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European Commission Reviews 'Tax Aid' Issue

by Ulrika Lomas, Tax-News.com, Brussels

28 November 2003


The European Commission has adopted a report relating to action taken by the executive in the field of 'tax aid' (ie government support via fiscal measures) which looks at the 1998 notice on tax aid, as well as the relationship between the monitoring of state aid and measures taken to combat 'harmful tax competition'.

The report starts by reviewing implementation of the Commission's notice on the application of the state aid rules to direct business taxation. It looks not only at the concept of state aid and the assessment of compatibility but also at the procedural aspects. According to the report, the notice has proved to be a suitable instrument for vetting cases of 'tax aid' in particular under the proceedings instituted on 11 July 2001. These cases were concerned mainly with the special tax schemes for multinational companies. For instance, the Commission had to decide on the application of alternative tax methods such as the cost-plus method, designed to capture transactions carried out in a cross-border, intra-group context.

This method consists in calculating taxable income not by reference to the difference between a company's revenues and expenses but by looking at the costs incurred by the company in connection with transactions with other companies in the same group. A cost-plus mark-up is added to these costs to obtain an appropriate profit in the light of the functions performed, assets used, risks assumed and market conditions. The report states that the Commission is not fundamentally opposed to such methods. It does, however, point out that an alternative method of taxation may give rise to state aid if the resulting tax burden is lower than that which would have resulted from the application of a "traditional" method of taxation.

The report also states that the Commission will continue to pursue a strict approach to the principle of justifying a selective tax measure by reference to the nature or general scheme of the tax system. According to this principle, differential tax treatment may be justified by factors stemming from the intrinsic logic of the tax system. The fact that the selective nature of the measure results from the application of objective criteria (turnover, size, geographical location, etc.) is not such as to justify the existence of a derogation. In this connection, the Commission attaches particular importance to verifying whether the eligibility criteria for benefiting from a measure are consistent with the justification put forward by the Member State concerned.

When it comes to assessing compatibility, the Commission emphasises that it does not have any positive or negative preconceived ideas regarding state aid in the form of tax measures. In practice, it has vetted such aid in the light of the existing frameworks and guidelines, and has not drawn up any special rules for it.

In addition, the report examines the relationship between the monitoring of state aid by the Commission and measures to tackle harmful taxation under the 'Code of Conduct' for business taxation.

While pursuing the same general goal of reducing distortions of competition within the internal market, the procedure for examining tax schemes from the state aid angle is distinct from the work in connection with the Code of Conduct. The classification of a measure as harmful under the Code of Conduct does not necessarily mean that it will be regarded as state aid, and vice versa. The report stresses that, in so far as the Commission has given priority to vetting harmful measures that also constituted state aid, it has helped to remove certain harmful tax measures.

The report also emphasises that Commission action on tax aid will not come to an end with the agreement on the Code of Conduct for business taxation and will continue to focus on cases that have a significant economic impact and particularly harmful effects on competition and trade.

Lastly, the report looks at indirect taxation, which, in theory, is not covered by the 1998 communication. It concludes that, while the principles laid down in the notice are also largely applicable to indirect taxation, a number of issues could perhaps be dealt with in a separate notice. The report also describes how the Commission ensures consistency between the policy for monitoring aid and tax policy. The Commission now simultaneously vets requests for derogations from the harmonisation of excise duties on mineral oils and analyses the situation in the light of the relevant state aid rules.


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