** This is an excerpt of a blog-post which I did whilst at the 2016 conference of the International Fiscal Association **
Day 3 of the congress of the International Fiscal Association (IFA) coincided with a much bigger event: my 36th birthday. Sadly there was no cake, but I got chatting with a guy from one of the American tax journals, and he said that there would be cake tomorrow at three o’clock at their booth. Not sure what kind of cake (presumably some Spanish variation on the humble sponge), but it will make a nice change from mozzarella and cherry tomatoes which is what they’re serving at the cocktail parties.
Seminar D: IFA/EU
The main event for today was Seminar D on EU developments. In the programme, Seminar D was described in the following way:
“An increase in the awareness of potential and actual implications of global tax issues for third countries has been causing EU draft measures and ongoing tax developments to gain momentum. Yet, in order to anticipate and outline likely scenarios capturing these development, an analysis of these global tax issues has to reflect and indeed follow the categories of European tax law. This seminar focuses on a selection of European tax law issues connected with recently announced measures and ongoing developments which may well be of interest to a global tax audience. In the framework of this seminar the EU anti-BEPS project announced on 28 January 2016, and selected issues of the ongoing procedures on State aids in tax matters, will be analysed.”
The Chair was Pasquale Pistone (Italy), who presided over four panel members, a ‘speaking Secretary’ and two surprise guests.* The performance was well choreographed and dynamic, also incorporating a significant section on a European Commission (EC) decision which had been published just three hours earlier. I am under the impression that a full report of the Seminar will appear in due course, so in this post I will focus on one of the most annoying aspects of the State aid discussion.
The biased consensus on State aid (“the EC is WRONG WRONG WRONG”)
The State aid cases are sufficiently famous not to need repeating here. In a series of decisions, the EC has challenged rulings by a number of Member States (Belgium, Ireland, Luxembourg and the Netherlands), arguing that these agreements offered selective advantages to the companies concerned. The EC is blessed with an excellent legal cabinet which now also contains experienced transfer pricing specialists, and is frequently assisted by external advisors and academics (see for example the following report on State aid and tax rulings). It would be a mistake to underestimate team Vestager.
Nevertheless, the general mood within the tax community is that Vestager is – without any doubt – 100% wrong about Apple. The mad woman must therefore be stopped! This what for example the White Paper issued by the U.S. Treasury on 24 August 2016 is all about. In that document, the focus is mostly on the (alleged) retro-activity of recovery in these cases, which – in the view of the U.S. – would be contrary to the principles of legitimate expectation and legal certainty. The EC’s take on Article 107(1) TFEU is considered unforeseeable, especially on the point of selectivity.
The U.S. Treasury’s concerns are valid in the sense that the Treasury is free to have positions EU issues (but recall that the U.S. is not an interested party in any of the present cases). They also provide an insight into how State aid law is perceived in third countries. The EC needs to learn some lessons from this as – let’s put it nicely – there is significant confusion. Note that this is not intended as criticism; my grasp on the Individual Income Tax of Nebraska is also pretty limited. My gripe with all of this stems precisely from this point: How have we moved from the situation where almost noone had ever considered the State aid rules, to one where everyone is suddenly an expert? The extreme certainty with which the EC’s position is dismissed, is bizarre. I can think of no other issue (with the possible exception of statutory tax rates) that elicit such extreme and rigid reactions.
Fiscal State aid should have been flagged much earlier
It has repeatedly been said that the State aid investigations were not foreseeable. In substantive terms, I think this is on balance fair, especially for tax practice (in academic circles there has been some tentative grumbling on this for a few years now, but academics grumble about nearly everything so until stuff gets written down – which by and large it wasn’t – it doesn’t count). This is especially true of the technical aspects in the Apple and McDonald’s cases. Now let me say something controversial. Although the substantive analysis is novel, we should not lose sight of the fact that the State aid rules and the scope of challenges by the EC most certainly were not. In 1998, the EC published a Notice, specifically warning Member States and taxpayers about the application of the State aid rules to direct tax measures.
Does this document say anything about Cost Sharing Agreements and Fluctuating Royalties? Well, no. But the Notice does call attention to substantial risks, something which the Member States and the tax community should have taken on board. What should have happened, is that State aid was identified as a key topic and then savaged by the IFA membership and other fiscal carnivores. We would have said: “This is absurd, we don’t understand it. Where is the guidance? What about transfer pricing? This isn’t transparent. It doesn’t take into account tax treaties. What about the U.S.?” Etc. etc. We would have invited Vestager’s great grandfather (Mario Monti) to the congress. Hell, we could have set Philip Baker on him. And all of this would have resulted in much needed changes to the rules and in a much better tax system.
* I believe that the whole Congress is under the Chatham House rules. Information which is not already in the public domain is therefore included on a no-names basis.