A first reaction on the Starbucks and Fiat State aid decisions
I’m typing as I listen to Commissioner Vestager live at the press conference announcing the decisions considering the tax rulings granted by the Netherlands and Luxembourg to Starbucks and Fiat as illegal State aid.
I have just read the press release and, whereas it might not seem to be saying much on the legal issues, it actually does trigger a few thoughts; for now let me just address one:
Does selectivity have anything to do with ideal economic reality?
According to the press release, the rulings at issue are considered “selective” (a necessary requirement for State aid to exist) because they endorsed “artificial and complex methods” and “do not reflect economic reality”.
Under EU law, at least until now, selectivity was assessed by comparing whether a public measure treats some companies differently than others by deviating from the ordinary way of doing things.
Never before -and we have done quite a lot of tax State aid cases- have I seen a measure considered selective on the basis of a comparison not with how things are normally done , but with an ideal reconstructed method of how things should have been done.
To be continued…
Chillin'Competition 
Dear Alfonso,
To answer your question: no it doesn’t. But then again, this isn’t the Commission’s benchmark. The Commission isn’t claiming that ideal economic reality should be the standard; it refers to ‘economic reality’. Those who believe in the (more) (economic)effects-based approach can only welcome such a statement as ‘economic reality’ is the ultimate uniform and invariable yardstick in this approach. Bottom-line for economic reality: would Starbucks have paid similar royalties for anyone else’s coffee roasting recipe or the same price for anyone else’s beans? I’m confident there’s a market price for a coffee roasting recipe and there’s a market price for coffee beans for sure.
best wishes,
hans
Hans
21 October 2015 at 11:16 am
The selectivity element seems especially absent in Luxembourg, where obtaining a tax ruling was as easy as simply asking for it nicely…
Eager to learn the full set of facts considered by the Commission and the legal theory behind today’s announcement.
Miguel
21 October 2015 at 10:16 pm
[…] on Wednesday, October 21, and the rulings could not have been worse for Starbucks and Fiat (h/t Chillin’ Competition). These cases can be seen as a barometer of what is to come in the legally similar but much larger […]
Angry Bear » EU slams Starbucks and Fiat advanced tax rulings as state aid; Is Apple next?
22 October 2015 at 8:40 am
I cite this post in my blog today. Link and text below. Best, Kenneth Thomas
http://www.middleclasspoliticaleconomist.com/2015/10/eu-slams-starbucks-and-fiat-advance-tax.html
The European Commission decided two of its major tax subsidy cases on Wednesday, October 21, and the rulings could not have been worse for Starbucks and Fiat (h/t Chillin’ Competition). These cases can be seen as a barometer of what is to come in the legally similar but much larger case of Apple, where potentially billions of euros could be at stake.
The gist of the three cases is that tax haven subsidiaries of each company (Starbucks in the Netherlands, Fiat in Luxembourg, and Apple in Ireland) were given advance tax rulings by each country that were so removed from economic reality as to constitute illegal subsidies (“state aid” in Euro-speak) under EU competition law. In the Commission’s decision, it was emphasized that the artificially low tax bills created by the rulings gave them an unfair competitive advantage over competitors, especially small business (“small and medium-sized enterprises” or “SMEs” in Euro-terminology).
Since the alleged subsidies were not notified to the European Commission in advance as required by EU law, the Commission has ruled that Starbucks and Fiat have to repay the illegal aid to the granting countries, with interest. The decision states that each company will owe € 20-30 million in aid repayments.
Of course, both of these cases will be appealed to the European court system, all the way to the Court of Justice of the European Union (CJEU), the highest court in the EU. Tax haven shenanigans are built into the economic structure of both Luxembourg and the Netherlands, and the two countries will do everything they can to maintain the status quo. The Apple case is much bigger, because it goes back all the way to 1991, and some estimates have put its tax savings at billions per year. If Apple loses, and I think it will, we can again be assured that the case will be appealed to the CJEU.
If the Commission makes these decisions stand up on appeal, it will dramatically change the shape of tax havens in Europe (including Switzerland, which the EU holds as being subject to the state aid rules through its free trade agreement). It won’t put them out of business, because the decisions pertain to corporate income tax rather than personal income tax, but the amount of revenue lost on the corporate tax alone is a very big deal. ________________________________
Thomas, Kenneth P.
22 October 2015 at 8:59 am
I may be over simplistic here but “artificial and complex methods” that “do not reflect economic reality” it’s the HOW, not the WHO -i.e. selectivity. The tax rulings are selective per se as they cover the corporate tax methods that the addressed companies need to follow on an individual basis. Thanks for the post.
G
22 October 2015 at 9:15 am
G, I entirely agree that those references relate to the “how”, not the “who”, which is precisely why they cannot- in my view- support a finding of selectivity.
You say that “tax rulings” are selective per se, but this is something that the Commission has explicitly ruled out, saying that it does not question the existence of rulings as such!
Alfonso Lamadrid
22 October 2015 at 10:39 am
Can the how and the who be separated here? Would any other, smaller, company be able to het a tax Ruling on a similar basis? I doubt it? You could compare the situation to that of asubsidy scheme with general application but discretion for the authority applying it. That is going to be selective anyway.
Hans
22 October 2015 at 1:26 pm
Hi Hans, you have actually raised two very interesting points in your comment, but ones that perhaps need a decently long response (and one that I’m not sure I can provide yet because then I won’t have anything to offer to potential clients) 😉 I will come back to your questions soon!
Alfonso Lamadrid
22 October 2015 at 2:51 pm
As you point out, by definition, a State Aid is selective. And “economic reality” means nothing. Well… it might mean very different things depending on who is using the words. The recipients of the aid may perfectly argue that their “economic reality” justified the ruling.
Miguel Troncoso Ferrer
22 October 2015 at 4:01 pm
Come on, Alfonso, i’m sure your aware of Gibraltar! 😉 To me, more than selectivity, i think there areinteresting questions to be raised at the level of the state resources…
S
22 October 2015 at 10:16 pm