Tax policy and state aid in the EU

This article was first published by the Peterson Institute for International Economics.

The European Commission’s decision to recover €13 billion plus interest in unpaid taxes due Ireland and some other European countries from the Apple corporation raises many questions. Many of these questions, for example on the retroactive nature of the adjustment, will presumably be taken up by Apple and the Irish government in the courts. Whether classifying tax policy as state aid will lead toward tax harmonization in the European Union is for economists to tackle.

Brussels bureaucrats demonstrated that between 1991 and 2007 Irish tax authorities reduced Apple's tax rate from the statutory 12.5 percent to well below 1 percent. This arrangement is in breach of EU state-aid rules preventing member states from offering preferential treatment to particular firms. Apple received gains that no other company did.

This is the largest state-aid ruling by the European Commission that focuses on tax policy, though recently there has been a flurry of related activity. In 2015, the Commission concluded that Luxembourg and the Netherlands had granted tax advantages to Fiat and Starbucks, respectively. In January 2016, the Commission concluded that selective tax advantages granted by Belgium to three dozen multinationals are illegal under EU state-aid rules. The Commission also has two ongoing investigations into tax preferences that gave rise to state aid in Luxembourg, benefitting Amazon and McDonald’s.

So far, all investigations center around preferences given by an EU member to a firm or group of firms. But can the European Commission at some future date argue that a country with a low statutory corporate income tax, for example Bulgaria at 10 percent, is providing an unfair advantage to firms that operate on its territory, relative to companies that operate in neighboring Greece (29 percent) or Romania (16 percent)? This possibility seems far-fetched, but only a few years back, so was the notion that the European Union would consider tax policy as state aid. Note that such cases start around 2012, in the aftermath of the euro area crisis. Before 2012, not a single case of preferential tax policy as state aid was initiated. Who is to say that in a few years the tax harmonization argument will not carry the day?

Several EU countries have argued for corporate tax harmonization in the European Union as a measure against tax avoidance.

Several EU countries, most notably France, have argued for corporate tax harmonization in the European Union as a measure against tax avoidance. This topic was picked up in 2011 at Ecofin, the meeting of EU finance ministers, and drew support from Germany and several other Northern European countries(link is external) like Finland. The Juncker Commission has been receptive and spurred another round of discussion(link is external) in 2015. But a large group of countries, led by the United Kingdom, Ireland, the Czech Republic, and Poland, countered that tax policy is not part of the common EU rules and belongs to the sovereign. Ultimately the latter group won, but now its stance is significantly weakened with Ireland under suspicion for breaking the rules and the United Kingdom dealing with the aftermath of the Brexit vote. East European countries are left to defend sovereign tax policies on their own.

It is conceivable, however, that the discussion started in 2011 about an EU-wide finance ministry(link is external) will gather support in the near future, and that corporate tax policy will be seen as part of the EU finance ministers' powers. The time for such a shift may be less distant than we think. Hopefully by then the convergence in living standards across the European Union will have progressed sufficiently that corporate tax harmonization will not be detrimental to poorer countries trying to catch up with the rest of Europe. This is the main reason why Eastern Europe has objected to harmonized—effectively higher—corporate taxes.

Copyright for this work is held by the Peterson Institute for International Economics.