Ilegal State aid: Fiat, Starbucks, Belgium, Apple and more cases to come

3.1 General

The EU State aid rule does not differentiate how the assistance is granted, because article 107, §1, of the Treaty says "any aid granted ... in any form whatsoever”, i.e. the Commission’s action to investigate MS tax rulings is absolutely justifiable by this provision.

The referred article prescribes four cumulative criteria that must be fulfilled in order to consider a measure prohibited.6 The reason why this paper approaches these criteria instead of TP issues regards to the fact that, these cases might have a different outcome at the EU Courts just by dealing primarily with State aid questions.

3.2 By a Member State or through State resources

The EU State aid prohibitory rule does not require any particular form, simply that the aid is granted by a Member State or through State resources. The first part of this criterion, by a MS, is easily verified in the cases under analysis, since it was the MS’ tax authorities who recognised as valid the corporation’s APAs as valid. If such tax rulings supposedly conferred a tax advantage to the recipients of these decisions, they consequently legally bind the MS concerned, which is thus imputable to the aiding measure.

Regarding the second part of this first criterion, through State resources, according to the pacified case-law, taxation has the capacity of transferring directly or indirectly State resources. In this sense, any type of tax benefit can potentially make an indirect use of public resources, because the tax normally levied is not charged at its regular time.7 Consequently, the revenue normally raised never enters the public treasury, incurring an indirect loss of tax revenues or consumption of public resources. Following this rationale, the fulfilment of through State resources criterion requires that the recipient of the aid receives a tax relief of his or hers usual tax burden, which is called favourable tax treatment or tax advantage and represents the second State aid criterion.

3.3 Tax advantage, selective or selective advantage

In the Starbucks, Fiat, Belgium and Apple cases, the Commission concluded that the tax rulings investigated conferred a selective advantage to the corporations that benefited from the illegal State aid decisions. Although tax advantage and selectivity are in principle two different criteria, because it is possible to confer a tax advantage without being selective, the Commission carried out their assessment jointly.8 A clear distinction must be made between both criteria, since tax advantage refers to the tax burden of the recipient (non-horizontal benefit), whereas selectivity targets the recipient of such advantage.9

Notwithstanding the Commission’s joint approach choice, it is settled in the case-law that selectivity assessment in tax matters should follow three progressive steps.10 First, identify and examine the reference system which is also relevant for verifying the existence of a tax advantage and, consequently, the use of State resources. Second, verify within the reference regime, if the appointed tax advantage derogates from this regime by favouring some taxpayers and not others (called prima facie selective). Third, verify if this derogation can be justifiable by the structure, rationale and guiding principles of the tax system in reference. If the measure cannot be justifiable, it is thus selective, otherwise it is general and not State aid.11

Due to delimitation purposes, the selectivity and tax advantage analysis below focuses particularly in the Starbucks (Netherlands) and Fiat (Luxembourg) cases, although this discussion is still useful for the Belgium and Apple Ireland cases.

When appointing and identifying the normal or common reference system for the first step of selectivity assessment, the Netherlands argued that the Dutch Corporation Tax Act 1969 (CIT), specifically article 8b, §1 and, the Dutch Transfer Pricing Decree (Decree) constitute the reference regime. Netherlands argued that the reference system incorporates article 9 of the OECD Model Tax Convention on TP and is applicable only to corporation groups. Conflictingly, the Commission understood that the reference system is only the CIT, rejecting the application of the Decree as part of the system and, that the reference system is applicable to all companies, regardless their structure (standalone or groups).12

Similarly, in the Fiat case, Luxembourg appointed that the reference system is the Luxembourg Income Tax Code (LIR), specially article 164, §3, and is applied only to group of companies. The Commission divergently understood the reference system is Luxembourg Corporate Income Tax (IRC) and that it is applied to all companies, regardless their structure.13

Following the referred confronting arguments between the Commission and the MS, the first step of selectivity analysis and starting point question is: which is the proper common and normal reference system in Netherlands and Luxembourg cases? From this question two clear departing answers can be appointed. At one side, if the EU Court understands that the Commission’s decisions are based on the wrong or incomplete common and normal reference framework of the MS imputable for the tax ruling, it is safe to presume that these decisions will be overruled, since they would lack legality in the light of the proper reference regime. Contrary, if the EU Court understands that the Commission properly identified the reference system, the Court should than verify if the tax rulings questioned created a favourable tax treatment to the recipient of the measure. Therefore, the logic follow-up question and second step of selectivity analysis is: which are the taxpayers under the same factual and legal situation according to the reference regime?

This analysis draws a circle around all taxpayers in a comparable situation in the light of the reference regime and it is relevant to understand how the Commission concluded that, the MS’ tax rulings granted a selective advantage to Starbucks and Fiat in comparison to their competitors. First, the Commission pointed out that Starbucks and Fiat income taxation results changed after the tax rulings were granted.14 During the process of investigating the existence of a State aid measure within these administrative tax decisions, the MS, recipients of the rulings and third parties provided substantial information to the Commission. A brief distinction must be made, Fiat only carried out business within the group, whereas Starbucks carried out business within the group as well as with non-related parties.15 Finally, the Commission understood that the investigated tax rulings granted a selective tax advantage to both companies, mainly because of the arguments presented below.

First, the method used to deliver corporations groups and standalone companies income tax base was accounted differently.16 Therefore, is the reference system applicable to both standalone companies and corporation group of companies? If the Court understands that the answer is ’no’, following the MS position and contradicting the Commission’s argument, corporation group of companies and standalone companies are not in the same comparable position and cannot receive the same tax treatment. On the other hand, if the Court follows the Commission’s position, this understanding strengthens the selectivity criterion fulfilment and requires an analysis of other arguments.

Second, the Commission challenged that the accountability methods contained in the APAs and approved by the challenged tax rulings did not deliver an arm’s length result regarding: (i) the corporation income tax base; (ii) the level of royalties’ payments in Starbucks case; and, (iii) the return tax rate on equity payments in Fiat case.17 Hence the TP methods applied did not consider the normal market conditions.18 The Commission understood that the questioned tax rulings fulfilled tax advantage and selective criteria, with the following argument:

The arm’s length principle therefore necessarily forms part of the Commission’s assessment under Article 107(1) of the TFEU of tax measures granted to group companies, independently of whether a Member State has incorporated this principle into its national legal system. It is used to establish whether the taxable profits of a group company for corporate income tax purposes has been determined on the basis of a methodology that approximates market conditions, so that that company is not treated favourably under the general corporate income tax system as compared to non-integrated companies whose taxable profit is determined by the market. Thus, for any avoidance of doubt, the arm’s length principle that the Commission applies in its State aid assessment is not that derived from Article 9 of the OECD Model Tax Convention, which is a non-binding instrument, but is a general principle of equal treatment in taxation falling within the application of Article 107(1) of the TFEU, which binds the Member States and from whose scope the national tax rules are not excluded.19

The Commission legally based the cited paragraph with another paragraph of a ECJ case, which says "it should be pointed out, first, that rules relating to tax are not excluded from the scope of Article 87 EC.”20 It is unclear why the Commission cited this part of the referred case to fundament its position, since within the context of the referred ECJ case, the Court was answering to an argument that the Commission did not have stands to review MS tax matters, according to article 87 EC (article 107, §1, TFEU).

The Commission also cited other parts of the referred ECJ precedent (§§96–97) to imply that the arm’s length result is a prerequisite of the State aid criteria in tax measures. However, the ECJ understood in the light of the regime analysed in that case, that the TP accountability which did not include the expenditures costs relevant for the determination of the business’ taxable income, represented a selective tax advantage. Following the rationale that, once such costs are normally charged in a free market, but only 5% of the undertakings in the same factual and comparable situation (coordination centres in Belgium) benefited from this measure, such tax law represented an illegal State aid scheme.21 Consequently, the arm’s length result in this case was part of the logic of Belgium’s tax law regime and not a general rule of article 107, §1, TFEU, as sustained by the Commission.

In this sense, the key question to this second step analysis and for the future of the EU State aid rules interpretation in tax matters is: is the arm’s length principle a general principle of article 107, §1 of the Treaty, when it comes to ensuring an equal tax treatment amongst taxpayers?

If the Court’s understanding is similar to the Commission’s position, this will represent a landmark in State aid cases involving tax matters, since this position will legitimise the Commission implementation of the ALP as a general principle of the Treaty (State aid) rule. It seems very aggressive to adopt such understanding, since the letter of the referred article does not intrinsically imply such interpretation, rather the Commission does. Moreover, article 109, TFEU requires that the Council adopt secondary law (regulations) for the application of article 107, thus such interpretation of the referred State aid article could represent a breach of article 109.

Contrary, if the Court disagrees with the Commission’s position, the conclusion that the ALP is a general principle of article 107, §1, TFEU falls apart, which consequently maintain the MS sovereignty rights for this tax matter and some level of legal certainty, in the sense that the ALP can only be implemented through national law or EU secondary law. Following this rationale, the argument that the tax rulings in Starbucks and Fiat cases granted a selective advantage, because the tax base and tax rate applied in these companies’ taxation did not represent an arm’s length result, has to be based strictly in the national law scheme and not a Treaty interpretation.

Finally, in the third step of selectivity analysis, the Court should answer if the tax rulings questioned have in fact deviated from the reference system in an unjustifiably way, fulfilling the selectivity criterion with a positive answer. If these cases are not solved by the Court until this level of State aid analysis, TP methods and ALP will most likely become the main legal discussion, since the last criterion (distort or threatens to distort) of State aid are easily fulfilled with the presence of the other three criteria.