The influence of the European state aid rules on national tax policy

Abstract

Art 87 of the Treaty of Rome reads: "Save as otherwise provided in this Treaty, any aid in any form whatsoever granted by a Member State or through State resources 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 underlying purpose of a principal ban on State aid in Art 87 EC lies in guaranteeing fair competition, functioning markets and economic efficiency within the European Union. In the words of the Commission's recent State Aid Action Plan 2005 its competition policy "rests upon the idea that a market-based economy provides the best guarantee for raising living conditions in the EU to the benefit of citizens.... Competition is furthermore essential to enhance the competitiveness of the European economy, as it creates an environment in which efficient and innovative companies are rewarded properly".2 Against this background the Commission emphasizes that "State aid control comes from the need to maintain a level playing field for all undertakings active in the Single European Market, no matter in which Member State they are established. There is a particular need to be concerned with those state aid measures, which provide unwarranted selective advantages to some firms, preventing or delaying the market forces from rewarding the most competitive firms, thereby decreasing overall European competitiveness. It may also lead to a build-up of market power in the hands of some firms, for instance when companies that do not receive state aid (e.g. non-domestic firms) have to cut down on their market presence, or where state aid is used to erect entry barriers. As a result of such distortions of competition, customers may be faced with higher prices, lower quality goods and less innovation".3 Moreover state aid would "not come for free", as taxpayers in the end have to finance state aid and there are opportunity costs to it. Giving aid to undertakings would "mean taking funding away from other policy areas".4 Without questioning the reasonableness of these economic considerations of the Commission in principle, it must however be noted that it would be an illusion to think that the EC State Aid rules alone can ensure a "level playing field" on the European Market, as the EC State aid control has to start from an unequal general legal setting in the European Union. An illustrative example is the procedure against the Austrian Energy Tax Rebate system that was installed in Austria in package with the first introduction of a new energy tax.5 The rebate system was then attacked because it provided for a selective advantage for huge energy consumers that were granted a rebate of a certain percentage of their energy tax debt establishing a sort of ceiling of the maximum energy tax costs. To the Austrian industry the reproaches of being "subsidized" by the energy tax package came as an "economic surprise" since the introduction of the energy tax package meant a huge additional financial burden for them, while many other European Member States still did not have any energy taxation at all at this time. Therefore one should not forget: As the choice of tax events lies within the sovereignty of the Member States, the European State aid rules cannot do anything against such general differences between the Member States - a structural deficiency that has to be kept in mind when talking about the economic function of State aid control.6 As the wording of Art 87 EC already shows (arg "any aid in any form whatsoever"), Art 87 EC is characterized by a very broad notion of State Aid7, also referred to as "form neutrality" of the EC State aid surveillance. This form neutrality has already been stressed by the Spaak Report preparing the draft of the EC Treaty in 19568 and shall prevent Member States from easily circumventing the prohibition by simply changing the form of their individual business support. As the Treaty of Rome does not contain any legal definition of the term "aid", its borderlines had to be determined by the ruling practice of the ECJ. According to the Court the term embraces every "measure which, in various forms, reduces the charges normally borne by an undertaking and which is not therefore a subsidy in the strict sense of the word but is equivalent to one by reason of its nature and effect". 9 This early ruling in the Case De Gezamenlijke Steenkolenijnen has remained the landmark decision in the definition of the scope of Art 87 EC and is thus still the starting point of any examination of indirect State aid including cases of preferential tax measures. Later rulings of the ECJ have further stressed the broad concept of Art 87 EC and its effect-orientated definition approach. On the occasion of the Case Italy v Commission of 1974, in which the ECJ had to examine a temporary and partial reduction of social charges for the benefit of the textile and garment-making industry and small craft, the Court held: "The aim of Article 9210 is to prevent trade between Member States from being affected by benefits granted by the public authorities which, in various forms, distort or threaten to distort competition by favouring certain undertakings or the production of certain goods. Accordingly, Article 92 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. Consequently, the alleged fiscal nature or social aim of the measure in issue cannot suffice to shield it from the application of Article 92".11 Tax privileges do not go hand in hand with direct funding, but they put the beneficiaries in a clearly better position than their competitors who pay the full amount of taxes and hereby fulfil the De Gezamenlijke-formula. Fiscal privileges could consist of "a reduction in the tax base (such as special deductions, special or accelerated depreciation arrangements or the entering of reserves on the balance sheet); a total or partial reduction in the amount of tax (such as an exemption or a tax credit) or a deferment, cancellation or even special rescheduling of tax debt."12 Due to the progressive element of direct taxation it is, however, typical for this form of aid that its exact amount cannot be fixed at a certain sum a priori. It varies case by case depending on the exact profit situation of the individual undertaking in the relevant fiscal year, which can logically just be determined a posteriori. In a loss situation it might even be nil.13 For enterprises this makes it often difficult to plan extra-investments on the mere grounds of tax advantages attainable. That's why economics rather prefer direct subsidies over tax reductions as means to reach important political goals.14 From an economic point of view another fundamental peculiarity of fiscal aid is that it is normally designed as so-called operating aid. This means that the aid measures "are not linked to the carrying out of specific projects and reduce a firm's current expenditure without it being possible to assess the precise volume involved when the Commission carries out its ex ante examination". 15 As such aid is not proportionate to and directly targeted to new investments, job creation or other Community objectives, the Commission is very reluctant to authorise it at all. If it does so, the aid must be degressive, limited in time and applied outside sensible sectors of disrupted competition. 16 If a Member State plans to introduce new State aid measures, it has to notify its plans to the Commission that can authorize these measures under a catalogue of reasons (Art 87 para 3 EC), if the proposed aid scheme has a beneficial impact "in overall Union terms". This possibility of being declared compatible with the Common Market has been included in the Treaty because State aid measures can - in the words of the Commission - "sometimes be effective tools for achieving objectives of common interest. They can correct market failures, thereby improving the functioning of markets and enhancing European competitiveness. They can also help promote e.g. social and regional cohesion, sustainable development and cultural diversity, irrespective of the correction of market failures".17 As the allegedly "clearly defined"18 objectives of common interest in Art 87 para 3 EC are in fact not that clearly defined, but leave a huge room of discretion to the Commission, they have given the Commission a very strong political position in coshaping the Member States' economic policy.19 The rest of this chapter is organized in four main sections: Section 6.2 will shortly describe the evolvement of the EC State aid policy and the development of Art 87 EC into a sort of European Principle of Equality Test for national business legislation demonstrating that there are no areas of tax law spared from its grasp. In Sect. 6.3 I will elaborate on the specific procedural concept of the European State aid rules as failures to duly notify State aid measures have - despite the uncertainty of the material EC State aid test - far-reaching immediate consequences including possible recovery claims on the motion of competitors. In this context I will also demonstrate that many core procedural issues are still not settled by European case law. Sometimes undertakings therefore even ended up being given additional money when unlawful State aid was detected.20 The procedural uncertainties make it also difficult to assess the political dimension of the EC State aid rules comprehensively. © Springer-Verlag Berlin Heidelberg 2007. All rights are reserved.