The following is a summary of the main points that were presented and the issues that were discussed in the seminar on State Aid in Tax Measures that was held by Lexxion in Brussels on 7-8 November 2016. The summary has been prepared for information purposes only and it is not meant to be a precise record of the proceedings of the seminar. No statement may be attributed to any of the speakers or participants.
Particular attention was given to the three-stage selectivity test as set out by the EU Courts. First, it was considered how the reference framework was defined in cases like C‐66/02, C-106/09P and C‐75/97. The matter of derogations and exemptions was then discussed, especially in relation to the recent Spanish Goodwill cases, which, as was aptly noted, concerned “general exemptions”. It was also stressed that the ECJ judgment on the appeal against the rulings of the General Court in these cases is due in December. The focus then turned to the comparability exercise that is embedded in the selectivity test. The session was concluded with a discussion of the notoriously hard to apply “nature or general scheme” justification of prima facie selective measures.
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The second session, led by Pierpaolo Rossi-Maccanico of the Commission’s Legal Service, focused on the Commission’s 2016 Notice on the Notion of State aid, and more specifically on its section dealing with fiscal State aid. The speaker initially delved into a comparative analysis of the Commission’s 1998 Notice with its 2016 successor, in the context of which he stressed that there were many differences, most notably in relation to their background, objective and scope. He then went on to scrutinise the most important provisions of the recent Notice, discussing the concepts of direct/indirect advantage and the various types of selectivity, the latter mainly through landmark ECJ judgments like Gibraltar, Forum 187 and Paint Graphos. The focus then shifted to specific fiscal aid issues, such as the tax treatment of cooperatives, tax amnesties, tax settlements and tax rulings. The session concluded with several interesting remarks on the still unresolved fiscal aid issues that the Notice did not adequately address, while lively debate ensued between the speaker and the participants on the relevance and significance of the upcoming ECJ judgment in the Spanish Goodwill cases.
The third speaker for the day was Mr Andrew Thomson of Sullivan & Cromwell, whose presentation addressed transfer pricing, the arm’s length principle (ALP) and advance pricing agreements (APAs). This engaging presentation led us to the heart of the recent controversial Commission investigations. At first, some background on transfer pricing in general was provided; the OECD’s instruments were explored, the different transfer printing methods were set out and their practical application was meticulously illustrated. The discussion then moved to the recent tax ruling cases which were analysed in depth. An even more detailed examination was, however, reserved for the Fiat case; here the speaker reviewed the publicly available data on the content of Fiat’s transfer pricing report, the Commission’s pertinent views and the opposing side’s counterarguments. Furthermore, he pointed at certain weaknesses in the Commission’s reasoning and concluded by stressing that the uncertainty that its novel approach had stirred was not well-received by companies.
The fourth session concerned the perennially topical selectivity condition and its treatment in some of the most pivotal Court judgments of the past few years, namely the Spanish Goodwill, Spanish Tax Lease and MOL cases. The speaker, Mr Alfonso Lamadrid de Pablo, replied to questions by participants in what proved to be a very interactive session, since his law firm (Carrigues) was involved in several of those cases. The speaker started his presentation by drawing a distinction between the individual aid cases that Mr Thomson had addressed and the tax schemes that he would be addressing. He then proceeded to highlight the key issues in fiscal State aid law in general, before returning to the recent “hot” cases and the importance of the selectivity condition in determining the remit of Article 107 TFEU. First, the Commission’s decisions and the General Court’s judgment in the Spanish Goodwill cases were dissected. Then, AG Wathelet’s Opinion was described and three lines of criticism (legal, functional and institutional) were raised against it. The speaker made it clear that, should the Commission’s line of argumentation be endorsed by the ECJ, State aid law could become over-inclusive as regards Member States’ tax policies. A similarly rigorous analysis of the Spanish Tax Lease and MOL cases ensued. The session concluded with the interesting point of view that the Commission’s argumentation in the recent Hungarian (progressive tax rate) cases contradicted the submissions it made in the Spanish Goodwill case.
The first day’s final session, on the complex issue of charges levied by sub-national entities and authorities, was led by College of Europe Professor Massimo Merola. After reminding participants of the typical three-step selectivity test, he went on to explain the nuances involved in identifying the reference framework, while also discussing (a)symmetric measures and the three Azores criteria. In order to better illustrate his points, the speaker relied on the Italian Regions case (SA.34249) and the German Lübeck airport case (T-461/12). In both cases the crucial question was how the relevant reference framework was to be determined; however, the first case concerned regional selectivity, while the latter was about material selectivity. After a careful comparative analysis, Professor Merola showed that there are substantial differences in the intensity of the scrutiny employed by the Commission and the General Court when it comes to selectivity, while at the same time the treatment of material and regional selectivity continues to raise fascinating dissimilarities.
The seminar’s second day started off with a summary by Professor Nicolaides of the points raised and the debates that took place on the first day, particularly in relation to the tax ruling cases. The first speaker for the day, Dimitrios Kyriazis of Oxford University, then took the stage in order to discuss the interaction between environmental taxes/levies and the State aid prohibition. The session began with an exploration of primary and secondary EU law provisions that illustrated how the Union’s environmental protection goals affect EU regulation in general. The presentation then focused on the Commission’s soft law approach to environmental levies, more specifically in relation to the selectivity condition. In this context, the Commission’s 1998 Notice was compared with the 2014 Draft Notice and the 2016 Final Notice. Moving on to CJEU case law, several landmark judgments were thoroughly analysed, most notably Adria Wien, the British Aggregates saga and the Dutch NOx cases. The speaker identified common threads in these cases and concluded by summarizing the lessons that can be drawn therefrom, e.g. that the ECJ will seriously examine whether the alleged aid measure’s design and scope serve its environmental protection aim, thus rendering the Court’s effects-based doctrine particularly visible in this strand of case law.
Professor Nicolaides then proceeded to the second session of the day, where he tackled the topic of parafiscal charges and the hypothecation of tax measures. At first he explained the difference between parafiscal charges and excise duties: tax revenue on the former is raised to support the taxed industry itself, while with excise duties the state uses the revenue as it wishes, their effect being mostly deterrent. A major complication in this area arises when a tax measure is hypothecated to a State aid measure. Hypothecation means that the method of financing of the aid measure forms an integral part of the State aid measure. In such cases, the Member State must notify both the aid and the tax measure that finances it, thus leading to a counterintuitive result: the application of Article 107 TFEU to taxes per se. A further complication in this area relates to the second state aid condition, i.e. the use of State resources. Some parafiscal charges are levied by industry or professional associations, thus making their classification as State resources dubious. Through a series of both older and more recent Commission Decisions and Court judgments, Professor Nicolaides shed light on this problem and helped the participants understand how the law applies by analyzing various scenarios. The remaining part of the session was devoted to the issue of compatibility and specific cases on hypothecation, e.g. the Nazairdis case.
The final session of the two-day seminar, led by Hungary’s State aid attaché Mr Péter Staviczky, focused on the application of state aid rules to tax measures in the Hungarian practice. Fiscal state aid was one of the main tools for attracting foreign direct investment in the 1990’s (due to budgetary reasons) and was then also a major obstacle to Hungary’s accession to the EU. Thus, Hungarian fiscal aid cases abound and some of them were used by the speaker to demonstrate how they were caught by Article 107(1) TFEU. The first case concerned Hungarian tax deductions for intra group interest, where only half of the net interest revenue (received from affiliates and paid to affiliates) formed part of the corporate tax base. The Commission maintained that the measure led to a selective advantage in cross border situations for net interest receiving companies and adopted a negative decision. The second case was rare in its factual basis. It concerned the Hungarian tax donation system, which applied to cinema, sport and performing art donations. Donors received automatic tax exemptions for donating money in support of such causes and the donated amount was deducted both from the tax base and their tax payable. The Commission opened an in-depth investigation to ascertain the measure’s state aid character and its findings were interesting. On the donors’ level no state aid existed: the measure was open to all donors without any limitations and was thus not selective. However, for the beneficiaries, e.g. theatres and sports clubs, the measure was selective because the tax advantages to the donors only accrued if the beneficiaries belonged to the cinema, sport and performing art sectors. Despite the fact that the aid was found to be compatible with the internal market, this case is a good example that a measure can be both general and selective when looked at through different lenses. Mr Staviczky then discussed two environment-related cases, namely the product‐levy case and the case of the excise duty reduction for gas, which perfectly complemented the first session of the day by Mr Kyriazis. Finally, the speaker examined the three recent turnover taxes that Hungary introduced and were all negatively assessed by the Commission. The session ended with practical advice to government lawyers on State aid notifications.
Professor Nicolaides concluded the two-day seminar by summarizing the main points of consensus and contention of the two preceding days. He then opened the floor to participants for the final problem solving session where specific “real-life” questions were raised. To briefly mention two, one question was raised in relation to Scotland’s newly acquired fiscal powers and their exercise in compliance with State aid, while another question concerned the State aid compatibility of taxes on sugar. An interesting discussion on the specificities of the sugar tax ensued, with the participants examining whether the criteria of Article 107 TFEU were fulfilled and what the comparable products could be in the context of the selectivity exercise.
Overall, the seminar far exceeded participants’ expectations and improved significantly their understanding of the peculiarities of fiscal State aid. A general wish was expressed that a similar event be organized again in the near future, especially once the Apple decision is published and the ongoing fiscal State aid investigations are concluded.
* Dimitrios Kyriazis is Tutor in Law at the University of Oxford and Teaching Fellow in Law at UCL.