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How Multinationals Benefit From State Aid in the EU

Updated on April 1, 2019
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The second part of a series of articles demonstrating how multinational companies benefit from State Aid through favourable tax policies.

Introduction

A series of recent decisions delivered by the European Commission (“EC”) have catapulted the arguments for and against individual member state aid to the forefront of European Union (“EU”) law. The EU’s law governing the restrictions on state aid are set forth in provisions contained in the Treaty on the Functioning of the European Union (“TFEU”).

Article 107 of the TFEU (“Article 107”) states:

Any aid granted by a Member State or through State resources…which distorts or threatens to distort competition by favouring certain undertakings…shall…be incompatible with the internal market.”

While this provision seems unequivocal there are a number of exceptions to the above law. Biondi has defined state aid as any form of advantage that is selectively granted by public authorities in order to achieve a social or economic objective.

Within the EU’s single market one major area that has still yet to be harmonised is tax. This sovereignty that is granted to each individual member state allows for discretional taxing, with the exception of VAT. For example, it is accepted that a member state having a lower rate of tax for a corporation’s income than another state is not in breach of the TFEU provision on state aid as it is a common policy applied to every company within the jurisdiction. The issue of state aid arises only when particular enterprises or sectors have been granted favourable arrangements. This has been the case for many jurisdictions within the EU in recent times and the true values of the impact of the rulings against the countries are yet to be seen. This will further be discussed in depth at a later stage of the paper.

In light of these recent revelations it seems appropriate to ask the same question asked by Claus-Dieter Ehlermann in 1994; “should state aid control be entrusted to an independent European Competition Office?”

The State Aid Powers of the European Commission

In order to enable us to precisely understand the rulings delivered by the EC in the recent cases briefly mentioned above it is vital that the operation of the EC in cases for state aid is comprehensively understood. In order to gain a greater insight into this the focus of this section will be on the individual elements that are contained in Article 107. It will then examine the requirements that a country seeking to provide state aid to a company must meet. Finally, this section will explore the causes for the recent increase in surveillance within the EU.

There are three main aspects to be considered when determining state aid under Article 107. They are: (i) the resources of the state must have an involvement; (ii) there is a real or prospective situation at hand that could impact on competition; and (iii) that the aid benefits not all, but rather, specific undertakings.

State Resources - The definition of state resources is not simply the public expense that may be suffered with the grant of subsidies to a multinational company (“MNC”). It is far more comprehensive. The judgement delivered by the Court of Justice of the European Union (“CJEU”) in Italy v Commission reaffirms this point. The court in this case stated that:

Article [107] does not distinguish between the measures of State intervention concerned by reference to their causes or aims but defines them in relation to their effects.”

The purpose of this judgement is to seal any loopholes that may have existed if an exhaustive list of what is considered state aid had of been provided. State aid is not concerned with the nature of the benefits given to the selected undertakings but more focused on the result derived from these benefits. This ensures that the opportunity cost suffered by states from neglecting to collect the correct level of tax can be considered state aid. Once again this is just one example of indirect state aid. Further examples that have been provided by Biondi include loans, guarantees, redundancy payments, and exemptions from insolvency legislation. However, this does not mean that any of the aforementioned benefits will automatically be considered state aid.

Real or Prospective Threat to Competition - The nature of distorting competition under the provision in Article 107 is a two-fold one. The EC have recognised this in a 2014 report while also commenting further that the two elements are commonly considered in tandem.

Initially, the aid given by the state will be assessed on how it has impacted on the undertaking in the market. Under the precedent set in the judgement of Philip Morris v Commission if something has been considered to better the competitive situation of one undertaking without similarly benefitting a competitor then it will be considered to interfere with competition.

The second consideration regarding impact on competition involves examining the threat that the aid poses to trade in free trade markets. The nature of the effect on trade is that if one country aids an undertaking in a specific jurisdiction within the EU, where free trade exists, this could have an adverse effect on the competing undertaking in a separate jurisdiction as they will not be receiving similar benefits. It has been suggested that a balancing method, whereby the negative impact of the state aid is more significant than the positive impact, should be used when assessing state aid with respect to trade competition.

Favouring Certain Undertakings - The three words contained in the title of this subsection all have a significant meaning under the application of Article 107. The word favouring can be linked to the notion that the undertaking that is subject to the supposed state aid must be benefitting from it. As has been discussed above, this can be done through a number of mediums. The concept behind the word certain is related to the fact that the benefit derived from the state aid must be targeted to a specific company and/or sector. It is worth mentioned that policies that are applicable to all undertakings within a certain jurisdiction cannot be considered state aid as they are general practices. Finally, what constitutes an undertaking has not been expressly stated in the TFEU. However the definition has been derived in the CJEU in Klockner v High Authority. This definition constitutes that an undertaking has to have “personal, tangible and intangible elements” that are connected to a legal body with the purpose of pursuing long term economically-driven target.

Exceptions that Allow for State Aid

There are a number of provisions that permit state aid. These provisions that automatically allow state aid are contained in Article 107(2) while conditions that may give rise to legally administering state aid after an application to the Commission are contained in Article 107(3). The exceptions in subsection 2 include: societally beneficial aid bestowed upon a single consumer without differentiation in aid dependant on products consumer; aid that is intended to facilitate regrowth after the occurrence of a natural disaster; and aid granted to the disadvantaged areas of Germany where the disadvantage relates to the split that occurred between East and West Germany.

The provisions in Article 107(3) are significantly more subjective than the aforementioned and are all subject to the approval of the EC. The first provision seeks to improve the situation of underdeveloped areas in terms of economic output and employment by allowing state aid.The second exception allows for state aid where the funding will be focused on completing a project that will benefit the EU as a whole.The third provision in subsection 3 aims to improve the development of certain sectors or regions provided that trading conditions do not regress. This provision is similar to the first only the area does not have to be underdeveloped and it may also apply to sectors of business. There is also a provision that allow for state aid in order “promote culture and heritage conversion”. Finally, the TFEU provides an open-ended discretionary provision for the EC to decide if certain state aid would not be in breach of Article 107(1) after an application has been made.

Application of State Aid

It is pivotal to focus on an example of state aid being justifiably administered as a means of seeing the theory mentioned above in practice. A significant and recent administration has been the aid provided by the Irish government to Allied Irish Bank (“AIB”) on multiple occasions. In light of the financial crisis of 2008 AIB’s position in the market was catastrophically compromised. The initial €3.5 billion in funding was intended to stabilise the financial position of the bank by restoring its capital to satisfy investor needs and allow for lending to benefit production of goods and providing of services.The funding was acknowledged to be state aid by the EC as the money provided was state-funded, affected intra-community trade as AIB operated in many EU jurisdictions, and specifically enhanced the situation of AIB.

The justification for the aid was confirmed by the EC under Article 107(3)(b) [formerly Article 87(3)(b)] as it has been used to “remedy a serious disturbance in the economy of a Member State”. However, due to the financial nature of the institution receiving state aid the accepted provision within the TFEU must also comply with the Financial Institutions Communication.The communication sets down a three part test of appropriateness: specifically-targeted to efficiency remedy the disturbance; proportionately: remaining within the realms of what is required and not succumbing to gluttony; and necessity: the monitoring the strict need of the aid in order to halt distortion of competition.The Commission considered the points mentioned above and concluded that the state aid administered by Ireland has been within their power.

This precedent was subsequently followed in the aforementioned additional decisions on state aid provided by Ireland to AIB. Initially, under the same justification, Ireland injected another €9.8 billion into AIB in 2010. Furthermore, Ireland provided the newly merged AIB and ESB with €13.1 billion through various means and cited the justification under Article 107(3)(b).

Recent Increase in State Aid Decisions In recent years the number of high profile cases brought by EC regarding MNCs receiving state aid has received a significant amount of attention in the media. This influx of cases has been a direct result of measures introduced by the Organisation for Economic Co-operation and Development (“OECD”).

In 2012 the OECD were encouraged by the G20 to introduce a policy that would inhibit the ability of MNCs to avoid tax. Many MNCs were doing this by altering the location of where profits are made therefore deteriorating the tax base of the domestic country.Subsequent to this engagement the OECD released a proposition on Base Erosion and Profit Shifting (“BEPS”) which comprised of a 15 point plan that would focus on eliminating the aforementioned issues.

The following section of this series will focus on cases brought by the EC against MNCs in the EU regarding the shifting of profits in order to reduce their tax liability. The focus of this series of articles will be on Ireland’s relationship with Apple, Luxembourg’s relationship with Amazon, and the Netherland’s dealings with Starbucks.

Should Member States provide tax incentives to MNCs in their country?

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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2019 John Wolfgang

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