The EU Commission has issued a paper outlining its position on when a Member State’s laws and practices run afoul of EU restrictions on State aid, including when national tax laws, tax rulings, and tax settlements violate State aid.
The concept of State aid, contained in Article 107(1) of the Treaty on the Functioning of the European Union, prohibits “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods […], in so far as it affects trade between Member States.”
The Commission said in its guidance, issued May 19, that in its view, a tax ruling confers a selective advantage on a taxpayer contrary to State aid rules when:
- the ruling misapplies national tax law, resulting in less tax due,
- the ruling is not available to undertakings in a similar legal and factual situation, or
- its administration applies a more favorable tax treatment as compared with other taxpayers in a similar factual and legal situation.
A tax ruling can confer more favorable tax treatment to a multinational enterprise, the Commission said, when it endorses a methodology that is not arm’s length and that produces an outcome that departs from a reliable approximation of a market-based outcome. The Commission said that if a ruling follows OECD Transfer Pricing Guidelines, it is unlikely to give rise to State aid.
A ruling can also provide more favorable treatment when it “allows its addressee to use alternative, more indirect methods for calculating taxable profits, for example the use of fixed margins for a cost-plus or resale-minus method for determining an appropriate transfer pricing, while more direct ones are available,” the Commission said.
A tax settlement can also grant State aid, the Commission said, when the tax administration makes concessions that provide a taxpayer with more favorable discretionary tax treatment as compared to other taxpayers or that result in tax that is lower than what is reasonable.
State aid can also be granted in cases where preferential tax treatment is given to collective investment vehicles when the preference is “limited to well-defined investment vehicles which fulfill specific conditions to the detriment of other investment vehicles that are in a comparable legal and factual situation,” the Commission said.
Depreciation incentives for specific assets or undertakings can also give rise to State aid. Examples include situations where a tax authority has discretion to set different depreciation or valuation methods for firms or sectors or where taxpayers must obtain prior approval to take deprecation, the Commission said.
Application of anti-abuse rules can also be selective, the Commission said, when anti-abuse rules are not applied to specific undertakings or transactions.
The Commission also said that excise duty relief could fall within the ambit of the State aid rules. Reduced duty can grant selective advantage to undertakings which use the product as an input or that sell it on the market.
The paper also discusses when tax amnesties and fixed basis tax regimes for specific activities are considered considered State aid and addresses application of State aid rules to cooperative societies.
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