State aid and specific fiscal aid measures in the context EU Law.

The EU Commission Notice on the notion of State aid pursuant to Article 107 (1) of the Treaty on the Functioning of the European Union (TFEU) aims to be a tool that helps Member States (MS) to clearly identify the key concepts regarding State aid within the EU laws, by simply clarifying how it understands these treaty provisions in line with the interpretation given by the European Court of Justice in its case law.

Summary of Specific Fiscal Aid issues mentioned in the Notice.

As part of the manner in which MS decide to structure their fiscal policy, the Commission has identified the main pillars of tax policy that might fall under the concept of State aid:

1. Cooperative Societies. Type of undertaking with special membership requirements, whose assets and benefits are not distributed to outside shareholders and must be dedicated to the common interest of the members. MS tend to provide special tax treat due to the fact that these are undertakings that are not in a comparable factual and legal situation from the standard commercial undertakings.
2. Undertakings for collective investments. Undertakings that perform as intermediaries within investment transactions, placing themselves between the investors and the targets of investment. MS intend to give these undertakings a fiscal treatment that follow the objective of achieving tax neutrality, so that any investment transaction carried out through them gets the same amount of tax liability that an investment carried out directly by the investor.
3. Tax amnesties. Waivers of MS regarding unpaid amounts of tax by undertakings. The amnesties seek compliance of undertakings on their tax obligations. Should be exceptional, temporary, open to any type of undertaking and to any type of sector.
4. Tax settlements and rulings. (i) Tax settlements are the result of a dispute between tax authorities and taxpayers regarding amount of taxes owed; (ii) Tax rulings are administrative interpretations of tax laws by tax authorities to provide certainty, in advance, to taxpayers, regarding the application and interpretation of tax laws e.g. advance pricing agreements. Both tax settlements and tax rulings must fulfill certain conditions in order to be compliant with State aid rules.
5. Depreciation/amortization rules. These are technical rules within a tax system that apply in the calculation of the value of assets through their economic lifetime aiming to assess the financial situation of an undertaking. These rules must follow a benchmark and should not be favorable to certain undertakings on a selectivity basis. 
6. Flat rate regimes. System to apply lower tax burden to undertakings in certain industries or with certain economic size e.g. agricultural undertakings justified for the lower administrative burden implied in the calculation of a flat rate tax compared to a conventional tax rate.
7. Anti-abuse rules. Specific tax rules aimed to counter tax evasion. If applied, should not be derogated for certain undertakings or for certain transactions on a selectivity basis. Its application should be general.
8. Excise duties. Special taxes on certain products or sectors that should not be reduced by MS in order to favor certain undertakings.

In my personal view, the most sensitive specific fiscal aids that MS might be incurring into are the ones related to administrative tax rulings.

The Commission makes reference to the administrative tax ruling in a broad manner. In general terms, it only offers an example of a case for the issuance of an administrative ruling being the one for setting the arm’s length profit in an intragroup transaction or controlled transaction. Also, the Commission states that tax rulings might represent a challenge from a State aid viewpoint in (a) the absence of publication of the tax rulings and (b) in cases where the tax administrations get room for maneuver.

On the one hand, the first issue (a) is something that should be addressed in a relative straightforward way by making sure that MS administrative regulations provide for a transparency policy in terms of the publication of the tax rulings granted to any and all taxpayers. Furthermore, in the context of global trend on tax transparency, creating a harmonized system where tax administrations of all EU MS share the tax rulings that have granted should be something that must be seen as the only destination under international legal instruments like the OECD Convention on Mutual Administrative Assistance in Tax Matters.

However, on the other hand, the second issue (b) is something far more complicated to attend. Considering that, in essence, a tax ruling is the expression of how a tax administration understands and interprets relevant tax provisions, I can’t hardly see how can a tax ruling can be issued without, what the Note mentions is “room for maneuver”.

In addition to the above, the Note states that there will be deemed selectivity in the issuing of the tax rulings when, among other situations, the tax authorities have discretion in granting administrative tax rulings. 

The problem is that the sole essence of the tax ruling relies upon the discretion and room of maneuver that the tax authorities should have in order to interpret and understand the relevant tax provision. Without these two elements (discretionarily and room for maneuver in the interpretation), tax authorities will not be able to produce tax rulings, because they would be (1) obliged or vetted to issue the tax rulings and (2) subject to a fixed criteria regarding the interpretation of tax provisions.

Another different thing would be that tax administrations apply different interpretation of the same relevant tax provision to undertakings that are placed in the same legal and economic situation.

Against this background, last October 21st, 2015, the Commission made public two important State aid decisions regarding tax rulings; these are the once concerning Starbucks Manufacturing in the Netherlands and Fiat Finance and Trade in Luxembourg. The Commission declared in both cases that the tax rulings were considered to constitute unlawful State aid within the context of Article 107 (1) of the TFEU taking the view that the methods endorsed by the tax authorities in the Netherlands and Luxembourg to establish the companies’ taxable profits do not reflect economic reality and amount to a selective advantage against these companies’ competitors.

I think is not out of context to say that these decisions have created significant legal uncertainty for multinational companies that have relied on tax rulings in Europe.

My suggestion is that the Commission should be more clear regarding the conditions under which the discretionarily and room for interpretation might become an element of selectivity when a tax administration issues a tax ruling and hence contravene EU’s State aid rules.