End of the road for "parasite" Member States?
In a move that emphasises the new activism of the EU in matters of corporate tax avoidance, the EC Commission has directed EDF to repay to the French State an €889 million tax break granted in 1997, together with interest of a further €488 million.
The move marks the second direction of the Commission that EDF make repayment, the first having been annulled by the European in 2012.
Under Article 87 of the EC Treaty, any aid granted by a Member State 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 common market.
The practice of tax authorities in member states granting tax rulings to companies can perform the desirable function of giving to those companies the clarity to make investment decisions. However, there is a temptation for member states to seek to grab tax revenues from other states by offering 'sweetheart deals' to induce a company to base itself there. This behaviour distorts the market - companies cannot fairly compete with one another if they are subject to different tax treatments - and can constitute unlawful state aid.
The Commission has been investigating tax rulings granted by Ireland to Apple, by the Netherlands to Starbucks and by Luxembourg to Amazon.
It was exposure of abuses of this practice in Luxembourg that lead to the #LuxLeaks scandal leading Margaret Hodge, then Chair of the Public Accounts Committee, to dub Luxembourg a "parasite state".
There are profound issues at stake here. The UK is explicitly pursuing a policy of tax competition through lowering its rate of corporation tax - at 20% already the lowest in the G20 - to 18% from 2020-21. By way of comparison, Germany has a 30% corporation tax rate, France 33.33%, Spain 28% and so on. And although the EU has focused to date on tax rulings granted to member states the language adopted by the Commission suggests there is a broader interest in leveling the playing field:
Such interventions would be politically explosive in the UK. Speaking to the European Tax Policy Forum, Financial Secretary to the Treasury, David Gauke said:
But the institutions of the EU, including the ECJ, have a long - and some would say proud - history of interventionism where such is necessary to overcome political impediments to delivering a single market. Indeed, there are said to be continuing state aid threats to our own (reformed) Patent Box tax regime.
It is not easy to identify any rational sense in which a distinction can be drawn between tax competition in the form of preferential tax rulings on the one hand and preferential tax regimes on the other. Both distort the market. And, writing in the Guardian earlier this year (in an article well worth reading), Margrethe Vestager (Competition Commissioner) and Pierre Moscovici (the Commissioner for Economic and Financial Affairs, Taxation and Customs) noted that:
In the worst-case scenario, unfair tax competition could create a race to the bottom, in which countries feel compelled to give handouts to multinationals in the form of tax breaks.
The losers are the taxpayers, who foot the bill, the small businesses that cannot compete, and national governments, which lose tax revenue needed to maintain roads, power grids and schools. The winners are the big businesses that play European countries off against each other. Tax rulings granted by HMRC in the UK are under investigation by the EC Commission.