Incoming European Commission President Ursula van der Leyen has set out as her primary goal moving forward the mission of further unifying Europe and “protecting the European way of life.” As a result, there will continue to be close oversight and aggressive regulation of non-European companies under the new EC administration set to take office on November 1st. This regulatory push will be especially notable in the areas of tax and competition, two regulatory issues which have often merged under the oversight of current European Commission Competition Commissioner Margarethe Vesteger in her pursuit of special tax deals as unfair competitive arrangements.
American technology companies have already encountered Vestager’s regulatory sting. This has been the “headline” issue seen in the U.S. For example, in March 2019, the EC fined Google €1.5 Billion ($1.64 Billion) because the EC had concluded that Google abused its dominant position by forcing customers of its AdSense business to sign contracts stating they would not accept advertising from rival search engines.1 This was on top of fines of €4.3 billion in 2018 for abusing its market dominance in mobile, and €2.4 billion the year before that for manipulating shopping search results. However, it is not only the tech companies that are undergoing regulatory scrutiny. Commissioner Vestager has interpreted her jurisdiction very expansively in several high-profile cases involving multinational companies.
Over the next five years, Vesteger will notably have considerably more regulatory discretion in her new capacity as an Executive Vice President of the EC. As noted recently in Politico, “Vestager will not only retain authority over antitrust enforcement, but also will be in charge of defining how technologies like artificial intelligence should be governed and how the [EU] could potentially block foreign acquisitions in strategic sectors, particularly related to Europe’s tech sector.”2 Moreover, she can be expected to continue to use her jurisdiction to ferret out what the EC would consider uncompetitive tax arrangements.
During this outgoing EC Administration, Vestager pursued high visibility cases against U.S. multinational companies on the basis that their tax arrangements constituted illegal “state aid” under EU policy, i.e., subsidies by Member States of the EU that have the effect of undermining free competition. For example, in 2016, the EC concluded that Apple had benefited from illegal state aid due to two Irish tax rulings which artificially reduced its tax burden for over two decades. The EC ruled that the company owed €13 billion ($14.2 billion) to Ireland after receiving an unfair advantage through tax breaks that constituted illegal state aid. Both Ireland and Apple appealed the case to the European Court of Justice (“ECJ”).
This interpretation of tax arrangements as constituting state aid made by Vestager and her Competition Directorate is controversial in the U.S. but, in fact, has been part of the EU law since 1974, when the ECJ clarified that the EC's competence in the field of state aid control also covers the area of direct business taxation.3 Thus, although Member States enjoy fiscal autonomy in the design of their direct taxation systems,4 fiscal measures that a Member State adopts cannot be used to provide selective advantages to a specific company or group of companies.5
Unlike questions involving taxation, State aid is clearly a matter of EU competence. Article 107 of the Treaty for the Functioning of the European Union “prohibits using state resources to grant selective aid which may distort competition or trade between member states.” Individual EU countries cannot grant companies selective benefits that put them in a better competitive position compared with other players in the European market. Vestager and the EC have used this authority over state aid to blunt individual country tax arrangements.
What generally constitutes “state aid” can more understandably be seen in the example of competitive “breaks” to airlines in the form of airport subsidies. In a ruling concluding that Italy had provided state aid to regional airports, the EC found that subsidies to airports were financial compensation granted by the [state owned] airports to the airlines for the opening of new routes or extension of operations on existing routes to Sardinia. This compensation provided a financial incentive for the selected airlines to increase air traffic to Sardinia. Therefore, the EC concluded that the agreements involved state aid in favor of the selected airlines flying to and from Sardinia.6 What the EC during Vestager’s tenure as Competition Commissioner has done is to pursue more aggressively international companies’ tax arrangements with Member States as constituting prohibited state aid.
In the Apple case, the EC concluded that private tax rulings by Ireland to Apple about its tax structure were not given to other Irish-based US multinationals. Thus, from the perspective of the EC, Apple had received illegal Irish state aid through a selective tax arrangement not available to others. As noted above, both Apple and Ireland appealed to the ECJ. A ruling is expected sometime in 2020.
Whether the EC can continue to succeed in using its state aid powers in these high visibility cases will ultimately be decided by the ECJ. Decisions issued by the Court on September 24, 2019, went both for and against the EC. Only days after the Apple arguments before the ECJ, in the first European court cases reviewing the Vestager fines against tax arrangements as illegal state aid, the ECJ ruled against the EC in a case brought originally against Starbucks and the Netherlands. In October 2015, the EC had ordered the Netherlands to claw back between €30 million in unpaid taxes from Starbucks on the basis that the tax arrangements were illegal state aid. In its Starbucks ruling, the ECJ ruled that “the [EC] has not managed to demonstrate the existence of an economic advantage within the meaning of Article 107” of the TFEU.7
Yet the same day, the ECJ upheld a European Commission decision against Luxembourg involving tax arrangements for Fiat involving a 2012 tax ruling in Luxembourg that enabled Fiat to determine its taxable profit on a yearly basis for corporate income tax based upon transfer pricing within member companies of the Fiat corporate group.8
Although the question of whether tax policy can be deemed illegal state subsidies is not yet resolved, it is certain is that under Executive Vice President Vesteger, the EC will continue to pursue the European tax arrangements of non-European multinationals aggressively. In her press statement following the release of the Starbucks and Fiat decisions, Vestager claimed victory for her approach to tax as a competitive matter: “Today's judgments give important guidance on the application of EU state aid rules in the area of taxation,” she said in a statement. "The Commission will continue to look at aggressive tax planning measures under EU State aid rules."9
American companies doing business in Europe should monitor these issues. Rimon’s international practice group is prepared to assist in guiding you through regulatory questions like those noted above when doing business in Europe.
1 ”Antitrust: Commission fines Google €1.49 billion for abusive practices in online advertising,” EC Press Release, 20 Mar. 2019; https://europa.eu/rapid/press-release_IP-19-1770_en.htm
2 “Europe’s tech enforcer lost legal battle, not political war,” Politico (25 Sept. 2019), https://www.politico.eu/article/vestager-starbucks-tax-the-netherlands-30-million-digital-competition-state-aid/?utm_source=POLITICO.EU&utm_camp%E2%80%A6
3 Case 173/73 Italy v Commission EU:C:1974:71
4 DG Competition Working Paper on State Aid and Tax Rulings, 3 Jun. 2016, https://ec.europa.eu/competition/state_aid/legislation/working_paper_tax_rulings.pdf
5 “State aid: Commission investigates transfer pricing arrangements on corporate taxation of Apple (Ireland) Starbucks (Netherlands) and Fiat Finance and Trade (Luxembourg),” EC Press Release, 11 Jun. 2014); https://europa.eu/rapid/press-release_IP-14-663_en.doc
6 “State aid: Commission finds Italy provided incompatible aid to airlines in Sardinia,” EU Press Release, 29 July 2016; https://ec.europa.eu/commission/presscorner/detail/en/ip_16_2682
7 Judgment in Cases T-760/15 Netherlands v Commission and T-636/16 Starbucks and Starbucks Manufacturing Emea v Commission.
8 Judgment in Cases T-755/15 Luxembourg v Commission and T-759/15 Fiat Chrysler Finance Europe v Commission.
9”Statement by Commissioner Margrethe Vestager following today's Court judgments on two tax State aid cases (Fiat in Luxembourg and Starbucks in the Netherlands),” EC Press Release, 24 Sept. 2019, https://europa.eu/rapid/press-release_STATEMENT-19-5831_en.htm
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