End of the road for “parasite” Member States?

In a move that emphasises the new activism of the EU in matters of corporate tax avoidance, the EC Commission has directed EDF to repay to the French State an €889 million tax break granted in 1997, together with interest of a further €488 million.

The move marks the second direction of the Commission that EDF make repayment, the first having been annulled by the European in 2012.

Under Article 87 of the EC Treaty, any aid granted by a Member State which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market.

The practice of tax authorities in member states granting tax rulings to companies can perform the desirable function of giving to those companies the clarity to make investment decisions. However, there is a temptation for member states to seek to grab tax revenues from other states by offering ‘sweetheart deals’ to induce a company to base itself there. This behaviour distorts the market – companies cannot fairly compete with one another if they are subject to different tax treatments – and can constitute unlawful state aid.

The Commission has been investigating tax rulings granted by Ireland to Apple, by the Netherlands to Starbucks and by Luxembourg to Amazon.

It was exposure of abuses of this practice in Luxembourg that lead to the #LuxLeaks scandal leading Margaret Hodge, then Chair of the Public Accounts Committee, to dub Luxembourg a “parasite state”.

There are profound issues at stake here. The UK is explicitly pursuing a policy of tax competition through lowering its rate of corporation tax – at 20% already the lowest in the G20 – to 18% from 2020-21. By way of comparison, Germany has a 30% corporation tax rate, France 33.33%, Spain 28% and so on. And although the EU has focused to date on tax rulings granted to member states the language adopted by the Commission suggests there is a broader interest in leveling the playing field:


Such interventions would be politically explosive in the UK. Speaking to the European Tax Policy Forum, Financial Secretary to the Treasury, David Gauke said:


But the institutions of the EU, including the ECJ, have a long – and some would say proud – history of interventionism where such is necessary to overcome political impediments to delivering a single market. Indeed, there are said to be continuing state aid threats to our own (reformed) Patent Box tax regime.

It is not easy to identify any rational sense in which a distinction can be drawn between tax competition in the form of preferential tax rulings on the one hand and preferential tax regimes on the other. Both distort the market. And, writing in the Guardian earlier this year (in an article well worth reading), Margrethe Vestager (Competition Commissioner) and Pierre Moscovici (the Commissioner for Economic and Financial Affairs, Taxation and Customs) noted that:

In the worst-case scenario, unfair tax competition could create a race to the bottom, in which countries feel compelled to give handouts to multinationals in the form of tax breaks.

The losers are the taxpayers, who foot the bill, the small businesses that cannot compete, and national governments, which lose tax revenue needed to maintain roads, power grids and schools. The winners are the big businesses that play European countries off against each other.

Tax rulings granted by HMRC in the UK are under investigation by the EC Commission.

14 thoughts on “End of the road for “parasite” Member States?

  1. I don’t follow your point on tax regimes.

    The problem with these deals is precisely that: they are *deals*. Private, secret, negotiated special deals.
    Some companies get them, some do not – and that distorts the market.

    But a tax regime does not distort the market: it is a “list price” that anyone can see. That is “fair play in taxation”.

    A well-functioning market does not mean all suppliers charge the same price: only that the prices are public, consistently applied in an open way.

    Deals distort the market because none of those are true.

    Tax competition is a different thing from preferential terms for select companies on a secret basis.

  2. I’m not arguing that differential CT rates constitute unlawful state aid. Plainly they don’t on the law as it stands. What I am arguing is that differential CT rates distort the market – and that the Commission is becoming more interventionist, and not just in its language.

    The market that we’re talking about here is not the tax market. Rather it is the market in which enterprises compete. True it is that (as you point out) a fair and functioning market doesn’t require that everyone charge the same price. But what it does require is that everyone have the ability to try and charge the same price. If you are based in a jurisdiction where you can only return (eg) 60% of your profits to your investors you’re going to have a much higher cost of capital than if you can return 90% of your profits to investors. That will distort the market – whether the tax differential is known about or not known about.

  3. This is excellent news!

    It seems illogical to seek a single market without tax harmonisation

  4. I think it’s illogical too. But my title is a bit click-baity… we’re still a long way off..

  5. It is one of Bernard’s irregular verbs, isn’t it. I encourage fair tax competition; you have harmful tax practices; he provides unlawful state aid contrary to Article 87 of the EC Treaty.

  6. Nicely put.

  7. I doubt the EC can make a sustainable case that the common tax rate in one member state is an impediment to “competition”. I think this would be extending the ambit of competition far more than it can sustain and could open the floodgates to any state who argued another State did things differently, to the complainant’s detriment.
    What about claims that a higher rate of personal taxation, or employers social security contributions, reduce the sums available for workers to buy more costly goods and thus discriminated against people selling Rolls Royces? Or more stringent Health and Safety rules?
    And I’m not convinced that a prerequisite is that “everyone have the ability to try and charge the same price”. Price is dependent on many variables, such as economies of scale, R&D, sales forces, supply networks, transport infrastructure, and so on. So Amazon can claim to charge very low commission rates because it has huge sale volumes; Google sold Nexus phone at prices competitors did not match because they needed higher profit margins. On what basis in law, or fact, could you regulate “the market” to provide this ability to compete on price?
    And all this is before you start looking at how differing national accounting and tax systems arrive at figure of taxable profits – CC(C?) TB, BEPS, and all the other alphabet soup!

  8. All I’m saying, really, is that a common tax system is a pre-requisite of a true single market.

  9. I am no expert, but does not the USA also have federal taxes (hence the IRS), as well as state and local taxes?. Federal taxes will be harmonised across the states.

  10. Tax rates arise at least partly out of political considerations. A ‘big government’ country might want high taxes as it wants to control and pay for everything. A ‘small government’ country the opposite. Some countries might be woefully inefficient and corrupt and need high taxes to compensate, others very efficient and so not need such high rates. Some governments might think income redistribution the answer to all societies ills, others may see it differently. Some countries might be blessed with state owned resources so won’t need to tax their citizens so much.

    To suggest that there is any merit in tax harmonisation across the EU takes all that out of the equation. It would be a push toward political harmonisation and take away a country’s right to govern and tax as its citizens see fit.

    It should be avoided at all costs. If some countries want and need to tax their citizens to bejezus and back let them but they shouldn’t expect the rest of us to have to do so as well.

  11. They do have federal taxes but state and local tax differences do make for huge variations in total taxes due in total.

  12. Ah, but whose tax system do we adopt EU-wide? Should the UK increase its CT rate or should Germany, France et al reduce theirs?

  13. I have never understood how Ireland has, with one hand, been able to maintain its 12.5% tax rate so collecting relatively little from Irish tax payers while, with the other taking large handouts from the EU and hence taxpayers in other countries. (Perhaps not unlike some would wish for Scotland where thee government would set the spending and if local taxes weren’t enough, some other taxpayers could make up the difference.) But I don’t see this changing anytime soon.

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