State Aid and Direct Taxation and the Big Eruption Between the U.S. and the EU

• Author: Liza Lovdahl Gormsen
• DOI: 10.1177/0003603X17708359
• Published date: 01 June 2017
• Date: 01 June 2017

Article

State Aid and Direct Taxation

and the Big Eruption Between

the U.S. and the EU

Liza Lovdahl Gormsen*

Abstract

This article critically assesses the division that the recent decisions of the European Commission in the

field of State aid have exposed between the EU and the U.S. It examines how the two legal orders

address the issue of government subsidies and explores the reasons for their different approach.

It argues that State aid law has become increasingly important as a competition policy issue and its

enforcement is much more aggressive compared to the past. The article tries to untangle the long-

term effect that the recent cases of fiscal aid will have for the tax relationship between the U.S. and

the EU. Finally the article concludes with some tentative solutions and stresses the importance of

international cooperation in the field of taxation.

Keywords

European State aid, U.S. subsidies, tax, WTO, OECD

Introduction

European State aid is no longer about millions—it is about billions. On August 30, 2016, the European

Commission (the “Commission”) concluded that Ireland granted undue tax benefits of up to €13 billion

to Apple and ordered the recovery of the—allegedly—illegal State aid.

1

Both Apple and Ireland have

appealed the decision to the General Court.

2

According to the Irish Finance Minister, Michael Noonan,

Ireland had no choice but to appeal the Commission’s decision “to defend the integrity of our tax

system, to provide tax certainty to business and to challenge the encroachment of EU state aid rules

*British Institute of International and Comparative Law, Charles Clore House, London, UK

Corresponding Author:

Liza Lovdahl Gormsen, British Institute of International and Comparative Law, Charles Clore House, 17 Russell Square, London,

WC1B 5JP, UK.

Email: lovdahlgormsen@biicl.org

1. Commission, State Aid: Ireland Gave Illegal Tax Benefits to Apple Worth up to €13 Billion (Press Release, Aug. 30, 2016),

europa.eu/rapid/press-release_IP-16-2923_en.htm.

2. Tom Bergin, Apple Appeal Against EU Tax Demand Would Break New Ground,REUTERS (Sep. 2, 2016), www.reuters.com/

article/us-eu-apple-taxaviodance-court-idUSKCN118155; Vincent Boland, Ireland to Appeal Against EU’s Apple Ruling,

FINANCIAL TIMES (Sep. 2, 2016), www.ft.com/content/2b8adff6-711f-11e6-a0c9-1365ce54b926.

The Antitrust Bulletin

2017, Vol. 62(2) 348-366

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into the sovereign member states competence of taxation.”

3

As the tension between various Member

States and the Commission is mounting, so is the tension between the EU and the U.S.

The taxation of multinational enterprises (MNEs) has become an increasingly political issue as

reflected in a recent exchange between Europe and the U.S. The arguments raised vary from the

encroachment of Member States’ sovereign powers in relation to direct taxation matters to alleged

discriminatory treatment of U.S. multinationals.

4

The former secretary of U.S. Department of the

Treasury, Jacob Lew, formally expressed concerns that the Commission “appears to be adopting an

entirely new legal theory and applying it retroactively in a broad and sweeping manner.”

5

Furthermore,

the Commission’s “enforcement actions...are inconsistent with, and likely to contrary to, the BEPS

project” and “appears to be targeting U.S. companies disproportionately.”

6

Competition Commis-

sioner Margrethe Vestager argued, in her response to Jacob Lew, that the Commission’s

“investigations into tax rulings is based on firm legal ground.”

7

This was followed up with a White

Paper from the U.S. Department of the Treasury challenging those legal grounds.

8

It is not the first time the U.S. and Europe disagree on matters of competition policy. In 2001 the

GE/Honeywell merger was approved in the U.S.,

9

but prohibited by the Commission under the Eur-

opean Merger Regulation.

10

In 2004 the Microsoft case was found to infringe Article 102 of the Treaty

of the Functioning of the European Union (TFEU),

11

whereas no violation of the Sherman Act Section

2 was found.

12

The big difference between previous disagreements and the current one is that the

previous cases mentioned were antitrust cases, whereas the current line of cases relates to State aid law.

This is the first ever disagreement relating to State aid.

Ironically, the European State aid investigation into Apple’s tax affairs in Europe was initiated due

to U.S. Senator Carl Levin and U.S. Senator John McCain questioning of Apple’s offshore profit

shifting and the U.S. Tax Code before the U.S. Senate Permanent Subcommittee on Investigations on

May 21, 2013.

13

Following their questioning, in June 2013 the Commission sent a number of infor-

mation requests to tax authorities in selected Member States on their respective tax rulings.

14

From

2014 onwards, the Commission opened a number of investigations in Ireland (concerning Apple), the

Netherlands (concerning Starbucks) , Belgium (concerning the Belgian “Exce ss Profit” case), and

Luxembourg (concerning Fiat, Amazon, McDonalds, and Engie).

15

Initially, the Commission was

3. Sean Farrell & Henry McDonald, Apple Ordered to Pay €13bn After EU Rules Ireland Broke State Aid Laws,THEGUARDIAN

(Aug. 30, 2016).

4. Letter from Congressman Boustany to David O’Sullivan (Dec. 18, 2015).

5. Letter from Jacob J. Lew to Jean-Claude Juncker (Feb. 11, 2016).

6. Id.

7. Letter from Commissioner Magrethe Vestager to Jacob J. Lew (Feb. 29, 2016).

8. U.S. DEPARTMENT OF THE TREASURY,THE EUROPEAN COMMISSION’SRECENT STATE AID INVESTIGATIONS OF TRANSFER PRICING

RULINGS (White Paper n.d.), www.treasury.gov/resource-center/tax-policy/treaties/Documents/White-Paper-State-Aid.pdf.

9. U.S. Department of Justice, Justice Department Requires Divestitures in Merger between General Electric and Honeywell

(Press Release, May 2, 2001), https://www.justice.gov/archive/atr/public/press_releases/2001/8140.pdf (last visited Oct. 25,

2016).

10. See COMP/M.2220, General Electric.

11. Case COMP/37.792. The case was upheld on appeal Case T-201/04, Microsoft v. Commission [2007] ECR II-03601.

12. United States of America v. Microsoft Corporation, 253 F.3d 34 (2001); DANIEL J. GIFFORD &ROBERT TKUDRLE,THE

ATLANTIC DIVIDE IN ANTITRUST:ANEXAMINATION OF US AND EU COMPETITION POLICY 15 ff. (2015).

13. All relevant documents available at: http://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-

shifting-and-the-us-tax-code_-part-2.

14. Tax rulings are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated

or on the use of special tax provisions.

15. Commission Decision SA.38373, 11 June 2014, Apple; Commission Decision SA.38375, 11 June 2014, FFT; Commission

Decision SA.38374, 11 June 2014, Starbucks ; Commission Decision SA. 38944, 7 Octobe r 2014, Amazon. See also

European Commission Press Release, Commission Investigates Transfer Pricing Arrangements on Corporate Taxation of

Gormsen 349