EU loss in Polish State aid case may be a win for digital services tax

By Leopoldo Parada, University of Turin, Italy

The EU General Court on 16 May annulled two European Commission decisions finding that a Polish tax on the retail sector conferred state aid.

In its opinion in Poland v. Commission (joined cases T–836/16 and T–624/17), the EU General Court concluded that the Commission was wrong to take the view that the Polish tax constituted a selective measure favoring certain undertakings because, under the Polish regime, a company’s tax rate was tied to the amount of its Polish turnover.

The EU General Court’s decision, still subject to appeal before the CJEU, raises important questions about the legality under EU law of other taxes based on turnover thresholds, notably European digital services taxes.

State aid and unilateral digital services taxes

Article 107 of the Treaty of Functioning of the European Union (TFEU) forbids Member States from granting selective advantages to certain sectors or undertakings affecting competition within the internal market.

In a recent publication, Prof. Ruth Mason (University of Virginia) and I argue that unilateral digital services taxes are susceptible to State aid challenges because they are selective on the basis of at least size, nationality, and sector, each of which generally suffices for a successful State-aid claim.

In particular, as regards nationality discrimination, we argue that the use of high-revenue thresholds in the current unilateral digital services taxes might constitute a selective advantage favoring competitors. For example, the Spanish tax requires worldwide annual revenues over €750 million and Spanish annual taxable revenues over €3 million which ensures that almost no Spanish companies will pay the tax.

To reinforce our argument linking revenue thresholds to nationality discrimination, we referred to the joined cases T–836/16 and T–624/17 which were the subject of the 16 May General Court decision. In those cases, the Commission had actually concluded that the Polish retail tax was “specifically designed to favour smaller retailers over larger ones by… subjecting undertakings with lower turnover to a lower average effective tax rates than undertakings with a higher turnover, which also tend to be foreign-owned”.

Reversing the Commission’s conclusion, the EU General Court states that “…as regards a turnover tax, an adaption criterion in the form of progressive taxation as from a certain threshold, even a high threshold, which may reflect the intention to tax the activity of an undertaking only when that activity reaches a certain level, does not, in itself, imply the existence of a selective advantage”.

In the view of the EU General Court, therefore, Member States have more room to make selections than the Commission supposed. If affirmed, the EU General Court’s decision would make a state-aid challenge against a unilateral digital services tax more difficult.

In the view of the EU General Court, therefore, Member States have more room to make selections than the Commission supposed. If affirmed, the EU General Court’s decision would make a state-aid challenge against a unilateral digital services tax more difficult.

What about intent to discriminate?

Although the EU General Court adopted a formalistic approach, dismissing the Commission’s argument that the Polish tax was designed to favor smaller retailers over larger ones and concluding that the use of thresholds (even high-revenue thresholds) does not imply per se a selective advantage, the Court still left open the question of whether revenue or other size thresholds would be legal even in the face of clear evidence that the threshold was chosen for the purpose of nationality discrimination.

Such evidence is abundant when it comes to most unilateral digital services taxes. For example, the Austrian Chancellor touted that no Austrian companies would be subject to the Austrian tax. And the blueprint for the Spanish proposal and Spanish officials’ statements about it, openly declared too that the Spanish digital services tax would apply mostly to big, non-Spanish, multinational companies.

In a pending publication, Prof. Mason and I argue that the CJEU decision in Gibraltar illustrates judicial use of intent to discriminate in a State aid case. In that decision, the Commission asserted a novel approach to identifying State aid, arguing that the proposed Gibraltar tax regime would constitute a state aid as applied.

This approach differs from a typical tax State-aid case where the Commission focuses only on domestic tax laws that deviate from generally applicable tax law to benefit a selective group of companies. However, such a formalistic approach would not have worked in Gibraltar because the proposed regime was facially neutral and had no de jure derogations favoring offshore companies.

If legislative intent plays a role in future State-aid cases, as it did it in Gibraltar case, the CJEU might regard unilateral digital services taxes as State aid.

Too early to conclude anything…

While we must wait for the decision of the CJEU to draw conclusions, the EU General Court decision is a victory for supporters of unilateral digital service taxes in Europe. On the other hand, it is also a victory for those who believe that the State aid principle has become overbroad. The debate is nonetheless still open.