Carte blanche: The EU’s competition authority is creating uncertainty about taxes, writes Keith O’Donnell.
The European Commission’s Apple and McDonald’s state aid cases have piqued the interest of journalists worldwide. State aid, once an obscure legal field, has become a frontline topic. Here is why these cases are so important for the future of international tax laws.
Shouldn’t the EU member states concerned take the money and be happy? This would be an error. The states believe that they were applying their tax rules in line with their administrative practice, exercising national sovereignty and respecting EU commitments. The EU Commission disagrees. The next step is to take the matter to the European Court of Justice for a binding decision on the extent of state sovereignty.
Don’t the multinationals who avoid taxes deserve to be taxed? The fact is that there are vastly different beliefs of what is a fair level of tax. No amount of debate will reconcile these views into a single definition of what is fair. Differing views are balanced through a democratic process that leads to laws that must be respected by all. Any attempt to settle tax matters on extralegal moral grounds is therefore doomed to be subjective and anti-democratic.
Aren’t the rulings in some way abusive and, therefore, by agreeing to them EU states granted special deals? This is the heart of the commission’s case. Simply put, the commission is saying that the laws under which these structures were implemented are valid under state aid law, but the states should not have granted the rulings. In Apple, the EU Commission second guesses the tax officials’ opinion and comes to a different conclusion: that the local officials’ decision amounts to a selective advantage. There is no consideration of whether the same conclusion would have been inevitable in any comparable fact pattern. We believe this analysis to be fundamentally flawed as a matter of law. The initial findings in McDonald’s, and more recently Engie, seem to indicate the same line of thinking. The consequence of this analysis would be that any administrative decision in tax matters, which the commission might in future disagree with, is subject to a 10-year uncertainty.
What’s next? The commission has taken state aid to a new level. If the commission is prepared to challenge an individual EU taxpayer’s tax affairs in any jurisdiction if it doesn’t like the outcome, it substitutes itself for national authorities and governments in a way that brings us into unexplored territory. For example, do all individual taxpayer assessments involving an element of judgement have to be reviewed? Will bilateral transfer pricing agreements and tax treaties also need the blessing of the commission?
The US reaction, thinly veiled outrage at a perceived targeting of its companies and tax base, raises the stakes. Concerns about a new hybrid trade war are inevitable.
In the middle of some difficult discussions about the future of Europe, this may be as a distraction that the EU can ill afford.