Nobody will accuse me of being lax on state aid enforcement. In 2008, when European Union member states were about to embark on a subsidy race to bail out banks hit by the financial crisis, I stated that state aid rules are part of the solution, not the problem. And while many disagreed with the application of state aid rules to bailouts, I advocated the enforcement of tough restructuring obligations for state-aided banks.
However, state aid is not a cure for all ills. Today, there is a broad sentiment that multinational companies do not pay enough taxes, that they are using mismatches between national tax laws to lower their tax burden.
State aid is not suited to deal with such mismatches. It is a tool to address instances where a member state has made an exception to its own rules and given a specific company an advantage. To know whether that is the case, one has to understand how corporate taxation works.
International corporate tax principles dictate that companies pay taxes where value is created. In the modern world, companies create value through design, marketing and intellectual creativity. It is where those activities take place that the profits really originate.
It is therefore no surprise that US companies with research and development and intellectual property developed in the US will pay most of their taxes there, and not where the products are made or sold. Of course, the same principles apply to innovative design-focused European companies that sell their products abroad.
EU member states have a sovereign right to determine their own tax laws. State aid cannot be used to rewrite those rules. However, the current state aid investigations into tax rulings appear to do exactly that, by suggesting a radical new approach to so-called transfer-pricing rules that determine where profits shall be allocated. By doing so, the commission risks undermining the important work carried out within the Organisation for Economic Co‑operation and Development (OECD) through its “Base Erosion and Profit Shifting” (BEPS) project.
The US government has expressed concerns about this approach warning that it expands the commission’s role “beyond enforcement of competition and State aid law under the Treaty on the Functioning of the European Union (TFEU) into that of a supra-national tax authority”.
We all agree on the need to tackle tax avoidance, but such reform should come from a transparent legislative process within the EU and through consensus building in international fora, such as the OECD. Once the new rules are in place, they can be applied to every taxpayer.
But you cannot change the rules of the game through ad hoc state aid enforcement, and then seek retroactive recovery for unpaid taxes. Doing so would be fundamentally unfair and would harm competition, growth and tax income in Europe. And it raises serious questions about legal certainty and the rule of law.
Anyone who has filled out a tax return knows that tax rules can be complex. This is even more so for companies operating in multiple jurisdictions. Tax authorities issue tax rulings, or advance opinions, in order to explain how local tax rules will be applied in individual cases, and companies rely on these to take investment decisions. But if such rulings can now be second-guessed by Brussels years or even decades later, that value is lost.
It is a fundamental principle of tax law that changes will not apply retroactively. Companies (as individuals) should know what their fiscal obligations are up front and should be able to plan with them. When tax rules change, they do so for the future only and there are strict limits to the re-opening of tax assessments for the past.
With the application of state aid rules, this changes, as the commission may order the recovery of any state aid deemed illegal for 10 years into the past. This could happen in a situation in which neither the company nor the member state have violated any tax rules nor had reason to believe that the tax assessment was illegal. I have taken note of the commission’s commitment to focus its enforcement only on “outliers”, but I assume nobody can determine what those are. The de minimis threshold in state aid is relatively low and there is no definition of “outlier cases”.
Benjamin Franklin is thought to have stated that nothing in this world is certain, except death and taxes. But these recent state aid investigations have introduced uncertainty about corporate taxation.
Rather than pursuing a handful of countries and companies for the past, we should focus on shaping a fair tax system for the future. The controversy about state aid and tax rulings is not about whether companies pay their fair share, but where that share should be paid. That is an important question, but not one for state aid.
Neelie Kroes was the European Union’s commissioner for competition from 2004 to 2010, and commissioner for digital agenda from 2010 to 2014. She is now special envoy for StartDelta, a tech startup development project run by the Dutch government, and sits on the public policy board of Uber and the board of directors for Salesforce