Vestager speech confirms Commission's approach to State aid and special tax treatment

On 31 January 2017, Margrethe Vestager, the European Commissioner for Competition, affirmed the Commission’s approach to enforcing State aid rules, especially in the context of special tax treatment.

The importance of EU State aid rules

Ms Vestager began her speech by looking back over sixty years of competition rules, particularly those in relation to State aid. These rules play a fundamental role in making the European Union’s single market a success, and mean that governments cannot use subsidies and special tax breaks to recreate barriers between countries. Without State aid rules, companies based in less prosperous Member States would find it difficult to compete because their governments could not hope to win a subsidy race against larger countries with deeper pockets.

Rules on State aid have been clear for a long time. In the 1970s, the European Court of Justice made clear that preferential tax treatment could constitute State aid, in the same way as a simple grant. Commission guidance in 1998 reaffirmed the position that corporate tax rules can lead to State aid. Finally, the European courts confirmed in 2006 that dealings between group companies had to be on market terms to avoid being State aid.

State aid decisions on tax rulings

Shifting her focus to special tax treatment, Ms Vestager defended the Commission’s recent controversial decisions on tax rulings, which are currently being appealed by the governments and companies involved. She argues that the decisions were based on principles that have been part of the law for many years, and which are essential to make the single market work for all Member States.

Despite the long-standing and clear rules, Ms Vestager acknowledged a recent change: multinational companies pushing the boundaries of aggressive tax planning. Beginning with investigations into a ‘tax incentive arrangement’ offered by the Irish government, the Commission has shown a commitment to pursuing such practices throughout the EU, asking every EU Member State for information on tax rulings and following up with in-depth investigations in the most serious cases. The investigations have led to four decisions so far involving high-profile multinational companies. Ms Vestager stressed that the decisions should help the single market to work better, and act as a deterrent against corporate tax planning practices that are against the State aid rules.

Two take-away points

In closing her speech, Ms Vestager made two points clear. First, despite recent decisions, tax rulings in principle are perfectly legal. In most cases, they simply want to give clarity to how tax bills should be calculated or how tax rules will be applied. The Commission only wants to ensure they are not used to allocate profits in a way that is disconnected from economic reality. Second, Member States in the EU still retain their rights to determine their own tax systems and set their own taxes; the Commission is not claiming authority over national or international tax rules.

Companies and governments alike should be aware that State aid and special tax treatment remain high on the Commission’s agenda.