State-aid surveillance

The European Commission is renewing its scrutiny of tax breaks and incentives across the EU

Joaquín Almunia, European commissioner for competition and the European Union’s antitrust tsar, does not shy away from battle. He has notched up bruising investigations into all sorts of headline-hitting issues: the smartphone wars between Apple and Samsung, Google’s search engine, the Russian government’s use of Gazprom to bully and cajole its neighbours in Eastern Europe, and traders in banks fixing Libor rates.

Almunia now has another sensitive investigation on his agenda. The European Commission’s competition department recently wrote to several EU member states as part of an inquiry into whether governments are handing out illegal state aid disguised as tax breaks and incentives.

This is by no means the first time that the Commission has examined member states’ tax arrangements under the EU’s competition rules. Landmark cases in the past include a 2003 decision ordering Belgium to shut down a favourable tax scheme for multinationals that based their corporate co-ordination centres set up on its territory. As many as 200 multinationals had done so, channelling tens of billions of euros through the country.

In another case, the Commission in 2005 asked the United Kingdom to scrap Gibraltarian tax rules that allowed offshore companies to pay only a low, fixed tax rate regardless of their revenues or profits. Both decisions arose from a wave of 15 investigations opened by the Commission in 2001 under Mario Monti, who was then European commissioner for competition.

It was the first time that the Commission’s state-aid teams had examined fiscal arrangements that favoured individual companies or types of companies rather than targeted at specific sectors or regions. Monti at the time rejected accusations that the Commission was misusing state-aid rules to harmonise member states’ tax regimes.

In October 2013 the Commission reopened a case into Gibraltar’s tax rules, examining further alleged advantages for offshore companies. It has also written to the governments of Ireland, the Netherlands, Luxembourg and Belgium over concerns that national tax tribunals might be singling out certain companies for favourable treatment. No formal investigation has yet been opened.

In particular, the Commission is concerned about companies whose business model is largely built on intellectual property, such as those in the digital and creative sectors. Such companies are far more mobile than traditional industrial or bricks-and-mortar companies and can relatively easily move to member states with more favourable tax regimes.

They are particularly open to taking advantage of distortions in the single market, Almunia told the EU Competition Law Forum in mid-February. Indeed, he continued, “a limited number of companies actually manage to avoid paying their proper share of taxes”. The Commission would clamp down on countries with tax authorities that permit or encourage such practices, he said.

Yet member states jealously guard their autonomy over tax matters. Member states such as Ireland or the Netherlands openly use their light tax regimes to give themselves a competitive advantage over other neighbouring member states. Trying to change such attitudes may prove daunting even for a battle-hardened Almunia, and for whoever replaces him at the end of the year.