The European Commission has issued warnings about more than 380 potentially unlawful tax breaks in the last five years, with France being singled out for contravention of state aid rules, as well as low-tax jurisdictions like Ireland, Netherlands and Luxembourg
Tax rulings that give some businesses an advantage can fall foul of state aid rules, for example by offering unfair tax breaks to support specific industry sectors. The number of tax arrangements contravening the rules has gone up five-fold over the last five years, with the Commission reviewing the arrangements to examine whether they are illegal.
There have been 385 tax breaks which may be unlawful under EU state aid rules over the last five years (as at year-end 31 March 2019), says Pinsent Masons, the international law firm. This is part of the EU drive against aggressive corporate tax avoidance by multinationals.
Over the last 12 months, the European Commission has received 51 notifications, while only 80 notifications were received by the Commission between 2007 and 2013.
France tops the list with 51 notifications over providing unfair, anti-competitive tax breaks. Research by Pinsent Masons shows the most notifications made to the Commission by member states since 2007 were from France (51), followed by Czech Republic (37) and Poland (36). There have been 24 notifications by the UK government.
The high number of notifications against France reflects the more interventionist nature of government policy, with 81 French companies part nationalised, adding complexity to the aid relationship.
Jason Collins, partner and head of tax at Pinsent Masons, says: ‘Offering favourable tax treatment on a selective basis to multinational businesses has become an important method by which many countries attract inward investment. However, in this era of the war on tax avoidance this has become more controversial.
‘The complexities of the tax rules in some EU member states will also likely have driven the increase in the number of notifications. Other factors, such as tax breaks provided to investments in a country’s overseas territories or to encourage investment in certain industries, could also count.’
The Commission argues that tax rulings that confer a selective advantage on specific niche sectors or are only available to specific types of business such as multinationals amount to state aid.
State aid rules also affect government subsidies, with the UK government was unable to intervene in the collapse of a number of businesses due to state aid rules, including the closure of the Redcar steel works in Teesside in 2015, and last week, the secretary of state for business Greg Clark blamed state aid issues for preventing the government from intervening before British Steel went into administration.
The increase in the number of notifications follows a number of high profile investigations by the Commission that began in 2013 into certain tax rulings by EU member states, in particular, in Ireland, Luxembourg and the Netherlands. These relate to multinationals which have been accused of using the favourable low-tax environments to significantly reduce tax liability, for example using complex profit shifting through various low-tax jurisdictions.
Since 2013, the Commission has run tax investigations into a number of multinationals, which identified unlawful state aid. Apple, Starbucks, Amazon and Fiat have all been hauled up over their tax strategy, and the Commission found that they had all received unlawful state aid and and has demanded that the companies repay the state aid. In Apple’s case, the Irish government was forced by the EU to charge the IT giant €13bn (£11.5bn) over the long-standing tax arrangement.
State aid post-Brexit
In April 2019, the Commission ruled that the UK's controlled foreign company (CFC) rules partly contravened EU state aid rules and that the UK must require repayment from companies that have benefited.
Alan Davis, partner and head of competition, EU & trade at Pinsent Masons, said: ‘The Commission has made it clear that any UK tax rulings found to have infringed the state aid rules before the UK's exit from the EU will still require any unlawful state aid arising before that date to be repaid notwithstanding Brexit.
‘After Brexit, the position becomes less clear. On the one hand, the UK will have a domestic UK state aid regime that will be enforced by the Competition and Markets Authority (CMA) and which may regulate these tax rulings at a domestic level.
‘But EU state aid law will no longer apply in the UK, so UK businesses will no longer be able to complain to the Commission about new and potentially unlawful tax schemes in other EU member states.’