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The Dangers of a Protectionist Revival: Digital Turnover Taxes under State aid law

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(by Alfonso Lamadrid and José Luis Buendía)

Our last blog post on State aid observed how the Covid-19 crisis may awake dangerous currents in Member States and how, absent concerted action or legal safeguards, unilateral measures could pose a threat to the EU internal market. We had in mind measures that could aggravate existing economic asymmetries between Member States. The Commission is now commendably pursuing a concerted approach on that front.

This post is about a different but related threat: that Member States may succumb to a renewed temptation to engage in backdoor protectionism through State aid.

The problem is not new. The Commission quickly realized about this risk and challenged the Polish and Hungarian taxes on retail and advertising, pointing to their clearly discriminatory nature (by virtue of progressive turnover thresholds, they affected almost exclusively companies from other Member States, and not domestic ones). We ourselves had also already discussed this on this blog (see here, and also here for Pablo’s take) when commenting publicly on the Digital Service Taxes announced in several Member States due to the absence of international or EU-wide consensus. Like the Polish and Hungarian measures, these also seek to tax non-domestic companies [Disclosure: we (but not Pablo) have since then written legal opinions for various companies on this subject].

Even if the problem is not new, it is now that this risk is acquiring a completely different dimension due to a combination of factors. First, Member States obviously need additional sources of income to support their economies (this is not only legitimate, but very necessary). Second, Member States might now have more incentives to obtain new income from non-domestic companies in order to support domestic ones (that is neither legitimate nor necessary). Third, recent Court Judgments may be read as suggesting that there is a creative way for Member States to pursue protectionist goals without contravening free movement and State aid rules.

These latter Judgments come from both the General Court (in Poland/Commission, T-836/16 and T-624/17, and Hungary/Commission, T-20/17) as well as, more recently, from the Court of Justice (Tesco-Global Áruházak, C-323/18, Vodafone Magyarország, C-75/18, and Google Ireland, C-482/18). In these cases the EU Courts would appear to have adopted a more lenient stance regarding Member States’ protectionist measures, refusing to follow the sensible positions advance by the European Commission (for a comment on the latter see also Prof. Nicolaides’ comment here).

What these Judgments have in common is that they have seemingly dismissed allegations of material discrimination, choosing instead a formal assessment of ad hoc taxes as reference systems of their own. In other words, they accept at face value the declared logic of each specific tax (for instance, the need to tax advertising and to do so based on turnover) without wondering if the said logic is consistent and fits within the objectives of a fiscal system as a whole.

Perhaps the EU Courts’ ambivalence and lack of decisiveness in the assessment of these measures has to do with political sympathy for other unilateral measures (Advocate General Kokott’s Opinion in the Hungarian cases suggests that the Court may have had in mind Digital Services Taxes when approaching these other recent cases). Political sympathy for a given set of measures, however, should not blind us to their possible illegality; arguably, it should even make us more alert to it.

Indeed, the problem is much bigger than DSTs or that the Hungarian and Polish taxes at issue in the recent Judgments and in other pending cases. If this new and recent line of case law were confirmed in the pending appeals against the General Court Judgments, it would open the door to deconstructing all the progress achieved in fiscal State aid in recent years.

Negating the potential discriminatory nature of progressive taxes could run counter to non-discrimination principles as well as to an established line of case law on asymmetric taxes (British Aggregates, T-210/02 RENV recently confirmed in ANGED, C-233/16). In these and other cases EU Courts have consistently established safeguards against artificial boundaries around fiscal measures, emphasizing the need to check whether the boundaries and conditions of specific taxes are coherent with their declared objective or are rather set in an arbitrary way.

The lack of a clear EU position on unilateral asymmetric/ protectionist measures can be the source of enormous problems at a time when the temptation to resort to them may be particularly high. Any Member State could simply decide to slice up the national tax systems into ad hoc taxes in order to avoid State aid control, and to create asymmetric taxes targeting not a public policy goal, but only certain players with a perceived capacity to pay. This would not just concern EU retailers in Poland and Hungary or a handful of US multinationals. These would simply be the first in a long list. And then, let’s not underestimate the capacity of other blocs around the world to reciprocate with similar discriminatory and distortive taxes.

One can only hope that the negotiations at OECD level to reform the international tax system will result in some international consensus on digital taxation. A very recent Commission Communication has confirmed that it supports the discussions led by the OECD and the G20 and stands ready to act if no global agreement is reached.

Pending these negotiations, it would be dangerous to EU law to permit unilateral discriminatory measures. Some may feel sympathy for measures designed to affect only global players, but one should keep in mind that exactly the same approach could be replicated to discriminate between different EU companies.

Written by Alfonso Lamadrid

29 May 2020 at 10:21 am

Posted in Uncategorized

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