The assumption underlying competition (and antitrust) rules is that competition is good. As interventions by the State may create distortions to competition, then they are to be governed. Thus, State aid rules regulate the assistance that governments may provide to economic actors.
But the rules do not and should not seek to eliminate all market distortions created by government. We do not live in a state of nature where barter is the norm and markets are truly free. Governments provide rules, infrastructure, goods and services for instance that influence the goods and services that are provided on the market. Taxes are raised to pay for government action and choices must be made in respect of both the tax base and rate. The result is that government action will necessarily have a distortionary effect on the market.
The task of the State aid rules as a result cannot be to prevent or eliminate all distortions of the market by governments but to draw a line between those interventions that are legitimate and those that are not. Where that line should be drawn is a contested issue, particularly today in the context of tax administration. The tax authorities of Belgium, Gibraltar, Ireland, Luxembourg and the Netherlands are alleged to have given unduly favourable tax rulings to multinationals in departure from the underlying tax rules and that this constituted State aid. The amounts at stake in the tax ruling cases are staggering. Apple may for instance owe up to €13 billion to Ireland.
Much of the discussion on the cases to date has focused upon whether the Commission has properly interpreted and applied the relevant tax rules. This however is the wrong starting point. A misapplication of the relevant tax rules alone should not be sufficient to give rise to State aid concerns, contrary to the Commission’s stated position.
Were this the case, serious practical consequences would follow. First, the Commission would have significant power to oversee tax administration. It would seem that a taxpayer simply paying less tax than due, where the difference is anything other than de minimis, could give rise to State aid concerns. One would also expect that taxpayers in the future, looking for assurance as to the consequences of tax arrangements or transactions, would first ask the relevant tax authority (or authorities) and then lobby the authority (or authorities) to get State aid clearance from the Commission. In effect, the Commission would become a quasi-tax authority itself – a supranational tax authority!
At the same time however, it cannot be doubted that there should be oversight of the actions of tax authorities when it comes to their dealings with taxpayers. There must be some external limit on tax authorities’ powers to hand sweetheart deals to favoured actors.
In order to bridge the gap, I suggest in an article just published in the April issue of the Law Quarterly Review (“The Power to Get it Wrong”) that, both as a matter of national and EU law, tax authorities can misapply the law within the limits imposed by public law. This shifts the focus away from figuring out correct transfer pricing and other complex tax calculations to matters that we are ultimately concerned with, such as whether a tax authority has deliberately colluded with a multinational in order to give it a tax break, or has had the wool pulled over its eyes, or has failed to follow its own processes to ensure parity of treatment between taxpayers and so on. Only once unlawfulness has been demonstrated do we then have to consider whether less tax has been paid than is due.
This does not mean that the Commission’s current investigations are without merit. Indeed, applying this approach to the Apple case generates reasons for thinking that the Revenue Commissioners breached Irish administrative law.
The article was accepted for publication long before it became clear what the UK’s post Brexit relationship with the EU would be in respect of the State aid rules and was essentially “at the printers” when the Trade and Cooperation Agreement (TCA) was finally reached late in December 2020. The level-playing field provisions of the TCA in any event mirror the State aid provisions of the Treaty on the Functioning of the European Union in all material respects for tax purposes.
The proposition in my article that the focus should be on the lawfulness of the tax authorities’ actions should equally apply then to actions of HMRC with regards the level-playing field provisions. In order to determine, under the new regime, whether HMRC has provided a “subsidy” through for instance tax rulings, settlements or guidance, it is suggested that the “independent authority” (LPF Article 3.9) or court (LPF Article 3.10) that has to decide that question should ask itself whether HMRC’s decision could successfully be challenged on standard public law grounds (for example error of law or irrationality) as the basis for determining whether a “specific advantage” arises. That test could be incorporated either: 1) as part of the “normal tax regime”, thereby meaning no “advantage” arises unless HMRC has acted unlawfully, or 2) into the principles that justify discrimination between comparable taxpayers, meaning a reduction in tax ordinarily borne is not “specific” if HMRC’s dealings with the relevant taxpayer could not be successfully challenged on public law grounds. An obvious practical advantage of this approach is that whatever court gets the task of reviewing decisions under Article LPF.3.10 will already be familiar with public law principles.
The full citation for the article is Stephen Daly, “The Power to Get it Wrong” (2021) 137(2) Law Quarterly Review 280 and it is available on Westlaw. Email: stephen.daly@kcl.ac.uk