EU Commission pursues attack on low-tax countries

The European Commission is vigorously pursuing its attack on low-tax countries, despite the slap-down it received when the EU’s second-highest court quashed its €14.3 billion lawsuit against Apple on July 16.

The Commission argued that Apple was receiving unfair state aid, under the terms of the Treaty that founded the EU. The court, however, said that the EU did not prove its case.

At that time, the Commission said that it would “reflect on future steps.”

But the Commission did not take long to reflect. On 31 August 2020, the Commission published the opening of the official procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union (state aid), against Belgium related to a series of regimes benefiting more than 20 multinational companies.

“We have every reason to believe that despite the Apple debacle, the Commission will continue its aggressive effort against the schemes of Member States offering preferential tax regimes to multinationals under the state aid legislation which gives to it the full executive power to pursue without needing the legislative approval of the Member States,” comments Antigoni Pafiti, an associate with the Elias Neocleous law firm in Brussels.

“But the publication of the official procedure in Belgium — post Apple — demonstrates that the Commission, after some eventual adjustments, sticks to its strategy. One should remember that the Commission has won some of the cases against Member States on this basis, having cut deals with multinationals on taxation,” Pafiti points out.

The Commission had already notified Belgium of its decision to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union with a letter dated 16 September 2019 (i.e. before the Apple Judgment).

The press release accompanying the letter addresses the issue of “excess profit” tax rulings issued by Belgium between 2005 and 2014 in favour of Belgian companies belonging to multinational groups. Most of these multinational groups are headquartered in Europe.

Belgian company tax rules require companies, as a starting point, to be taxed based on profit actually recorded from activities in Belgium. However, the Belgian “excess profit” tax rulings, relying on the Belgian income tax code (Article 185 §2, b of the ‘Code des Impôts sur les Revenus/Wetboek Inkomstenbelastingen’), allowed multinational entities in Belgium to reduce their corporate tax liability by so-called “excess profits” that allegedly result from the advantage of being part of a multinational group.

“The Commission argues that the excess profit measures provide for a reduction of a company’s taxable base, although there is no legal basis to do so in Belgian tax law. The “excess profit” measures therefore favour them as compared to all other corporate taxpayers in Belgium, who are taxed, as a starting point and notwithstanding possible adjustments provided by law, on their accounting profit,” Pafiti explains.

“On the other hand, even if Article 185(2)(b) BITC could be said to provide a basis to exempt profit allegedly derived from synergies and economies of scale, which the Commission contests, the Commission provisionally considers the measures to discriminate in favour of them, since the ‘excess profit’ exemption is not available to all corporate taxpayers that generate what Belgium deems to constitute ‘excess profit,” Pafiti adds.

So one should understand the Commission’s strategy as an effort to try the limits of the state aid tool in the Court. “Every inch that the Commission gains in this way is considered to be pure benefit, given the very limited competence the Treaties give to the Commission on corporate taxation,” she adds.

The Commission is trying to address a serious challenge. Jurisdiction shopping to get the best tax rate has become endemic among major corporates. In the UK, more than 50 per cent of the subsidiaries of foreign multinational companies reported no taxable profits, according to a 2019 study by Oxford university research fellow Katarzyna Bilicka, the Financial Times reports. In the US, 91 companies on the Fortune 500 index, including Amazon, Chevron, and IBM, paid an effective federal tax rate of zero in 2018.