘Aanpak belastingontduiking – en ontwijking’,
https://www.europa-nu.nl/id/vi38jaxg5zqp/aanpak_belastingontduiking_en_ontwijking, accessed 14 July 2018.
2 European Commission, ‘State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion’, http://europa.eu/rapid/press-release_IP-16-2923_en.htm, accessed 25 May 2018.
3 J. Derenne, ‘Commission v World Duty Free Group a.o.: Selectivity in (Fiscal) State Aid, quo vadis Curia?’, Journal of European Competition Law & Practice, Vol. 8, No. 5 (2017), pp. 311 – 313 [hereinafter Derenne]; N.
Phedon, ‘Excessive Widening of the Concept of Selectivity’, European State Aid Law Quarterly, Vol. 2017, No. 1 (2017), pp. 62 – 72 [hereinafter Phedon].
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one hand, it focuses on the framework established by the CJEU’s case-law. On the other hand, it analyses ‘soft law’ such as the Commission Notice on the notion of State aid and Commission Decisions. By this, it becomes clear what the boundaries of EU law are for Member States to issue tax rulings.
The most important findings of the first three chapters are taken together in chapter 4 to analyse the current interpretation of the selectivity criterion regarding tax rulings in comparison to the Member States’ fiscal autonomy to agree on such rulings. The last chapter contains the main conclusion in which the research question is answered.
METHODOLOGY
The research is mainly based on a descriptive and analytical approach from an objective point of view. Whereas the sources used are being analysed objectively, the comparison between the interpretation of the selectivity criterion and the Member States’ fiscal autonomy, does contain some subjective interpretations and expectations from my own point of view.
Sources such as the Commission Notice on the notion of State aid, Commission Decisions, press releases of the Commission, case-law of the CJEU, scientific articles and handbooks on EU State aid law are consulted. Regarding the literature, the ‘snowballing’ method is used to gather new sources of information.
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1
STATE AID IN THE EUROPEAN UNION
This chapter serves as an introduction to the EU’s competition policy and its State aid rules. It provides a general framework. The first subchapter shortly discusses EU State aid law and how it forms part of the competition policy. Chapter 1.2 deals with the four cumulative criteria that must be fulfilled to establish incompatible State aid. It is important to keep in mind that the third criterion on selectivity is discussed in more detail in chapter 3, since it is a significant element for answering the research question. The chapter finishes with a brief conclusion.
1.1 STATE AID AND THE COMPETITION POLICY
One of the EU’s aims is to establish an internal market.4 For that market to function effectively, it includes a system to ensure that competition is not distorted.5 The EU’s competition policy, with the fundamental objective of preventing distortions of competition, is aimed at, among others, protecting consumers, creating a level playing field and maintaining the competitive process in the market.6 Undertakings with market power can distort competition in the internal market which may result in raised prices, lower quality of products, ceased (technological) innovation, reduced output, and less choice of products for consumers.7
The EU has exclusive competence to establish the competition rules necessary for the functioning of the internal market.8 These competition rules can be found in Chapter 1 of Title VII of part Three of the TFEU and are applicable in all Member States. The provisions relate to cartels, anti-competitive behaviour and State aid.9 The Union’s competition policy is largely governed by the Commission through Regulations and Decisions.10 The Commission also is in charge to ensure correct compliance with the competition rules by the Member
4 Art. 3(3) TEU.
5
Protocol (no. 27) on the internal market and competition, TEU.
6 D. Chalmers, G. Davies and G. Monti, European Union Law: text and materials, Cambridge: University Press
2015, p. 944 [hereinafter Chalmers].
7 R. Whish and D. Bailey, Competition Law, Oxford: Oxford University Press 2015, pp. 1 – 2. 8 Art. 3(1)(b) TFEU.
9 European Commission, ‘Overview: making markets work better’,
http://ec.europa.eu/competition/general/overview_en.html, accessed 16 April 2018.
10 Committee of the Regions, ‘EU competition policy and state aids – Factsheet’, http://cor.europa.eu/en/welcome/Documents/Update%204%20June%2015/MOOC_EU_competition_policy_and _state_aid.pdf, accessed 16 April 2018.
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States.11 For State aid cases it can initiate formal investigations, followed by final Decisions. Such a Decision can either result in that the doubts on the national State aid measure are unfounded, or that the doubts are confirmed. The latter would result in a negative Decision.12 In chapter 3.2 several of those negative Decisions regarding tax rulings are discussed.
State aid control forms part of the EU’s competition policy because such aid can seriously distort competition. If Member States, for example, support private undertakings they make those undertakings able to carry out activities at lower cost than foreign competitors.13 Controlling State aid is thus one of the ways to maintain the effective functioning of the internal market.14
The provisions on State aid can be found in Articles 107 to 109 TFEU. Art. 107(1) provides that:
[…] any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market.15
State aid measures are not per se prohibited in the EU. Only State aid granted without consent of the Commission is forbidden. State aid falling within the scope of Art. 107(2) and 107(3) TFEU can for example be exempted. Further, Art. 108 TFEU provides for the procedural aspects of State aid supervision, and under Art. 109 TFEU the Council can make appropriate regulations for the application of Art. 107 and 108 TFEU.
1.2 FOUR CRITERIA TO ESTABLISH STATE AID UNDER ART.107(1)TFEU
Art. 107(1) TFEU is far from detailed and therefore it is often questioned which measures constitute State aid. The provision leaves a wide margin of interpretation for its application by
11 European Commission, ‘State aid control’, http://ec.europa.eu/competition/state_aid/overview/index_en.html,
accessed 16 April 2018.
12 European Commission, ‘Tax rulings’, http://ec.europa.eu/competition/state_aid/tax_rulings/index_en.html,
accessed 8 June 2018.
13
European Commission, EU State Aid Modernisation (SAM), Brussels: 2012, p.2.
14 C., Micheau, ‘Evolution of State Aid Rules: Conceptions, Challenges, and Outcomes’, in: Hofmann and
Micheau ed., State Aid Law of the European Union, Oxford: Oxford University Press 2016, p. 18 [hereinafter Micheau 2016].
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the Commission, which is subject to review by the CJEU.16 The latter thus has a key role in determining the contours of the notion of State aid.17 From the wording of Art. 107(1) and the case-law regarding this provision, four cumulative criteria can be derived to establish incompatible State aid.18 In the next sections, those four cumulative criteria are concisely discussed.
1.2.1 INTERVENTION BY THE MEMBER STATE OR THROUGH STATE RESOURCES
The first criterion which can be derived from Art. 107(1) is: ‘any aid granted by a Member State or through State resources in any form whatsoever’. The term ‘resources’ must be interpreted broadly. The CJEU has expanded this beyond obvious public expenditure support such as subsidies. State resources include foregone revenues that would otherwise be payable to the State, loans against an interest rest below market level, a State-owned firm to which State resources are available19, funds provided for by Member States’ central banks to specific credit institutions20, and tax breaks for certain undertakings.21
The CJEU does not make a clear distinction between aids granted by a Member State or through its resources. Rather, aid should be granted directly or indirectly through State resources.22 The provision applies to central, regional and local government bodies, and to both public and private undertakings created or appointed by a State to control its resources.23 So, even private sources can be under public control.
In sum, the relevant element to assess this criterion is that the granted aid must involve a burden on public financial resources. Irrespective of whether aid has been granted directly or indirectly, to establish State aid a cost must be involved on the Member States’ budget.24
16
T.M. Rusche, ‘General Theory on Compatibility of State Aid’, in: Hofmann and Micheau ed., State Aid Law of
the European Union, Oxford: Oxford University Press 2016, p. 224.
17 Chalmers, supra note 6, p. 1057. 18 Ibid., p. 1058.
19
E. Stuart and I. Roginska-Green, Sixty Years of EU State Aid Law and Policy, Alphen aan den Rijn: Kluwer Law 2018, p. 32 [hereinafter Stuart].
20 Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning
of the European Union [2016] OJ C 262, para. 47 – 49 [hereinafter Commission Notice].
21 C. Micheau, ‘State aid and taxation in EU law’, in: Szyszczak ed., Research Handbook on European State Aid Law, Cheltenham: Edward Elgar Publishing Limited 2011, p. 197 [hereinafter Micheau 2011].
22 Ibid., p. 195.
23 L. Hancher, T. Ottenvanger and P. J. Slot, EU State Aids, London: Sweet & Maxwell 2012, pp. 60 – 61
[hereinafter Hancher].
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1.2.2 ECONOMIC ADVANTAGE
The second criterion that must be fulfilled to establish State aid under Art. 107(1) TFEU is the presence of an ‘advantage’. That covers any economic advantage which (in)directly benefits undertakings, and which those undertakings could not have obtained under normal market conditions in the absence of State aid.25 Advantages include both positive actions, such as subsidies, and measures as relief of economic burdens normally weighing undertakings´ budgets.26 Regarding tax measures, one could think of advantageous tax schemes favouring certain undertakings.27
To establish an ‘advantage’ under Art. 107(1), the benefit must be given to an ‘undertaking’. This involves any entity engaged in an economic activity, regardless its legal form and the way it is financed. Economic activities consist of offering goods and services on a given market, irrespective of whether there is a profit-target.28 So, regardless the status of the undertaking under national law and irrespective of whether that undertaking generates profits, the only relevant criterion for designating an ‘undertaking’ is whether it offers goods and services on a given market.
To assess whether an undertaking received an advantage, the Commission uses the Market Economy Operator (MEO) test.29 This general term refers to the ‘market investor principle’, ‘the private creditor test’, and the ‘private vendor test’, developed by the CJEU to assess whether economic transactions of a State were carried out under normal market conditions.30
Here, the financial situation of an undertaking prior to the measure taken is compared to the financial situation after the measure has been taken. The effect of the measure is relevant: when the financial situation of an undertaking compared to its competitors´ position is improved because of State intervention, an advantage was granted.31
The CJEU stated in Commission v EDF that the MEO test, more specifically the private investor test, can also apply if the financial means used by the State are fiscal in nature.32. The means used, for example in the form of reduced tax liability, are not important for Art. 107(1) TFEU.33 If no economic advantage is found, Art. 107(1) does not apply.34
25 C-39/94 SFEI and Others [1996] ECLI:EU:C:1996:285, para. 60. 26
M.F.C. Cox, ‘Commentaar Artikel 107 VWEU Onverenigbare steunmaatregelen (voorheen art. 87 EG-verdrag)’, Nederlandse Documentatie Fiscaal Recht, (2018), p. 8 [hereinafter Cox].
27 Micheau 2011, supra note 21, p. 197. 28 Cox, supra note 26, p. 8.
29 Commission Notice, supra note 20, para. 75. 30
Ibid., para. 74 – 75.
31 173/73 Italy v Commission [1974] ECLI:EU:C:1974:71, para. 13. 32 Commission Notice, supra note 20, para. 80.
33
C-124/10 P Commission v EDF [2012] ECLI:EU:C:2012:318, para. 88 – 91.
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1.2.3 SELECTIVITY
The third criterion of Art. 107(1) TFEU is the ‘selectivity’ of a measure: only measures which grant an advantage in a selective way to certain undertakings or economic sectors constitute incompatible State aid.35 A measure is selective when certain undertakings are favoured over others, while they are in a similar factual and legal situation in the light of the objective pursued by the system in question.36 General measures benefitting the entire economy are not regarded to be selective.
A distinction can be made between regional and material selectivity. Regional selectivity is established when a measure treats undertakings in a specific part of the Member State more favourable than in the rest of its territory. A measure is per se regionally selective if a Member State’s central government adopts a measure which is only applicable in a specific area of the territory.37 If a public body lower than the central government grants regional tax measures, then it should be assessed whether the tax measure benefits certain undertakings in comparison to other undertaking in a comparable factual and legal situation within that area.38 It must be examined whether the measure is part of a local or regional legal system in its own right, or if it derogates from the national tax system as a whole.39 The CJEU established in Azores that if the regional or local authority enjoys institutional, procedural, and financial autonomy, its regional tax measures are not selective under Art. 107(1) TFEU.40
For the tax rulings analysed in chapter 3, regional selectivity is less important since the cases only concern measures taken by the central authorities, and they are not solely applicable in specific regions or areas of the Member States. Therefore, regional selectivity is not discussed in more detail in this thesis.
Material selectivity concerns all other forms of unequal treatment by Member States’ intervention.41 It can be established either de jure or de facto.42 One speaks of de jure selectivity if the measure is formally reserved for only certain undertakings or sectors. In the case of de facto selectivity, the criteria for application of a measure seem to be general and objective, but in fact the measure favours only certain undertakings or sectors.43
35 Commission Notice, supra note 20, para. 117. 36
Cox, supra note 26, p. 8.
37 A. Bartosch, ‘The concept of selectivity?’, in: Szyszczak ed., Research Handbook on European State Aid Law,
Cheltenham: Edward Elgar Publishing Limited 2011, p. 176 [hereinafter Bartosch].
38 C-88/03 Portugal v Commission [2006] ECLI:EU:C:2006:511, para. 54 – 55 [hereinafter Azores].
39 C-428/06 Unión General de Trabajadores de la Rioja [2008] ECLI:EU:C:2008:488, para. 47 [hereinafter Rioja].
40 Azores, supra note 38, para. 67; Rioja, supra note 39, para. 48 – 60. 41 Bartosch, supra note 37, p. 176.
42
Commission Notice, supra note 20, para 120.
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Regarding tax measures, the concept of material selectivity is mostly discussed.44 Therefore, chapter 3 analyses material selectivity in the context of tax rulings in detail.
1.2.4 EFFECT ON COMPETITION AND TRADE
The last criterion that must be met to establish incompatible State aid under Art. 107(1) TFEU, is that competition is (likely to be) distorted and trade is affected. Although these are two distinct elements, they are often discussed together because they are considered ‘inextricably linked’.45
A State measure distorts, or can distort, competition when it improves the competitive position of the undertaking that receives aid, compared to the position of that undertaking’s competitors.46 In that case, the intracommunity trade is affected. Even if the recipient of State aid is not directly involved in cross-border trade, a measure can affect the internal market trade.47 Also, the amount of aid or the size of the undertaking which receives aid does not exclude the possibility that intracommunity trade is affected. According to the CJEU there is no certain threshold or percentage below which it may be considered that there is no effect on trade between Member States.48
For Art. 107(1) to be applicable, an actual effect on trade between Member States does not have to be proven. However, the effect cannot be purely hypothetical or presumed.49 Based on the foreseeable effects of the measure, the Commission must establish why a measure distorts, or threatens to distort competition and is liable of affecting trade between Member States.50
1.3 CONCLUSION
One of the ways the Union tries to ensure an effective functioning of the internal market, which is a fundamental EU objective, is by maintaining a comprehensive competition policy. State aid control forms an important part of this, since unlawful aid to undertakings can distort the internal market’s competition and, consequently, harm consumers’ welfare.
44 Bartosch, supra note 37, p. 178.
45 T-298/97Alzetta and others v Commission [2000] ECLI:EU:T:2000:151, para. 81. 46
Commission Notice, supra note 20, para. 187.
47 Ibid., para. 192.
48 C-518/13 Eventech v The Parking Adjudicator [2015] ECLI:EU:C:2015:9, para. 68. 49
Cox, supra note 26, p. 10.
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Four cumulative criteria, derived from Art. 107(1) TFEU, must be fulfilled to establish incompatible State aid. First, there must be an advantage; second, that advantage has to be selectively applicable; third, it must be funded by a Member State or through State resources; and fourth, it must affect trade between Member States or (potentially) distort competition. These criteria have been explained briefly, but it is important to observe that their application in practice is much more complex due to recent developments in the Union’s State aid law
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2
TAX RULINGS AND FISCAL AUTONOMY
EU Member States enjoy national sovereignty to set their own tax schemes, and thus to agree on tax rulings. During the past years, the number of investigations and cases in which national tax rulings were regarded as incompatible with EU State aid law increased significantly.51 Tax rulings can improve the investment climate in a Member State by providing legal certainty to future investors within the limits of the law. However, they can also serve as a tool to secretly grant benefits to certain undertakings. In between these two, is a large grey area for Member States’ possibilities to agree on tax rulings and the boundaries of the EU State aid rules.52
Tax rulings and Member States’ fiscal autonomy on the one hand, and EU State aid law on the other hand, thus seem somewhat contradictory.
This chapter first describes what tax rulings exactly are. Chapter 2.2 explains how the national fiscal autonomy relates to EU State aid law. Chapter 2.3 shortly discusses under what frameworks tax rulings are issued in the Member States, with a special focus on the Netherlands. Lastly, the chapter finishes with a short conclusion.
2.1 WHAT ARE TAX RULINGS?
Tax rulings, provided for by the national tax authorities, establish in advance the application of an ordinary tax system to a particular case.53 By this, a taxpayer gets certainty in advance on how tax legislation and regulations apply to him or her. Then, he or she becomes aware of the fiscal consequences of the transactions that will be made.54 Especially for multinational undertakings, established in more than one Member State, this legal certainty and predictability on the application of tax rules is useful.55
According to the Dutch tax authorities, the term ‘tax ruling’ often covers the levy of corporation tax, either in the form of Advance Pricing Agreements (APAs) or Advance Tax
51 Stuart, supra note 19, p. 204.
52 R. Luja, EU State Aid Law and National Tax Rulings (DG for Internal Policies), Brussels: European Union
2015, p. 5 [hereinafter Luja 2015].
53 Stuart, supra note 19, p. 204.
54 C. Romano, Advance Tax Rulings and Principles of Law – Towards a European Tax Rulings System?,
Groningen: International Bureau of Fiscal Documentation 2002, p. 120 [hereinafter Romano].
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Rulings (ATRs).56 Following a paper of the DG for Internal Policies, tax rulings do not only include APAs and ATRs, but also other advance tax arrangements made by governments.57 The latter are informal tax arrangements which covers topics like extra-statutory agreements, advance agreements offering a favourable tax treatment based on case-law, or interpretations.58
‘Tax rulings’ is used as a general term because the Commission’s intention, with its investigations into ‘tax rulings’, is to cover all administrative practices made in advance between the tax authorities and taxpayers.59 Besides that, the literature generally refers to all kinds of tax arrangements as ‘tax rulings’, and also Member States’ various tax arrangements are labelled as ‘tax rulings’. 60
In this thesis, the term ‘tax rulings’ covers all of which the Commission sees as tax rulings: APAs, ATR’s and other advance tax arrangements. Below, the three concepts are briefly explained.
2.1.1 ADVANCE PRICING AGREEMENT
APAs give taxpayers certainty in situations where affiliated organisations and undertakings, or parts of the same organisations and undertakings, perform cross-border transactions (goods and services) amongst themselves. APAs may be uni-, bi- or multilateral agreements, communications, or other instruments with similar effects.61 Since it provides certainty in advance about the transfer pricing methodology it simplifies, or even prevents, costly and time-consuming tax checks into the transactions afterwards.62
APAs ensure that a fair price is paid for the transactions63, which can be based on the OECD Transfer Pricing Guidelines (TP Guidelines)64. More specifically, for an APA the transfer price between two affiliated parties within a group is determined in advance at arm’s
56 Belastingdienst, ‘Vooroverleg/ruling’,
https://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/standaard_functies/prive/contact/rechten_en_plic hten_bij_de_belastingdienst/ruling/, accessed 9 May 2018.
57 Luja 2015, supra note 52, p. 6.
58 E. van de Velde, ‘Tax Rulings’ in the EU Member States (DG for Internal Policies), Brussels: European Union
2015, p. 33 [hereinafter Velde]. 59 Ibid., p. 26. 60 Ibid., pp. 26 – 27. 61 Ibid., pp. 30 – 31. 62 Ibid., p. 30. 63 Belastingdienst, ‘Vooroverleg/ruling’, https://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/standaard_functies/prive/contact/rechten_en_plic hten_bij_de_belastingdienst/ruling/, accessed 9 May 2018.
64
OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Paris: OECD Publishing 2010 [hereinafter OECD TP Guidelines].
18
length, compared to what the transfer price would be between unrelated parties.65 This principle can be found in Art. 9 OECD Model Tax Convention on Income and on Capital. The transfer prices between two different situations may not differ, i.e. they must reflect the economic reality as if they were agreed on under market conditions.66 The arm’s length principle aims at preventing abusive behaviour like artificial tax constructions through which profits are shifted between affiliated parties and thereby reduces their tax burden.67 When the transfer prices take into account the arm’s length principle, normally no tax avoidance problems arise.68
The TP Guidelines, which may be relied on, provide for five methods to approximate transfer pricing at arm’s length. It is a non-binding instrument and the selection of the right methodology is often complicated.69 Even though all Member States have adopted the TP Guidelines or an equivalent thereof70, the Commission found that these Guidelines are differently interpreted among the Member States. This increases the chance of cross-border problems potentially harming the internal market.71
2.1.2 ADVANCE TAX RULING
An ATR is ‘a statement provided by the tax authorities [..] regarding the tax treatment of a taxpayer with respect to his future transactions and on which he is – to a certain extent – entitled to rely’.72
In other words, it is a binding legal decision on the application of tax law in a specific situation before any tax consequences occur, such as participation exemptions. ATR’s thus provide certainty for the taxpayer about the tax consequences of a future transaction. These rulings exist for all kinds of taxpayers, such as multinationals, small and medium-sized enterprises, and natural persons. They can only cover individual transactions.
65 Velde, supra note 58, p. 26. 66
Stuart, supra note 19, p. 206.
67 H. Buelens and P. Jansen, ‘Tax rulings in Nederland: much ado about nothing of verboden staatssteun? Het
onderzoek naar Starbucks juridisch geduid’, Nederlands Tijdschrift voor Europees Recht, Vol. 5, No. 3 (2015), pp. 73 – 75.
68
Ibid.
69 DG Competition, ‘DG Competition Working Paper on State Aid and Tax Rulings’, http://ec.europa.eu/competition/state_aid/legislation/working_paper_tax_rulings.pdf, accessed 14 May 2018.
70 European Commission, ‘Joint Transfer Pricing Forum’,
https://ec.europa.eu/taxation_customs/business/company-tax/transfer-pricing-eu-context/joint-transfer-pricing-forum_en, accessed 13 June 2018.
71 European Commission, ‘Transfer pricing in the EU context’,
https://ec.europa.eu/taxation_customs/business/company-tax/transfer-pricing-eu-context_en, accessed 13 June 2018.
19
The topics on which the rulings can be delivered vary considerably, from personal income tax and corporate income tax, to VAT.73
2.1.3 OTHER TAX ‘ARRANGEMENTS’
Lastly, in this thesis, ‘tax rulings’ also include other advance tax arrangements, which are ‘arrangements, ‘interpretations’ or, ‘opinions’ issued without any legal or administrative framework.74 They are so-called informal tax rulings, and they are made ‘between the taxpayer and the local tax inspector before a specific transaction takes place or before filing the tax return, after a tax mediation process, in court, within a horizontal monitoring process, or, within the context of a tax audit’.75
2.2 MEMBER STATES’FISCAL AUTONOMY REGARDING TAX RULINGS
Fiscal policy is a core State power and an area in which States have traditionally maintained their prerogatives.76 Also in the EU, the power to design tax systems and spread the tax burden is reserved for Member States.77 This is emphasized in the EU Treaties: the EU can only take legislative action in tax matters with unanimity of all Member States.78 Consequently, there is only little approximation of EU law in direct taxation.79
Even though Member States are exclusively competent in the field of direct taxation, they ‘must none the less exercise that competence consistently with Union law’.80
In other words, Member States must respect the free movement rights of taxpayers and the State Aid provision of Art. 107 TFEU.
Since the establishment of the EU, case-law and both soft and hard law on direct taxation have expanded increasingly. Already since the 1960’s there is a debate on direct tax harmonisation in the EU.81 At an early stage it was realized that direct tax laws could distort competition and form a risk for the effective functioning of the internal market. Several times
73 Ibid., p. 28.
74 Ibid., pp. 27 – 28. 75
Ibid., pp. 32 – 33.
76 M. Hallerberg, ‘Why is there Fiscal Capacity but Little Regulation in the US, but Regulation and Little Fiscal
Capacity in Europe? The Global Financial Crisis as a Test Case’, in Genschel and Jachtenfuchs ed., Beyond the
Regulatory Polity? The European Integration of Core State Powers, Oxford: Oxford University Press 2016, p.
87.
77
Stuart, supra note 19, p. 305.
78 Art. 114(2); Art. 115 TFEU; Art. 223(2) TFEU. 79 Stuart, supra note 19, p. 305.
80
Ibid.
20
the Commission proposed Directives on harmonisation, but they were rejected by the Council.82
In 1996, the Commission took a new approach and placed itself at the centre for coordinating taxes. It launched a ‘direct tax package’ including a ‘Code of Conduct’. This Code of Conduct, adopted by the Council, was not legally binding but did make a political statement. Under this resolution, tax measures were defined as ‘measures which affect or may affect in a significant way the location of business activity in the Community’, and criteria were established to identify harmful tax measures.83 After an examination based on the Code of Conduct it became clear how EU State aid rules were useful to fight harmful tax measures. Consequently, between 2003 and 2006 the Commission took several negative Decisions on preferential tax measures, and some of them were declared as illegal State aid by the CJEU.84
In 1998, the Commission issued a Notice on the application of State aid rules to measures relating to direct business taxation85, which was recently replaced by the Notice on the Notion of State Aid.86 In the Commission’s view, with support of some CJEU judgments, national tax rulings must respect EU State aid law.87 If they do not, they can be declared incompatible with the internal market.
Since the State Aid Modernisation initiative (2012) the Commission possessed more powers to enforce the State aid rules for aid which is most likely to distort competition.88 The Commission became more active in investigating national tax rulings, and it emphasised that the fight against tax evasion and tax fraud is one of its top priorities.89 In June 2015 the Commission adopted an Action Plan for fair and efficient corporate taxation in the EU90 aiming to improve the corporate tax environment in the EU. Consequently, in January 2017, a Directive entered into force on mandatory automatic exchange of information of cross-border tax rulings and advance pricing arrangements.91
82 Ibid., pp. 306 – 307.
83
Ibid., p. 308.
84 Ibid., pp. 309 – 310.
85 Commission Notice on the application of the State aid rules to measures relating to direct business taxation
[1998] OJ C 384.
86
Commission Notice, supra note 20.
87 Ibid., para 170.
88 Stuart, supra note 19, p. 318. 89 Ibid., p. 321.
90 European Commission, ‘Action Plan on Corporate Taxation,
https://ec.europa.eu/taxation_customs/business/company-tax/action-plan-corporate-taxation_en, accessed 17 May 2018.
91 Council Directive 2015/2376 of 8 December 2015 amending Directive 2011/16/EU as regards mandatory
automatic exchange of information in the field of taxation [2015] OJ L 332 [hereinafter Council Directive exchange taxation information].
21
As from 1 January 2019 a new Directive (ATAD) goes into force, containing legally-binding rules against tax avoidance practices which directly affect the functioning of the internal market.92 This Directive was one of the proposals included in the Commission’s Anti-Tax Avoidance Package (2016).93 It aims at creating a minimum level against corporate tax avoidance, and at ensuring a fairer and more stable environment for undertakings.
In sum, even though Member States enjoy fiscal autonomy, they must exercise that competence consistently with EU law. As described above, one can see how the Commission’s approach to national tax rulings developed and intensified over the years. Besides that, and because of that development, the CJEU’s case-law on direct taxes as prohibited State aid has expanded as well. This means that, even though Member States enjoy fiscal autonomy, they must take into account more and more EU law when introducing tax rulings.
2.3 TAX RULINGS IN THE MEMBER STATES
Even though tax rulings are for the Member States to decide on and they can be perfectly legal, they must respect the State aid rules.94 If not, they can possibly constitute State aid under EU law. This is the case when the four cumulative criteria of Art. 107(1) TFEU, as discussed in chapter 1.2, are met.
In each Member State, the ‘system’ regulating tax rulings differs.95
There are Member States with a long tradition in formal and informal tax rulings, such as Finland, France and The Netherlands.96 Some Member States have a legal or policy framework for their tax rulings practices, while in others a framework is lacking.97 Tax rulings are generally binding upon the tax authorities. Either through legal or administrative provisions for APAs and ATRs, or based on the principle of legitimate expectations for ‘other tax arrangements’. There are however certain conditions attached to this binding effect, like that the tax ruling is in accordance with national and international law, and that there are no fraudulent means.98
92
Council Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market [2016] OJ L 193 [hereinafter Council Directive tax avoidance].
93 European Commission, ‘Anti Tax Avoidance Package’,
https://ec.europa.eu/taxation_customs/business/company-tax/anti-tax-avoidance-package_en, accessed 13 June 2018.
94
Stuart, supra note 19, p. 204.
95 Velde, supra note 58, p. 37. 96 Ibid., p. 38.
97
Ibid., p. 39.
22
The Netherlands have an administrative, i.e. policy, framework for ATRs and APAs. The Dutch tax rulings are issued by an independent tax office in Rotterdam which forms part of the national tax authorities.99 The legal bases of the Dutch tax rulings practice can be found in Besluit DGB 2014/3098100 (decree), which handles procedures for requests for APAs in cross-border activities, and in Besluit DGB 2014/3099101 (decree) handling requests for ATRs. Under Dutch civil law ATRs and APAs are characterised as determination agreements (vaststellingsovereenkomst) according to which both the tax administrations and taxpayers are bound.102 In principle, they are valid for 4 to 5 years. There are however exceptions if they cover either long-term contracts or bilateral agreements.103
In the Dutch decrees it is ensured that a ruling provides certainty in advance about the application of laws, regulations, policy and jurisprudence for a specific transaction of activity within the framework of laws, regulations, policy and jurisprudence. More specifically, giving certainty in advance about fiscal consequences should fall within the general framework as laid down in Besluit Fiscaal Bestuursrecht.104 The application of law for rulings should be similar for both large and small companies, so there are no inequalities in tax burden. Therefore, the advance character of a ruling should not lead to a fiscally more favourable treatment: both with and without a ruling, the same effective tax rate is achieved.105
Rulings can however violate the law, regulations, policy or jurisprudence. This can, for example, be the result of incomplete information or lacking details when the ruling is issued by the tax authorities.106 So, the Dutch authorities are obliged to comply with the law, regulations, policy and jurisprudence when granting tax rulings. In case a ruling is breaching the law, this could be either the result of incomplete information or of a misapplication of the law.
2.4 CONCLUSION
In this thesis the term ‘tax rulings’ covers APAs, ATRs and other advance tax arrangements. Generally, tax rulings establish in advance the application of an ordinary tax system to a
99 Besluit van 13 juni 2014, DGB 2014/3099, Stcrt. 2014, 15956. 100 Besluit van 3 juni 2014, DGB 2014/3098, Stcrt. 2014, 15955. 101 Besluit van 13 juni 2014, DGB 2014/3099, Stcrt. 2014, 15956. 102 Romano, supra note 54, p. 101.
103
Velde, supra note 58, p. 61.
104 Besluit van de Staatssecretaris van Financiën van 24 mei 2017, Besluit Fiscaal Bestuursrecht, Stcrt. 2017,
28270.
105
Kamerstukken II 2017/18, 25087, nr. 190, p. 15.
23
particular case. They provide certainty for the taxpayer on how national tax law applies and give awareness about the fiscal consequences of future transactions.
Member States are exclusively competent in setting their tax schemes, and thus also to agree on tax rulings. However, they must exercise that competence consistently with EU law. Due to recent developments and the growing number of investigations into national tax
rulings, the EU legal framework on tax rulings has expanded as well. This means that it becomes more complicated for Member States to set tax rulings in accordance with EU State
aid law, even though they enjoy fiscal sovereignty.
Each Member State has its own system for the regulation of tax rulings. This means that there are currently 28 different ‘tax rulings systems’. They consist either of a legal or policy framework, or of an informal framework. Generally, tax rulings are binding upon the Member States and they are supposed to comply with the national laws, regulations, policies, and jurisprudence. They are ought to not favour certain companies by lowering their tax burden in comparison to other tax payers who were not granted an advance ruling. It can, however, be the case that a tax ruling does not comply with the law because of lacking information during the tax ruling request, or because it simply misapplied the law.
24
3 THE
SELECTIVITY
CRITERION AND ITS
INTERPRETATION
REGARDING
TAX RULINGS
A frequent criticism regarding direct tax matters is that the Commission and CJEU are acting beyond their competences and infringing the autonomy of Member States. Especially the interpretation of the selectivity criterion is often questioned.107 This is because tax rulings generally fulfil the other criteria of Art. 107(1) TFEU: there is a transfer of State resources, they grant an advantage, and they potentially affect trade and distort competition. The selectivity criterion is the issue on which it is often decided whether a tax measure constitutes State aid under Art. 107(1) TFEU.108
This chapter embraces an in-depth analysis on the interpretation by the CJEU and Commission of the selectivity criterion in tax matters. First, the framework established by the CJEU is described in detail. In chapter 3.2 the Commission’s interpretation of the selectivity criterion regarding tax rulings is discussed. By this, the interpretation of the selectivity criterion is assessed through both binding law and non-binding (soft) law.
The Commission is obliged to review national aid systems.109 If a tax measure is doubted to constitute State aid, the Commission assesses its compatibility with EU law. In case the Commission decides a national measure constitutes State aid, and the Member State concerned disagrees, the latter can ask for annulment before the CJEU.110 The CJEU has the last judicial word, and therefore, the Commission is obliged to follow the CJEU’s interpretation.111 For that reason both the interpretation by the CJEU and the Commission are analysed. The chapter finishes with a summarizing conclusion.
3.1 INTERPRETATION BY THE COURT OF JUSTICE OF THE EUROPEAN UNION Since Art. 107(1) TFEU is far from detailed, there is a wide margin of interpretation left for how it should be applied. The CJEU has the last judicial word and thus has a fundamental role for the interpretation and development of the Treaty provisions.112
107 Bartosch, supra note 37, pp. 179 – 180. 108 Ibid., p. 178.
109 C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke [2001] ECLI:EU:C:2001:598,
para 23 [hereinafter Adria-Wien Pipeline].
110 European Commission, ‘Competition: State aid procedures’,
http://ec.europa.eu/competition/publications/factsheets/state_aid_procedures_en.pdf, accessed 20 July 2018.
111
Adria-Wien Pipeline, supra note 109, para 29.
25
The Commission recently issued several negative Decisions on tax rulings of Member States, i.e. that they constituted State aid (chapter 3.2). The Member States concerned brought an action for annulment of these Decisions, so they are currently pending before the CJEU. Therefore, there is not yet a clear interpretation on the selectivity criterion regarding tax rulings by the CJEU. However, there have been numerous cases on direct taxation measures. This subchapter aims at giving an overview of those judgments and what that possibly could mean for the tax rulings cases currently pending.
3.1.1 MATERIAL SELECTIVITY
Material selectivity covers measures restricted to one or more sectors of activity, types of undertakings or production of goods.113 It is settled case-law that, to establish selectivity, it must be determined:
whether, under a particular regime, the national measure in question is such as to favour ‘certain undertakings or the production of goods’ over others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which accordingly suffer different treatment that can, in essence be classified as ‘discriminatory’.[emphasis added]114
The national measure is examined by its effects and not by the reasons of a Member State to introduce such a measure.115 For example, selective tax measures cannot be accepted for reasons of environmental protection. Even though that is a legitimate objective, it cannot exclude the selective measure from the scope of Art. 107(1) TFEU.116 Besides that, the number of undertakings in various sectors benefitting from a tax measure does not matter for a measure to be characterised as selective.117 Even measures benefitting a whole economic sector can constitute selectivity.118
113 Micheau 2011, supra note 21, p. 199. 114
C-20/15 P Commission v World Duty Free Group [2016] ECLI:EU:C:2016:981, para. 54 [hereinafter World
Duty Free Group]; C-233/16 ANGED [2018] ECLI:EU:C:2018:280, para. 31 [hereinafter ANGED].
115 Azores, supra note 38, para. 87; C-487/06 P British Aggregates v Commission [2008] ECLI:EU:C:2008:757,
para. 85 – 86, 89 [hereinafter British Aggregates].
116 C-409/00 Spain v Commission [2003] ECLI:EU:C:2003:92, para. 54 [hereinafter Spain v Commission]; British Aggregates, supra note 115, para. 86 – 92.
117 Spain v Commission, supra note 116, para. 48; Commission v World Duty Free Group, supra note 114, para.
80.
118
C-148/04 Unicredito Italiano [2005] ECLI:EU:C:2005:774, para. 44 – 45; C-78/08 Paint Graphos and
26
If measures apply without distinction to all undertakings in the national territory, regardless their activity, there is normally no selectivity.119 In case taxpayers only satisfying the conditions attached to the application of a measure can benefit from that measure, there is still not per se selectivity as long as the taxpayers are not in a factually and legally comparable situation in the light of the objective pursued by the general system.120
In the World Duty Free Group judgment, the CJEU clarified the selectivity criterion and gave it a broad interpretation. It judged that even if a national measure is accessible to all undertakings it can still be selective.121 With this judgment the ‘discrimination’ element was added.
The case concerned a Spanish corporate tax measure under which undertakings taxable in Spain, that required a minimum of 5% shareholding in a foreign company, could deduct the goodwill resulting from that shareholding in the form of an amortisation from the basis of assessment for the undertaking’s corporation tax. Spanish undertakings that held a shareholding in another Spanish company could not enjoy such an amortisation.122 Thus, the measure was accessible, a priori, to any undertaking and not directed to a particular category of undertakings. However, the CJEU judged that it was selective under Art. 107(1) TFEU.123 Since it differentiated in treatment through its actual effect between operators (undertakings with a shareholding in a foreign company and undertakings with a shareholding in a Spanish company) who were in the light of the tax system’s objective in a comparable factual and legal situation.124 The CJEU stated that it was sufficient to establish that ‘certain undertakings or the production of certain goods were being favoured’, if the Commission could demonstrate this differentiation, and thus discrimination.125 Consequently, the Commission does not necessarily have to identify a particular category of undertakings, with specific common characteristics, that exclusively benefit from a measure, in order to establish selectivity.126
119 Adria-Wien Pipeline, supra note 109, para. 35 – 36. 120 World Duty Free Group, supra note 114, para. 59. 121 Ibid., para. 81 – 83.
122
Ibid., para. 5.
123 Ibid., para. 68 and 87. 124 Ibid., para. 65 – 69. 125
Ibid., para. 92.
27
3.1.2 THREE-STEP DEROGATION TEST
The CJEU developed a three-step derogation test to examine whether a tax measure is selective. First, the reference system must be determined, i.e. the ‘normal’ regime applicable in a Member State. This forms the benchmark for assessing whether a tax measure is selective or not. The determination of the reference framework is important for tax measures, because ‘the very existence of an advantage may be established only when compared to “normal” taxation’.127
The normal regime covers ‘a consistent set of rules that apply on the basis of objective criteria to all undertakings falling within the scope as defined by its objective’128
, and is based on, among others, the tax base, the taxable persons, the taxable event and the tax rates.129 The reference system should be defined in the light of the objectives of the measure at issue. It can, for example, be the corporate income tax system or the VAT system.130
In Paint Graphos the reference system was the national corporate income tax system. This case concerned tax benefits for undertakings, by which their taxable income was lowered. The taxable income was determined by the amount of net profit earned by the undertaking’s activities at the end of the taxable period. This was calculated in the same way for both the undertakings concerned and other types of undertakings, while not all undertakings could enjoy the tax benefits.131 Derived from this judgment, the reference system in case of a corporate tax reduction is often the national corporate income tax system.
Second, it must be examined whether the tax measure derogates from the normal reference system, insofar as it ‘differentiates between operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation’.132
A distinction is made between individual tax measures and general schemes of aid. For individual tax measures is the identification of an economic advantage, in principle, sufficient to presume that the measure is selective. Regarding general schemes, however, one most not only examine whether it grants an advantage of general application, but also whether it exclusively benefits certain undertakings.133 It is, as mentioned in the discussion of the
127 C-106/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011]
ECLI:EU:2011:732, para 90 [hereinafter Gibraltar].
128
T. Iliopoulos, ‘The State Aid Cases of Starbucks and Fiat: New Routes for the Concept of Selectivity’,
European State Aid Law Quarterly, Vol. 2017, No. 2 (2017), p. 267 [hereinafter Iliopoulos]. 129 Commission Notice, supra note 20, para. 134.
130 K. Bacon, European Union Law of State Aid, Oxford: University Press 2017, pp. 71 – 72. 131
Paint Graphos, supra note 118, para 50.
132 Paint Graphos, supra note 1118, para 49; World Duty Free Group, supra note 114, para. 57; ANGED, supra
note 114, para 33.
133
C-15/14 P Commission v MOL [2015] ECLI:EU:C:2015:362, para. 60 [hereinafter MOL]; C-270/15P Belgium
28
World Duty Free Group judgment, for the Commission to demonstrate that a measure confers an exclusive benefit on certain undertakings or certain sectors of activity.134
If the measure derogates from the normal reference system, it is a priori selective. Then, the third step follows, in which it is determined whether the selective tax measure is justified under Art. 107(1) TFEU by the nature or general structure of the system of which it forms part. This is for the Member States to prove.135 They must demonstrate that ‘the measure results directly from the basic or guiding principles of its tax system’.136 In that regard, a distinction must be made between, on the one hand, ‘the objectives attributed to a particular tax scheme which are extrinsic to it’ and, on the other hand, the ‘mechanisms inherent in the tax system itself which are necessary for the achievement of such objectives’.137 Valid justifications are for example the principle of tax neutrality, tackling tax avoidance, and the obligation to consider specific accounting requirements. A justification such as the promotion of undertakings’ competitiveness has consistently been rejected.138
3.1.3 DE FACTO AND DE JURE SELECTIVITY
A tax measure is de jure selective if it is formally reserved only for certain undertakings or sectors. However, tax measures can also be de facto selective. In the Gibraltar case, companies had to meet several conditions to enjoy two corporate tax measures reducing the income tax.139 The measures were part of the general tax system, which had the taxation of all resident companies as its objective. The actual effect was that offshore companies, that have specific characteristics by which they automatically meet the conditions of the tax measures, were favoured.140 The CJEU ruled that the fact that these offshore companies were not subject to tax was not an arbitrary consequence of the general tax scheme, but ‘the inevitable consequence of the fact that the basis of assessment was specifically designed so that offshore companies have no tax bases under the basis of assessment adopted’.141
Therefore, the measure was de facto discriminating vis-à-vis other undertakings which were also subject to the general tax system. Concluding, by effectively excluding offshore companies from the tax
134
MOL, supra note 133, para. 59 – 60.
135 Spain v Commission, supra note 116, para. 52 – 53; C-159/01 Netherlands v Commission [2004]
ECLI:EU:C:2004:246, para. 46; World Duty Free Group, supra note 114, para. 58; ANGED, supra note 114, para. 35.
136 Azores, supra note 38, para. 81; ANGED, supra note 114, para. 36. 137
Azores, supra note 38, para. 81.
138 Micheau 2011, supra note 21, p. 203. 139 Gibraltar, supra note 127, para. 3 – 5. 140
Ibid., para. 104.
29
regime that had the objective to put in place generalised taxation of all resident companies, the measure was selective.142
3.1.4 BELGIUM AND FORUM 182 V COMMISSION
The Forum 187143 judgment is analysed because, as becomes clear in subchapter 3.2, the Commission heavily relies on this case in its negative Decisions on tax rulings.
The case concerned a tax regime for coordination centres in Belgium. These are companies belonging to multinational groups and executing certain specific functions within them, mostly in financial matters.144 The taxable income of the centres was determined as a fixed amount on basis of the costs incurred. The method of assessment of taxable income was based on the cost-plus method, which is one of the ways of calculating transfer prices recommended by the OECD.145 The staff costs and financial costs were, however, excluded from this calculation, which constitutes a deviation from the TP Guidelines.
The CJEU stated that, to determine whether an advantage is conferred under Art. 107(1) TFEU through the method of assessment of taxable income, it is necessary:
[…] to compare that regime with the ordinary tax system, based on the difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition.146
The CJEU concluded that staff costs and financial costs could not be excluded from the expenditure, because they had an important role in the determination of the centres’ taxable income. By excluding such costs, the transfer prices did not resemble those which would be charged in conditions of free competition.147 Therefore, the CJEU argued that the rules governing the determination of taxable income, conferred an economic advantage to the centres.148
Although the previous paragraph does not focus on the selectivity criterion, but on the economic advantage criterion, this judgment must be kept in mind for the next subchapter. It is important to notice that the CJEU only refers to the cost-plus method of the OECD and
142 Ibid., para. 107.
143 C-182/03 Belgium v Commission [2006] ECLI:EU:C:2006:416 [hereinafter Forum 187].
144 European Commission – Legal Service, ‘Summaries of important judgments’,
http://ec.europa.eu/dgs/legal_service/arrets/03c182_en.pdf , accessed 8 June 2018.
145 Forum 187, supra note 143, para 94. 146 Ibid., para. 95.
147
Ibid., para. 96.
30
states that applying such a method should result in transfer prices that resemble prices that would be charged in conditions of free competition. If not, there is an economic advantage. The CJEU does not, however, explicitly refer to the arm’s length principle as covered by the OECD TP Guidelines.
After the CJEU in Forum 187 determined that an economic advantage was conferred upon the centres, it assessed the selectivity criterion under Art. 107(1) TFEU. It concluded that the regime was selective because, amongst others, the regime only applied to international groups having subsidiaries in at least four countries, with a certain amount of capital and reserves, and a specific minimum annual turnover.149
3.2 INTERPRETATION BY THE EUROPEAN COMMISSION
Although the Commission Decisions are subject to review by the CJEU, the Commission has an important role since it is responsible for the enforcement of EU State aid law (chapter 1.1). This subchapter discusses the Commission’s interpretation of the selectivity criterion regarding tax rulings in both its negative Decisions and the Notice on the Notion of State aid.
3.2.1 COMMISSION NOTICE ON THE NOTION ON STATE AID
The Commission Notice on the Notion of State aid is a soft law instrument.150 Soft law can be defined as ‘a rule of conduct, which, in principle has no legally binding force, but which nevertheless may have practical effects’.151
The Notice is thus guiding and non-binding on the CJEU and Member States.
With the Notice the Commission tries to contribute to an ‘easier, more transparent and more consistent application’ of Art. 107(1) TFEU across the European Union.152
It clarifies the Commission’s understanding of Art. 107(1) as interpreted by the CJEU. On issues where case-law is absent, the Commission sets out how it considers that the concept of State aid, and thus selectivity, should be interpreted.153
The Notion’s interpretation of the selectivity criterion does not strikingly differ from the CJEU’s interpretation as discussed in chapter 3.1, and in this respect, it relies on the
149
Ibid., para 121 – 122.
150 Commission Notice, supra note 20. 151 Micheau 2016, supra note 14, p. 25. 152
Commission Notice, supra note 20, para. 1.
