European Parliament suggests changing recovery rule for sweetheart tax deals

Thanks very much to Alexander Rose for today’s blog post

On 20 July this year, the European Parliament published a draft report setting out recommendations on how to improve European tax systems. As you would expect, several of the recommendations relate to the handling of State Aid.

Perhaps the most controversial of these can be found at paragraph 95, which calls on the Commission “to assess the possibility of modifying the existing rules in order to allow the amounts recovered following an infringement of EU state aid rules to be returned to the Member States which have suffered from an erosion of their tax bases or to the EU budget, and not to the Member State which granted the illegal tax-related aid”.

The rationale is to address the situation where the State offers a sweet-heart tax deal to induce a business to relocate its operations and subsequently gains a windfall in the event the Commission find the award to be unlawful. Such a change would, however, be a fundamental departure from the procedural rule that the beneficiary repays the amount of the aid with compound interest, with the objective of returning the market to the position it would have been in had the aid not been granted.

It is also suggested that the Commission draft a new State Aid guideline which would clarify tax-related state aid, in particular setting out an “appropriate” transfer pricing system. The focus on transfer pricing appears to be because Commission data claims that 72% of profit shifting takes place in the EU through the channels of transfer pricing and location of intellectual property.

Finally the report suggests setting up a network of national tax administrations to exchange best practices.

It remains to be seen whether these recommendations will be taken forward. In the meantime it would be interesting to hear the views of UKSALA members on this issue.

[Note from The Editor – we are planning an UKSALA seminar specifically to discuss tax cases of this nature, so please look out for the announcement of that in due course.]

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