EU examination of tax ruling systems (Part 1): where could it lead?

in Tax, 30.09.2013

Tax has once more made it into the headlines here in Europe with the news that the European Competition Commission has started looking into whether tax ruling systems used by Luxembourg, Ireland and the Netherlands could contravene EU competition law. The enquiries centre around tax rulings made in a system where governments offer companies reassurance in advance on the legality of their tax plans, before they embark on complex and costly transactions.

What is interesting here is the nature of the new questions being asked and the potential consequences that could ensue. It is because of this that I and many others will be watching the outcome of the questioning with increased scrutiny.

It is true that all governments compete for investment from multinationals. Many do this by creating favourable regulatory, legal or tax frameworks to encourage them to set up shop in their jurisdictions. Tax optimization is not the only criteria for multinationals when taking their investment decision, but a stable economic, legal and tax environment, as well as an efficient public administration, are important factors when choosing new locations. There are many legal and legitimate ways for governments to give their country a competitive edge through an efficient administration of their tax system, but clouds gather on the horizon when these special arrangements deviate from the general rules.

The three scenarios

There are three main turns that this story could take on a European level. In the first scenario, the EU may find that the deals are entirely above-board and the hubbub will die down. In a second, the Commission’s Code of Conduct group may decide that a deal constitutes a harmful tax practice and pressurize Member States to phase out tax regimes they consider to be ‘anti-competitive’. This group’s decisions, however, are not binding and it has no power to enforce any measures.

A third and more disquieting scenario would involve the Commission deciding that a government’s actions meant that they had created a selective advantage towards a certain tax payer: in this case, the deal would be qualified as State aid. Despite the neutral sounding label, this is the most serious of the three scenarios and would see the state forced to request that the multinational reimburse any lost revenues, including interest payments with a 10 year retroactive nature. As State aid has a proper legal basis in an EC treaty, this decision can be enforced by the EU Commission.

A whole system at fault?

It is difficult to imagine that the EU will decide that a tax ruling system such as Luxembourg’s could be qualified as State aid. It seems a rather efficient tool that can be used by tax administrations to enhance transparency and stability vis-à-vis tax payers, in the interest of both parties. For me, it’s more plausible that debate may touch on specific decisions in different countries rather than the system itself. I have a feeling that you’ll be hearing a lot more about this in the future, including from me. As Schwarzenegger would say, I’ll be back.

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