THE APPLICABILITY OF STATE AIDS RULES TO TAX COMPETITION MEASURES: A PROCESS OF DE FACTO HARMONISATION IN TAX FIELD?

Transcription

1 THE APPLICABILITY OF STATE AIDS RULES TO TAX COMPETITION MEASURES: A PROCESS OF DE FACTO HARMONISATION IN TAX FIELD? I PART 1 - Introduction Since the Treaty of Rome in 1957, the creation of the Single Market was the basic goal of the Communities. To make the single market work as an internal one the treaty provides, inter alia, the four fundamental freedoms (Free movement of persons, goods, services and capital) and the competition policy. The European Union s State aid policy is an important part of the EU s competition regime and has been central to the single European market objective. Article 87 (1) of the EC Treaty imposes a general ban, subject to certain exceptions, on 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... in so far as it affects trade between Member States. Clearly, any financial assistance given by the State to one firm distorts or threatens to distort, to a greater or lesser extent, competition between that firm and its competitors which have received no such aid. It has to be pointed out from the beginning that the Commission is endowed of a de facto monopoly of enforcement in this field due to the absence of formal legislation (Until 1997 there was practically no Council legislation in this area). The absence of a classical legal framework beyond that provided by the treaty, opened up a regulatory space filled by the Commission with the so called soft law approach to the State aid policy. Through guidelines, frameworks, notices, etc, the Commission gave a systematic body of informal rules (to which, as we will see, member States were informally obliged to comply with) which serve as substitute for hard legislation. Fiscal aid is just one of the many forms in which State aid is given; however it comes without saying that one important difference between fiscal aids and a direct subsidies aid lays down the very nature of the two measures. The particular structure 1

2 of the fiscal aid increases, in fact, the relevance of the selectivity criterion: while subsidies are normally selective, fiscal measures could as easily be selective or not, therefore since general measures are non relevant as far as article 87, paragraph I is concerned, the definition of the selectivity criterion comes forth for its importance as far as fiscal aid are at stake. Fiscal aids do not enjoy any special status, even if tax competition measures. Nevertheless, because of their strict link with fiscal sovereignty of Member States, before the adoption of the Monti package the Commission had been very carefully handling fiscal measures under the State aid rules, limiting its analysis to the classical criteria of selectivity (sectorial and regional). It has to be borne in mind that the Commission has no much room for manoeuvre in the field of direct taxation, considering that the Treaty provides a direct legal base for the harmonisation only with regard to indirect taxation; direct taxation action has to be founded under the general rules aimed to eliminate diversities between national legislation that could endanger the functioning of the single market (art. 94). In fact limited progress has been made in this field since those measure require unanimity under article 94 of the EC treaty. 2 - Realisation of the internal market and harmful tax competition With the development of the Internal Market, and even more with the advent of Monetary Union, differences in national tax systems have become increasingly evident and therefore have an increasing influence on economic decisions by individuals and enterprises. Since the report issued by the Ruding Committee in 1992 it has become clear that the erosion of revenues caused by harmful tax competition imposed yet another restriction (together with the Mastricht requirements and the pact of stability) on Member States' ability to reform their tax systems and fund public expenditure as they choose. Nevertheless the Ruding report didn t come to a concrete action. The existence of tax competition between Member States is borne out by the evidence of convergence of Member States' tax regimes at a broader level. Between 1980 and 1997, there were fundamental changes in the structure of taxation in the EU. The fiscal burden shifted increasingly towards non-mobile factors of production, in particular labour, and away from more mobile factors of production, such as capital. Statistics show that the average implicit tax rate (i.e. the average effective rate) on employed labour increased steadily during the period in question from 35% to 42%, while the corresponding rate for capital and self-employed labour decreased overall from 42% to around 37%. 2

3 The Member States and the Commission acknowledged that tax competition between countries can be healthy. But they were strongly in favour of eliminating the worst forms of harmful tax competition so as to protect their tax revenues. They also acknowledged the need to tackle tax obstacles to cross-border activity within the Internal Market. But they were clearly not prepared to give their full attention to the elimination of such obstacles as long as they feared tax erosion. The Commission s approach to the fiscal state aid changed in 1996 when, after the Verona informal ECOFIN meeting, it was decided to take a global approach to tackle the harmful tax competition and the discussions led to the agreement on the outline of a tax package in December Tax Package and the Code of Conduct. The agreement consisted of a Code of Conduct for business taxation, and a request to the European Commission to make two proposals for Directives, one to ensure an effective taxation of the savings income of individuals and the other to eliminate withholding taxes on payments of interest and royalties between companies. The Commission made these proposals for Directives in March and May The directives have not yet been adopted. The Code is not a legally binding instrument (it is in fact an act of Soft law) but is a political commitment from all Member States to address harmful business tax measures within the EU. The Member States reached the agreement to standstill (do not adopt new potentially harmful measures), and rollback (eliminate the existing harmful measures in 5 years time). The absence of a legal text or sanctions meant that Member States had to rely on political peer pressure as a tool to ensure that Ministers deliver on their commitments. The Code addresses those business taxation measures (laws, regulations or administrative practices) which provide for a lower level of taxation than normally applied in the Member State concerned (paragraph B) and which affect, or may affect, in a significant way the location of business within the European Community(paragraph A). The Code lists a number of key factors designed to help to identify harmful tax competition. Five criteria are mentioned in paragraph B of the Code which are to be applied to evaluate regimes potentially harmful (by means of having met the A and B parameters). The first two criteria are closely linked covering those circumstances where tax advantages are open, either explicitly or implicitly, to non-residents or in respect of transactions with non-residents (B.1) or whose effects are otherwise ring-fenced from the domestic market (B.2). 3

4 A third factor to consider is whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages (B.3). Criterion four relates to the rules for profit determination and notably to OECD rules on, for example, transfer pricing (B.4). The fifth criteria refers to transparency and it could reasonably be argued that it is only if a measure is fully set out in national legislation, or is published in full in the form of regulations or guidelines and is not subject to any administrative discretion, that it can be regarded as transparent. The follow-up work on the Code has taken place in a Council Group of highlevel representatives of all the Member States and the Commission which is chaired by the UK Paymaster-General, Mrs. Dawn Primarolo. The Group was set up to monitor the application of the Code and evaluate existing tax regimes which fall within the scope of the Code in Member States (the regimes found harmful were 66). 4 - The Nature of the November 98 Commission notice on the application of the State aid rules to measures relating to direct business taxation As a matching commitment to the political agreement to the Code, many Member States urged the Commission (as appears from par. J of the code of conduct) to re-examine its policy in the field of fiscal State aid and to make full use of its powers under the Treaty rules in order to combat harmful tax competition, therefore in the framework of the Code of Conduct, the Commission also committed itself to publishing guidelines on the application of State Aids rules, to measures relating to direct business taxation. The guidelines were adopted by the Commission on 11 November They aim to link the provisions of the Treaty and related rules on State aid to the fight against harmful tax competition and also have the wider objective of clarifying and reinforcing the application of State aid rules generally to reduce distortions of competition in the Single Market. As pointed out by Commissioner Monti in a recent speech, Certain corporate tax regimes in Member States, by providing for different rates without objective justification, constituted infringements of state aid rules. It was therefore in the interest of some Member States to agree on a Code of Conduct with a period of grace (ndr: 5 years, with the possibility of delay) to roll back harmful measures. The less attractive alternative was to wait for the Court of Justice to condemn the measures on the basis of the State Aid rules and require their immediate elimination. The Notice, like the code is an act of soft law. Yet, despite the code, the non binding nature of the Commission s soft law in the State aid field is of a particular 4

5 nature. As mentioned above, the discretionary character of the State Aid decisionmaking process gives the Commission a substantial freedom of manoeuvre in taking State aid decision. Moreover, the lack of formal legislation has given to the soft law approach, in the State aid field, a significance which goes beyond the meaning of the sentence in other Community law fields. Therefore, it goes without saying that, despite its formal non binding force, the Notice is the fundamental text in which to find the rules to determine which harmful tax measures may be regarded as State aid. 5 - The content of the 98 Notice and the importance of the selectivity criterion Given that the question at stake is whether and by which means, a measure deemed to be harmful under the Code of Conduct can be ruled by the Commission powers on State aid, the analysis will now be focused on the core of the subject. In its notice the Commission points out and explains, through its practice and the case law of the Court of Justice, the criteria which define a State aid. Namely, the measure must confer on recipients an advantage which relieves them of charges that are normally borne from their budgets; the advantage must be granted by the State or through State resources; the measure must affect competition and trade between Member States (those two criteria are normally read as a whole by the ECJ); The last criterion is the pivotal point analysed herein and therefore needs separate mention: the measure must be selective in that it favours "certain undertakings or the production of certain goods. The selective advantage involved may derive from an exception to the tax provisions of a legislative, regulatory or administrative nature or from a discretionary practice on the part of the tax authorities. However, the selective nature of a measure may be justified by "the nature or general scheme of the system'. If so, the measure is not considered to be aid within the meaning of Article 87(1) ( 98 Notice, Par. 12). As pointed out lately, the selectivity that was considered by the Commission before the approval of the Monti package, was almost exclusively regional or sectorial. The 98 Notice, inspired by the principles enshrined in the Code of Conduct, introduces a far more reaching notion of selectivity: it explains, in fact, that Some tax benefits are on occasion restricted to certain types of undertaking, to some of their functions (intragroup services, intermediation or coordination) or to the 5

6 production of certain goods. In so far as they favour certain undertakings or the production of certain goods, they may constitute State aid (par. 20). Furthermore, in paragraph 26, the Commission explains that Certain exceptions to the tax rules are, however, difficult to justify by the logic of a tax system using as an example a case, manifestly inspired by the Code of Conduct (par. B.1) where non resident companies are treated more favourably than resident ones or if tax benefits are granted to head offices or to firms providing certain services (for example, financial services) within a group. The previous analysis shows implicitly that the Commission takes for granted the selectivity of the measures mentioned above. The way the Commission interprets the linkage between the two disciplines here at stake is perfectly shown by paragraph 30 of the Notice, which says that the qualification of a tax measure as harmful under the code of conduct does not affect its possible qualification as a State aid. However the assessment of the compatibility of fiscal aid with the common market will have to be made, taking into account, inter alia, the effects of aid that are brought to light in the application of the code of conduct. Some examples of the above mentioned assessment are given in paragraph 33, which takes in to account, among others, the aids deemed to be compatible with the common market by regional means, excluding from that derogation measures favouring off shore activities. After the analysis of the crucial points of the Notice, it is clear how extensively the Commission has interpreted its mandate to tackle harmful tax competition through State aid rules. Therefore, considering the particular nature of the State aid soft law, that empowers the commission of a wild, unfettered, discretionary decisionmaking power, it appears utmost clear that the State aid rules are potentially vigorous enough to rake all the measures potentially harmful under the Code of conduct. It appears in fact very difficult to imagine the Commission incapable to find a selective aspect to a harmful measure. Even more difficult if we consider that the criterion listed in paragraph B of the code (tax regimes which provide for a significantly lower effective level of taxation than those which generally apply in the Member State in question) is already a selection. 6

7 II PART 6 Recent trends in harmonisation and tax competition When in 1992, the report issued by the Ruding Committee had already been pointing out the need to counter the special tax regimes in effect in the EC due to their distorsive effects on the internal market, yet, time was not ripe for Member States to agree upon the need to dismantle these regimes in order to preserve a balance tax base and to prevent economic distortions. Indeed, the majority of such States was utterly concentrated on the achievement of the single market and on the promotion of intra-community trade, but much less intentioned to go seriously ahead along the road leading to the tax harmonisation and to consequently relinquish their sovereignty in the area of direct taxation. Since then, however, the harmonisation process in the field of direct taxation has been carried over by the EC Court of Justice, which, in few years, has developed a considerable body of case not only in the context of direct taxation but, above all, in the context of support measures in the sector of income tax. This trend has reached its most important phase when the same member states, which a time were reluctant, urged the Commission to re-examine its policy in the field of fiscal State aid and to make full use of its powers under the Treaty rules in order to combat harmful tax competition. Accordingly, as already noted, the Code of conduct, since its adoption in 1997, has not only addressed those measures that affect, or may affect, in a significant way the location of business activity in the Community, but it has aimed also at linking the provision of the Treaty and related rules on State aid to the fight against harmful tax competition. As a result of this, the Member States will preserve their untangled competence to adopt the preferred tax system, yet, the Commission is now invested with the power to apply the State aid rules, namely Arts. 87, 88 and 89 of the EC Treaty, to the tax rules set out by such States in the direct taxation business field. In simple terms, therefore, the Commission will scrutinize whether or not these tax rules may be regarded as harmful in so far as they are in contrast with the regulations on free and fair competition, that is the principle underlying the State aid discipline. 7

8 7 The legitimacy of the State aid rules applicability on tax competition measures. Following to this commitment and following to the Primarolo Report, on 11 July 2001, the Commission decided to initiate 15 State aid procedures regarding special corporation taxation regimes in 12 Member States. These procedures undertaken by the Commission address special tax regimes granted to multinational groups of companies or for insurance and financial activities. This achievement is certainly an high expression of the progress made by the Member States in the cooperation against harmful tax competition. Yet, we have to ask ourselves whether this dramatic progress, is really in line with the rules provided for by the EU Treaty which govern, on one hand, the field of the direct taxation and, on the other hand, the State aid discipline. Another question is, again, whether does it really make sense to apply the State aid rules to tax measures regarded as harmful under the Code of Conduct (given that it would imply that both regulations try to address the same phenomenon)? The third and last question which arises from the above is whether does it hold true that a tax measure which turns to be eroding the tax revenue of another member States be regarded both as tax harmful and as an infringement of the principle of free and fair competition in the Single market? At a closer glance, all these questions pertain to the same side of the coin. The coin which the EC Commission is willing to insert in the machine called harmonisation to make it function. In simple terms, we believe that it is to answer no, under a juridical point of view, to the questions risen above. Yet, as mentioned above, on the same matters, the Commission s view is instead different (in that apparently supported by a certain number of Member Sates as well as by the Court of Justice) because its political will is to make advance in any case the process of harmonisation in the direct taxation field, even beyond the competence attributed by the Treaty to the EC operating institutions (i.e. the EC Court and the EC Commission). Let us analyse in depth the above assertions and present in support of them a few argument starting from the three question posed above. 8

9 Firstly, as the current European Commissioner for competition policy Mario Monti has pointed out one of the main practical differences lie in the fact that the code looks at measures that may affect the location of mobile activity within the Union, while the State aid focuses on the impact on trade between Member States. In addition to this, it is to be noted that tax competition itself is mainly concerning the struggle between States for the attraction of the income produced by their citizen; and this competition is rather different from the concept of fair competition among companies as per Art. 87 of the Treaty. As a matter of fact, it is at least doubtful that the loss of tax revenue, produced by a member State against another State (which is the typical effect of a tax measure deemed harmful), may be compared to a tax subsidy, whose typical effect is the loss of revenue of the State introducing the fiscal support measure. Another point to be stressed is that the criteria set out in the Code of Conduct, such as the economic substance and the requirement according to which the tax base should be calculated in line with the OECD rules have very little to share, in itself, with the criterion of selectivity set out in Art. 87 concerning the State aid. To put it in simple terms, it is hard to understand how a tax measure meeting such criteria may, in its turn, also presents a selective nature under the State aid rules. To be a selective, the tax measure at issue need, in addition to the above, to be addressed to specific recipients. Therefore, the selective nature of a measure is not so much assessed with reference to those requirements, but rather with reference to the ( selected ) recipient of such tax benefits. This remark lends support to the thesis according to which tax competition measures cannot be assessed by making also application of criteria cut out for assessing the legitimacy of State aids. Yet apart from this technical remarks, scholars have also highlighted that structural tax measures may have profound negative effect on the fair competition principle, that is the pillar of the current Single Market. Effect turning to be much more negative, under the economic profile, than the effect arising out from any selective tax measures. It follows from the above, therefore, that, under such new trend, the Commission will apply the State aid rules not to any fiscal measures (of a selective character) liable to infringe, per se, the free and fair competition in the Single Market 9

10 but only to those fiscal measures which are currently considered, under a (let s call it) political viewpoint, as fiscal aid. 8 Conclusive remarks It should not go unnoticed that such decisions will assume an increasing political character given that, in the legal framework of the State aid rules, the competences attributed to the Commission in this sector, among which lie its decision powers, are not really submitted, in substance, to the legal control of the EC Court of Justice. As a matter of fact, the Court is hardly able to verify the legal coherence embodied in the decisions taken by the Commission in the Sate aid field. Yet, the Court cannot re-assess the legitimacy of the approach assumed by the Commission in setting out a decision in this regard. Therefore, it may be validly argued that the current development in the EC praxis, namely the applicability of State aid rules to tax harmful measure, whose linkage has been firstly promoted in the Code of Conduct, in accordance with as so far discussed, reflects the old approach both of the EC and the EC Court of justice consisting in pushing the boundaries of the harmonisation in the direct taxes bypassing the unanimity requirement provided for by Art. 94 in such field, that is the direct taxation. In this regard, it should be noted how this approach turns out to only support a certain set of Member States and to booster the intra-community integration in the area where said European institutions may act without being subject to decisions taken by all member States, namely, by the Council of Ministers. Consequently, such approach is liable to be accused of being conducive to the creation of an EU dominated by technocrats, who only comply with esoteric principle of decision, and not by 400 million people expressing their will in accordance with the basic principle of representation, which should be the only irrefutable pillar of the western economy. Anyone can see, therefore, that time is ripe because the attribution to EC Council of clear competence in the field of direct taxation including also the sector relating the tax competition be set out in a statutory way. No doubt that time is also ripe because the process of tax coordination in Europe be also carried forward by taking into account the need to speed up the political democracy within the legal framework of the EC. 10

11 Under this perspective, there is an extremely good occasion to reach the result above indicated. Needless to say that the occasion just mentioned is represented by the European Convention which is currently having place. One of the possible solutions (probably the easier) to be taken in to account by the European Founding Fathers, is a move towards more qualified majority voting for tax issues, meanwhile inserting in the Treaty an explicit legal base for the action of the Community on direct business taxation harmonisation, in particular to face harmful tax Competition. If the occasion get lost, a European Union with 25 members is waiting behind the corner. If the lack of clear rules in the fiscal sector or the everlasting democratic deficit will be still present in its body, any of us will hear the chattering of a timebomb making itself louder and louder. Prof. Augusto Fantozzi 11