SPECIFIC TAX REGIMES AND EUROPEAN STATE AID RULES: THE UK AGGREGATES LEVY

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1 EU LAW SPECIFIC TAX REGIMES AND EUROPEAN STATE AID RULES: THE UK AGGREGATES LEVY Case T-210/02 British Aggregates Association v Commission judgment dated 7 March 2012 LAURA ELIZABETH JOHN JULY 2012 Whether a specific tax regime is compatible with European state aid rules turns on the question of whether it is selective : does it favour certain undertakings or products over comparable undertakings or products, in a way that is not justified by the nature of scheme? That question can be difficult to answer in practice. After ten years of litigation, during which the General Court has itself misinterpreted selectivity, the General Court has outlined a staged analysis that should be undertaken, which focuses heavily on the effects that the tax has and will have in practice. The litigation The British Aggregates Association ( BAA ) submitted a complaint to the European Commission ( the Commission ) that the UK levy on aggregates breached Article 107(1) Treaty on the Functioning of the European Union ( Article 107 ) (formerly Article 87 EC Treaty). This states that:...any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market. The levy applies whenever a quantity of taxable aggregate is subjected to commercial exploitation in the United Kingdom: section 16(2) Finance Act BAA complained that it 1. breaches Article 107 in two key respects:

2 i. Certain products are exempted: section 17 Finance Act 2001 as amended. These included slate, shale, ball clay and china clay. ii. Exports are exempted: Regulation 13(2)(a) Aggregates Levy (General) Regulations The Commission decided 1 on 24 April 2002 not to object to the levy ( the Decision ). It found that it did not comprise any elements of state aid within the meaning of Article 107 as its scope was justified by the logic and nature of the tax system. BAA appealed to the General Court of the European Union ( GC ). In Case T-210/02 British Aggregates Association v Commission [2006] ECR II-2789 ( BAA 1 ) dismissed the appeal. BAA further appealed to the Court of Justice of the European Union ( CJEU ), which in Case C-487/06 British Aggregates Association v Commission [2008] ECR I ( BAA 2 ) upheld three of BAA s six complaints, and referred the case back to the GC. Following reconsideration, the GC has now held that the Decision not to open an investigation must be annulled: Case T-210/02 British Aggregates Association v Commission, judgment dated 7 March 2012 ( BAA 3 ) Assessing the compatibility of a specific tax regime with state aid rules There is an obvious theoretical tension between European rules against Member States conferring advantages on certain undertakings or products, and the discretion that Member States retain to determine their own tax systems. Taxing a certain sector, or exempting a certain sector from a generally applicable tax 2, inevitably means that providers outside that sector have commercial advantage over providers within the sector. The case law reconciling that tension focuses on the so-called criterion of selectivity : if the advantage conferred favours undertakings or products in a comparable legal and factual situation, and that approach is not justified by the nature or general scheme of the tax system of which it is a part, it will be selective and as such it will tend to distort competition and to be incompatible with the state aid rules. 1. Commission Decision C(2002) 1478 final of 24 April 2002 on state aid file N863/01 United Kingdom / Aggregates Levy 2. The CJEU s existing case law confirms that aid is constituted not only be conferring positive benefits, but also by conferring exemptions from burdens to which they would otherwise be subject: see, for example, Case C-222/04 Cassa di Risparmio di Firenze [2006] ECR I-289 at [131]-[132]

3 Case T-210/02 british aggregates association v commission The question of how, in practice, selectivity is to be assessed is now illustrated by BAA 3. The GC identifies five steps: i. Identify what is the normal taxation under the specific tax regime, against which the impugned measure is to be compared; ii. Identify the objective pursued by the specific tax regime; iii. Consider whether the situations of the undertakings/products in question are comparable; iv. If so, consider whether they are taxed differently; v. If so, consider whether that difference in tax treatment is justified by the objective pursued by the regime. (i) Normal taxation under the specific tax system The mere fact that a tax system is specific, and imposed on a narrowly defined economic sector, is not sufficient to take it outside Article 107. In BAA 1 the GC had held that Member States retain their powers to introduce environmental levies in order to attain environmental objectives, and to determine which goods and services they subject to such levies in order to meet their policy priorities. The fact that such a levy is a specific measure that does not apply to all similar activities does not make it selective: BAA 1 paragraph 115. The CJEU upheld the complaint that this was an error of law. It is possible for a specific tax system to confer a selective advantage within the sector to which it applies: BAA 2 paragraphs One must therefore consider the effects of the measure within the sector, rather than its objectives. Looking at its effects within the sector require one first to determine what is normal taxation within the system: BAA 3 paragraph 53. The GC found in this case that the Commission erred in its understanding of what constituted normal taxation under the levy. According to the relevant UK statutory provisions, the levy applies to the commercial exploitation of aggregates. The Commission based its Decision on the levy applying to virgin 3 aggregates and not to secondary 4 or recycled aggregates, but none of these terms had a basis in the system itself, and as the UK pointed out, the distinction was incorrect (both primary and secondary aggregates are virgin). 3. Freshly extracted 4. Extracted from land as a by-product or waste from other processes

4 (ii) Identify the objective pursued by the system The comparability of undertakings or products depends on the legal and factual situation. Here, the objective of the levy was environmental protection: shifting demand away from primary aggregates that have been quarried specifically for use as aggregates, onto secondary or recycled aggregates, with a view to limiting the environmental damage caused by the extraction process. Therefore the comparability of taxable and exempt products must be determined by reference to whether they were comparable in the light of that environmental objective: BAA3 paragraphs (iii) Consider the comparability of the undertakings / products In respect of BAA s first complaint to the Commission (concerning the exemption of certain products used as secondary aggregates from the levy) the GC held that taxable and exempt aggregates are comparable products, if not identical. Although the exempt products have traditionally been in less widespread use as aggregates than the taxed products, that is not relevant because they would only be covered by the levy when they are commercially exploited as aggregates. When they are used as aggregates there is at least a potential link in terms of competition or of substitutability : BAA 3 paragraph 72. Moreover, they are comparable in the light of the levy s environmental objective. It was common ground that the process for extracting exempt products was equally if not more harmful than the process for taxable products, such that the relative harm caused by the processes did not distinguish the situations: BAA 3 paragraphs In respect of its second complaint (concerning the exemption of exports) the GC upheld the Decision. Once materials are exported, the UK is not in a position to apply the decisive criterion for taxation, namely whether the product is being exploited commercially as an aggregate. Moreover, in the light of the levy s environmental objective the situation of products used in the UK is not comparable the situation of exported products, as the UK is not in a position to steer demand for the exported products by means of differentiated taxation: BAA 3 paragraph 99. (iv) Tax differentiation Given its findings on the comparability of taxable and exempt products, the GC held that the difference in their tax treatment could give rise to a selective advantage: BAA3 paragraph 75.

5 Case T-210/02 british aggregates association v commission (v) Justification The GC rejected the UK s argument that the differential tax treatment was justified by the nature or general scheme of the levy. Following Case C-88/03 Commission v Portugal [2006] ECR I-7115 at [80]-[81] one must look at mechanisms inherent in the tax system itself that are necessary for achieving its objective, and not at extrinsic considerations. The objective of the aggregates levy being environmental, it was not possible to justify exempting shale, clay etc. products in this case. If demand were successfully to be shifted to the exempt products, there was a risk that they would be quarried specifically in order to meet that demand, rather than demand being met by the by-products/waste generated by other extraction processes (i.e. the exempt products would become primary aggregates rather than secondary ). That would cause greater environmental damage than the quarrying of taxable products and would subvert the aim of encouraging the efficient use of the by-products/waste from other processes. BAA 3 paragraphs The Decision was therefore annulled. Comment Though a protracted piece of litigation for the parties, the case is a valuable tool for advisers considering the application of state aid rules to specific tax systems. The analysis may require a certain amount of adjustment in future cases (for example, the exercise may be more complicated in a dispute about the scope of a specific system, rather than about an exemption therefrom, as identifying what is normal taxation in such a case will be more difficult (here the parties agreed on the appropriate frame of reference: BAA 3 paragraph 51)). Nonetheless, the GC s judgment is helpful in breaking down the concept of selectivity and explaining how in practice it is to be applied. The crucial point to draw from the judgment is that evidence on the effects that the system has, and will have, will be key to the outcome of any challenge. For those concerned with environmental taxes specifically, it is also worth noting that environmental protection remains highly relevant notwithstanding the GC erred in BAA 1 by factoring it in in the wrong way. Although a measure cannot be treated as non-selective and outside the scope of Article because of environmental objectives, it is clear from the GC s judgment in BAA 3 that it could be treated as such if evidence shows that its effects are nonselective, i.e. if it demonstrates that products are not in environmentally comparable situations when applying Article 107(1). And, as the CJEU emphasised, environmental protection is one

6 of the essential objectives of the European Union under Article 3(3) TEU and will in any event be relevant in determining whether a selective measure is compatible with the common market under Article 107(3). Monckton Chambers 1 & 2 Raymond Buildings Grays Inn London, WC1R 5NR Tel: +44 (0) Fax: +44 (0) chambers@monckton.com