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A New Approach to Article 107(1) TFEU? - an Investigation Into Commission’S “New” Approach in State Aid Cases Relating to Tax Rulings

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A New Approach to Article 107(1) TFEU? - an Investigation Into Commission’S “New” Approach in State Aid Cases Relating to Tax Rulings FACULTY OF LAW Lund University Paran Khusndip Kumar A new approach to Article 107(1) TFEU? - An investigation Into Commission’s “New” Approach in State Aid Cases Relating to Tax Rulings JAEM03 Master Thesis European Business Law 30 higher education credits Supervisor: Axel Hilling Term: Spring 2018 1 TABLE OF CONTENTS SUMMARY ................................................................................................. 4 PREFACE ................................................................................................... 7 ABBREVIATIONS ..................................................................................... 8 1 INTRODUCTION ............................................................................... 9 1.1 PURPOSE ........................................................................................................ 10 1.2 METHODOLOGY AND MATERIALS ........................................................... 11 1.3 DELIMITATIONS ........................................................................................... 11 1.4 OUTLINE ........................................................................................................ 11 2 STATE AID IN THE EU .................................................................. 13 2.1 INTRODUCTION ............................................................................................ 13 2.2 GOVERNING AUTHORITIES ....................................................................... 14 2.3 TAX AVOIDANCE AND HARMFUL COMPETITION ................................. 15 2.3.1 AGGRESSIVE TAX PLANNING ........................................................................ 15 2.3.2 HARMFUL TAX COMPETITION ....................................................................... 16 2.3.3 INTERPLAY BETWEEN THE TWO ................................................................... 17 3 STATE AID AND TAXATION ........................................................ 18 3.1 INTRODUCTION ............................................................................................ 18 3.2 ESTABLISHING STATE AID IN ACCORDANCE WITH ARTICLE 107 ..... 20 3.2.1 INTERVENTION OF THE STATE OR USE OF STATE RESOURCES ........... 20 3.2.2 AFFECTING TRADE BETWEEN MS AND DISTORTION OF COMPETITION ................................................................................................................................ 21 3.2.3 ECONOMIC ADVANTAGE ................................................................................ 22 3.2.4 THE MEASURE FAVORS CERTAIN UNDERTAKINGS OR THE PRODUCTION OF CERTAIN GOODS ............................................................................ 22 3.2.4.1 GENERAL ................................................................................................................ 22 3.2.4.2 DETERMINING THE REFERENCE SYSTEM ...................................................... 23 3.2.4.3 DEROGATION FROM THE REFERENCE SYSTEM ........................................... 23 3.2.4.4 IS THERE A JUSTIFICATION FOR DEROGATION FROM THE REFERENCE SYSTEM ................................................................................................................................... 25 3.2.4.5 SOME FURTHER REMARKS ................................................................................ 25 3.2.4.6 CONCLUSION ......................................................................................................... 27 4 TAX RULINGS AND TRANSFER PRICING ............................... 29 4.1 INTRODUCTION ............................................................................................ 29 4.2 TAX RULINGS ................................................................................................ 29 4.3 TRANSFER PRICING ..................................................................................... 33 5 SOME COMMON POINTS RAISED FROM THE RECENT STATE AID CASES ................................................................................. 38 5.1 INTRODUCTION ............................................................................................ 38 5.2 FACTS OF THE APPLE CASE ....................................................................... 40 5.3 POINTS RAISED FROM THE COMMISSION’S INVESTIGATIONS IN THE CASES ......................................................................................................................... 41 5.4 CONCLUSION ................................................................................................ 45 6 ASSESSING COMMISSION’S NOVEL APPROACH AND THE ASSOCIATED ISSUES ........................................................................... 47 2 6.1 INTRODUCTION ............................................................................................ 47 6.2 SATISFYING THE CONDITIONS OF ARTICLE 107(1) TFEU..................... 48 6.3 CLOSER LOOK AND ASSESSMENT OF COMMISSION’S APPLE DECISION ................................................................................................................... 49 6.3.1 INTERVENTION OF THE STATE OR USE OF STATE RESOURCES ........... 49 6.3.2 AFFECTING TRADE BETWEEN MS AND DISTORTION OF COMPETITION ................................................................................................................................ 50 6.3.3 THE MEASURE FAVORS CERTAIN UNDERTAKINGS OR THE PRODUCTION OF CERTAIN GOODS – SELECTIVITY .............................................. 50 6.3.3.1 INTRODUCTION ..................................................................................................... 50 6.3.3.2 DETERMINING THE REFERENCE SYSTEM ...................................................... 51 6.3.3.3 DEROGATION FROM THE REFERENCE SYSTEM ........................................... 58 6.3.3.4 IS THE MEASURE JUSTIFIABLE? ....................................................................... 59 6.3.3.5 CONCERNS REGARDING COMMISSION’S SINGLE SELECTIVE ADVANTAGE TEST .................................................................................................................. 60 6.3.3.6 SELECTIVE-ADVANTAGE – CONCLUSIONS ................................................... 62 6.4 SPECULATING THE VIEW OF THE EU COURTS – THE APPLE CASE ... 63 6.4.1 INTRODUCTION .................................................................................................. 63 6.4.2 EFFECTS TEST ..................................................................................................... 63 6.4.3 SELECTIVITY OF THE MEASURE – INDIVIDUAL TAX TREATMENT ..... 65 6.4.4 CONCLUSION ...................................................................................................... 67 6.5 COMMISSION’S SUI GENERIS EU-ALP ON APPEAL ................................ 68 6.5.1 INTRODUCTION .................................................................................................. 68 6.5.2 TAXPAYERS’ RIGHTS ....................................................................................... 69 6.5.2.1 LEGAL CERTAINTY .............................................................................................. 69 6.5.2.2 LEGITIMATE EXPECTATIONS ............................................................................ 72 6.5.3 CONCLUSION ...................................................................................................... 73 7 FINAL CONCLUSION ..................................................................... 76 BIBLIOGRAPHY 3 SUMMARY In recent years, there has been significant amount of attention towards harmful tax competition and tax avoidance. These issues are of particular importance to the EU and its Member States, because of the internal market. As the internal market guarantees free movement of goods, capital, services and labour it offers great opportunities for economic operators to pick and choose the best business environment and tax regime for their enterprise, while enjoying the fundamental freedoms throughout the Union. The scope and nature of the tax regime in a particular Member State is a matter for the State itself and the EU does not have competence over direct tax matters. However, the EU became concerned that some Member States were introducing tax measures which were distorting competition within the single market. These measures had a number of common features, including a lack of transparency, offering benefits on a selective basis, or offering effective tax rates significantly lower than the normal base. The Commission took action against such practices and after its investigations decided that the tax rulings given by Ireland, Netherlands and Luxembourg to Apple, Starbucks and Fiat constitute illegal State aid according to article 107 TFEU. The Commission has lot of criticism for these decisions. The Commission has also been accused to depart from its previous practice in finding incompatible State aid. Major part of the criticism concerns the selectivity criteria and the new independent EU ALP. This thesis examines weather Commission has used “a new” approach in its State aid investigations relating to tax rulings and hence departed from its previous practice. The Apple case will be used as an anchor to test the practice of the Commission, but Starbucks and Fiat cases will be briefly discussed to illustrate my points even further. The thesis introduces each component of the EU State aid regime and tax rulings and analyses them separately. The final chapters The conclusion of the thesis is that the Commission has not erred in its investigations nor departed from its previous practice. A careful
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