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The EU watchdog ready to bite multinational companies?

The EU watchdog ready to bite multinational companies?
3 Nov 2014

First published in Law 360, 31 October 2014

Fiat, Amazon, Starbucks and Apple have been catapulted under the media spotlight and accused of not paying their “fair share of taxes.” The ever-increasing focus on these multinational companies has all the attributes of a witch hunt. The recent opening of investigations by the EU Commission in the context of the “state-aid” legal framework adds to this appearance.

The Treaty on the Functioning of the European Union (TFEU) protects free competition within the European Union. For that purpose, it prohibits illegal state aid. In broad terms, member states are not allowed to grant selective advantages that may distort competition between member states. Although tax was not the primary focus of the illegal state-aid prohibition, the very broad terms of its definition include tax measures. Any reduction in a firm’s tax burden entails a corresponding reduction of tax revenue for the state. If the tax measure is selective, in other terms if it benefits a certain sector or company, the tax measure can be illegal state aid.

The Commission's investigations appear to be directed against the application of transfer pricing principles by the member states in the case of each individual taxpayer selected. The objection of the commission is thus not in relation to the legal system per se but its application to the case of a specific taxpayer. Thus the “selectivity,” an essential condition for state aid, would seem in the Commission’s eyes to be based on application of general laws to an individual taxpayer.

This seems to put the Commission in the strange position of arguing that application of tax laws to an individual taxpayer, something that tax authorities have to do on a daily basis, is, per se, capable of being selective and can amount to state aid. Every assessment, every advance pricing agreement, every settlement of tax litigation outside court thus becomes potentially suspect.

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Taxand's Take

The action of the EU Commission is comprehensible as a political act, but much less so as a legal or administrative act. The underlying political idea is to make multinationals pay in response to public perception that they are not paying enough. Using the state-aid proceedings in TP matters and targeting a sample of high-profile taxpayers, the EU Commission seems to be going far beyond the terms of its mandate.

Taxand's Take Author

Keith O'Donnell
Taxand Board member & Taxand global real estate tax service line leader