Ireland levied an excise duty, known as the air travel tax [ATT]. This excise tax applied to departures from Irish airports and was payable for every passenger, depending on distance from a specific point which was the airport of Dublin. That is, the ATT was levied on the basis of the distance between the airport of departure and the airport of arrival, at the rate of EUR 2 in the case of a flight from an airport to a destination of no more than 300 km from Dublin airport and EUR 10 in all other cases.
When the Commission became aware of the ATT, it initiated an investigation on the grounds that Article 56 TFEU on freedom to provide services was infringed. This is because the way distance was measured resulted in discrimination in favour of domestic flights. Ireland then changed the ATT and a single tax rate of EUR 3 was applied to all departures regardless of the distance travelled. The Commission’s investigation relating to Article 56 TFEU was subsequently terminated.
However, the Commission continued its investigation under State aid rules. This investigation was concluded in July 2012 with a negative decision ordering recovery of incompatible aid that was estimated at EUR 8 per passenger. The amount of EUR 8 was the difference between what the Commission considered to be the standard rate of the tax, i.e. EUR 10, and the lower rate that was only EUR 2.
Incidentally, in July 2011, the Commission also found that another feature of the ATT did not constitute State aid. That feature was the non-application of the ATT to transfer and transit passengers. This decision was appealed too and was eventually annulled in November 2014 by the General Court with its judgment in case T-512/11, Ryanair v Commission. This case was also reviewed on the StateAidHub.
The main plea of Aer Lingus, and Ryanair, was that the Commission failed to calculate properly the advantage they obtained from the lower rate. This is because they claimed that they passed on to passengers some or most of the advantage from the lower ATT in the form of lower prices. Therefore, they could be not ordered to pay back the full EUR 8 per passenger. They did not refute that they derived some advantage. Instead they disputed that the amount of the advantage was EUR 8.
The General Court, first recalled that “83 […] the objective of the obligation on a State to abolish aid found by the Commission to be incompatible with the internal market is to restore the previous situation. That objective is accomplished when the recipients have repaid the sum paid by way of unlawful aid, thereby forfeiting the advantage which they had enjoyed over their competitors on the market, and when the situation prior to payment of the aid is restored”.
“85 If the Commission decides to order the recovery of a specific amount, it must – pursuant to its obligation to conduct a diligent and impartial examination of the case under Article 108 TFEU – assess, as accurately as the circumstances of the case will allow, the actual value of the benefit received from the aid by the beneficiary (see judgment of 29 March 2007 in Scott v Commission, T‑366/00, ECR, EU:T:2007:99, paragraph 95 and the case-law cited).”
“86 In restoring the situation existing prior to the payment of the aid, the Commission is, on the one hand, obliged to ensure that the real advantage resulting from the aid is eliminated and thus to order recovery of the aid in full. The Commission may not, out of sympathy with the beneficiary, order recovery of an amount which is less than the value of the aid received by the latter. On the other hand, the Commission is not entitled to mark its disapproval of the serious character of the illegality by ordering recovery of an amount in excess of the value of the aid received by the beneficiary (judgment in Scott v Commission, paragraph 85 above, EU:T:2007:99, paragraph 95).”
In order to understand the implications of these preliminary observations for the reasoning of the Court later on, it is important to note that the case T-366/00, Scott v Commission, which was quoted above as the guiding case law concerned sale of land. It was unavoidable in the specific context of that case that the value of the advantage had to be calculated before, first, the existence of State aid could be established [which was the difference between the market and the actual price] and, second, the recovery amount could be determined.
Then the General Court pointed to the fact that the ATT was an excise tax and argued that “89 an excise duty is, by definition, an indirect tax levied on the consumption of a particular good or service, by contrast with direct taxes such as taxes on income or on profits, which are paid directly by the undertakings.” Moreover, airlines were required to indicate the amount of ATT separately in the price of each ticket sold to passengers. The ATT was formally intended to be passed on through the price of the flight ticket bought by the passenger.
“91 As the applicant notes, it is therefore necessary to make a distinction between the formal or legal passing on, concerning the manner in which the tax is lawfully levied and applied, and the economic passing on, which consists in determining to what extent the airline bore the economic cost of the ATT by possibly adjusting the ticket price exclusive of the ATT according to the rate of the ATT actually applicable, or, in the case of application of the ATT at the reduced rate of EUR 2, to what extent they actually retained the economic advantage arising from the application of that lower rate.” However, there was no mechanism which ensured that the tax was actually passed on. That it was a choice left to each airline.
“97 It must therefore be held that, in a situation such as that in the present case, where the ATT was intended to be passed on to the passengers and where the economic advantage arising from the application of the reduced tax could also have been passed on to the passengers, the Commission cannot presume that the advantage actually obtained and retained by the airlines amounted, in all cases, to EUR 8 per passenger.”
“98 In such a case, the advantage actually obtained by the airlines does not necessarily consist in the difference between the two rates, but rather in the possibility of offering more attractive prices to their customers and thereby increasing their turnover, as the Commission itself acknowledged in recital 57 of the contested decision.”
“99 Accordingly, for airlines such as the applicant which paid the ATT at the lower rate of EUR 2, the Commission should have determined the extent to which they had actually passed on to their passengers the economic benefit resulting from the application of the ATT at the lower rate, in order to be able to quantify precisely the advantage which the airlines actually enjoyed, unless it decided to confer that task to the national authorities and provided the necessary information in that respect.”
“100 Thus, it is only if the applicant had systematically increased the price of its tickets excluding tax by EUR 8 per ticket for flights subject to the ATT at the rate of EUR 2 that it would have been possible to consider that the economic advantage resulting from the application of the differentiated rates amounted to EUR 8 per passenger for the applicant, since that advantage could not have been passed on, even partially, to the passengers.”
“102 In addition, the Commission did not take sufficient account of the particular situation of the market in the present case and of its competitive constraints, in so far as all the airlines operating flights of less than 300 km (calculated from Dublin airport) departing from an airport located in Ireland were subject to the ATT at the rate of EUR 2 per passenger. Thus, the Commission has not established how, in those circumstances, the airlines whose flights were subject to the ATT at the reduced rate of EUR 2 per passenger enjoyed an advantage corresponding to the difference between the two rates of ATT, namely EUR 8 per passenger.”
“103 In so doing, the Commission committed an error of assessment and an error of law.”
“104 As the applicant rightly points out, the recovery of aid must be limited to the financial advantages actually arising from the placing of the aid at the disposal of the beneficiary, and be proportionate to them (see, to that effect, judgment of 22 January 2013 in Salzgitter v Commission, T‑308/00 RENV, ECR, EU:T:2013:30, paragraph 138).”
Do you know we also publish a journal on State aid?
The European State Aid Law Quarterly is available online and in print, and our subscribers benefit from a reduced price for our events.
Once more it is important to note that the case Salzgitter v Commission quoted above concerned aid that was in the form of a tax deferral over several years which the General Court characterised as “an interest-free government advance or an interest‑free loan” [paragraph 139]. It was again unavoidable that, in order to calculate the amount that had to be recovered, it was first necessary to determine the amount of the advantage. The advantage was the difference between the zero interest rate and the relevant market rate. So, in both cases on which the General Court relied, the amount of the aid had to be calculated first. No such problem existed in the present case. The amount of the aid was the EUR 8 per passenger forgone by the Irish state.
The Court went on to state that “111 it was indeed possible for [the airlines] to increase the ticket price excluding tax in order to absorb the advantage resulting from the application of the ATT at the rate of EUR 2. However, the Commission could not determine the advantage actually obtained by the airlines without taking into account the circumstances of the particular case. Having regard to the operation of the ATT and the competitive constraints faced by airlines as regards the flights to which the ATT at the rate of EUR 2 was applicable (see paragraph 102 above), the Commission could not presume that the economic advantage resulting from the application of the reduced rate of ATT had not been passed on to the passengers at all.”
“116 […] in as much as the economic advantage resulting from the application of that reduced rate could have been, even only partially, passed on to the passengers, the Commission was not entitled to consider that the advantage enjoyed by the airlines amounted automatically, in all cases, to EUR 8 per passenger.”
On the basis of the above reasoning the General Court went on to annul Article 4 of Commission decision 2013/199, which ordered the recovery of EUR 8 per passenger.
This is an important judgment. It will be quoted extensively because it equates the formal concept of advantage to the actual economic benefit derived by aid recipients, which in turn depends on the particular circumstances of each recipient and the actual market situation.
However, in my view this is a faulty judgment for the following three reasons which are elaborated in more detail below. First, it misinterprets previous case law on the concept of advantage. Second, it sets an impossible task for the Commission. Third, its grasp of the underlying economics of pass-on is rather dubious.
i) Misinterpretation of the concept of advantage
As already indicated above, the General Court relied on two cases where the amount of aid was not defined ex ante [i.e. land price and interest rate]. The amount of aid had to be derived by calculating first the advantage obtained by the aid beneficiaries through cheaper land and lower interest rates. In fact, in neither of those two cases did the General Court attempt to quantify the amount of the advantage by examining the economic effects of each measure and how recipients actually used the aid. Indeed, in both of those cases the issue at hand was the amount of aid, not how the aid recipients converted the aid into a commercial advantage on the markets of their products. This is a subtle but important distinction. When the amount of aid is unknown, then it is calculated by quantifying the advantage granted to the aid recipient. In the present case the amount granted was EUR 8. The advantage is not measured by examining how effectively the aid is used by the recipient and whether it is passed on to consumers. The amount of aid and the advantage it confers do not depend on the discretion and commercial strategy of the aid recipient.
It is true that in some cases it is necessary to calculate the amount of aid that is indirectly granted to third parties via the direct recipients of the aid. This can happen, for example, when a subsidy to a research organisation is partly or wholly passed on to the users of the services or infrastructure of the research organisation. Indeed, here one can meaningfully consider that aid is passed on because the direct and indirect beneficiaries are undertakings. But, there was no suggestion that the reduced ATT was passed on to undertakings. This is possible because at the level of passengers, anyone could benefit from lower ticket prices and the reduced rate became a general measure.
ii) Impossible task
If the Commission will in the future have to calculate the actual advantage derived by each aid recipient before it can order recovery, it will be bogged down in interminable discussions and calculations. Each recipient will have used the aid differently. The benefits it will actually derive will also depend on the reactions of competitors, which will certainly vary from case to case.
In fact, the problem is worse because the aid recipient itself can argue that the advantage is not what it appears that it has gained from the aid, but what it has gained relative to a situation without aid. An example can clarify this point. Assume that a product is subject to excise tax of 15 per unit. The product can be made with the use of two different technologies which result in two different qualities, A and B, of that product. The cost per unit of that product for quality A is 110 and the price is 140. The cost per unit for quality B is 100 and the price is 120. If the excise tax were levied uniformly on the two varieties, the profit per unit sold would be 15 for quality A [= 140 – 110 – 15] and 5 for quality B [= 120 – 100 – 15]. But the government decides to reduce the excise tax for quality B from 15 to 2. Then the profit per unit remains 15 for quality A but increases to 18 for quality B. If 15 is presumed to be the standard rate or the reference rate of this excise tax, then the amount of aid is 13 [= 15 – 2].
However, following the logic of the Court in the present case, an aid recipient could argue that had the excise tax not been lowered it would have produced and sold more units of quality A and would have made a profit of 15 per unit. Hence the advantage it obtained from the aid was not 13 but only 3 [= 18 – 15]. Now, replace quality with internal and external flights and you can see immediately the problem for the Commission and the Irish authorities when they will attempt to quantify the advantage along the lines stipulated by the General Court.
iii) Economics of “pass on”
The General Court considered in paragraphs 97 to 100, quoted above, that the airlines could choose to pass on the whole or part of the tax reduction to passengers. In fact, under conditions of competition when costs of producers are upward sloping, any tax increase is shared between suppliers and consumers and, conversely, any tax reduction is also shared between suppliers and consumers. Taxes are “shared” for a simple reason. As price increases due to the tax, consumers buy less and suppliers sell less. Lower sales and lower output translate into lower cost. Hence the tax is eventually levied on less costly output. However, the difference between the cost of output and the price paid by consumers is always the amount of the tax.
There are also some extreme cases when the supply line is completely vertical or the demand line is completely vertical where only one side bears the tax. In the former case suppliers absorb all of the tax increase or decrease, while in the latter case consumers absorb all of the tax increase or decrease. In other cases, any tax increase or decrease is shared, with the share varying depending on the elasticity [i.e. steepness] of demand and supply. If tax is “shared”, it means that suppliers pass on to consumers only part of the nominal rate of the tax.
The extent of the pass on varies according to the extent of competition, but there is always some pass on. It follows that, if the present judgment becomes the normal standard, in all aid cases involving tax the Commission will have to calculate how much of the tax is passed on to consumers. A conceptually easy, but in practice very difficult exercise.
The discussion above was based on the assumption that suppliers have upward sloping costs. When they experience economies of scale, the situation can be different. Economies of scale imply that average costs decline as output increases. To appreciate the consequences of economies of scale, assume that the demand facing an airline is given by the equation P = 200 – N/4, where P is price and N is the number of passengers. Also assume that this airline has constant variable costs of C = 95N and fixed costs of F = 744. Finally assume that because of competition, the price it can charge per passenger is 107. At this price it will fly 372 passengers [because 107 = 200 – (372/4)]. Its revenue will be 39,804 [= 372 x 107]. But its profit will be zero because from that revenue it will have to subtract 3720 [= 372 x 10] of taxes due to the state, 35,340 [= 372 x 95] of variable costs and 744 of fixed costs.
If the tax is reduced to 2, it will immediately make a profit of 2,976 [= 372 x 8] by not passing on the tax decrease to passengers. However, let’s assume that because of competition, the tax reduction is fully passed on to passengers. The price declines from 107 to 99. At this new price, more people will be willing to fly. Given the demand equation above, the number of passengers will increase to 404 [because 99 = 200 – (404/4)]. With the extra passengers, the airline will have revenue of 39,996 [= 404 x 99], variable costs of 38,380 [= 404 x 95], fixed costs of 744 and will have to pay taxes of 808 [= 404 x 2]. However, it will now experience a modest profit of 64 [= 39,996 – 38,380 – 744 – 808]. We now see that even though all of the tax reduction was passed on to consumers, the airline still benefits because the increase in passengers enables it to reap economies of scale. Even with full pass-on, there is a residual benefit. It is not clear whether such a benefit will have to be taken into account in determining the amount of aid to be recovered. The General Court referred only to the advantage from the tax reduction itself.
The two judgments reviewed in this article are important. They appear to lay down a new method by which the Commission should calculate the advantage derived from State aid and, consequently, the amount of incompatible aid that has to be recovered. In my view the method is defective because it misinterprets the case law on the concept of advantage and sets an impossible standard for the Commission.
 I am grateful for comments I received on an earlier version from Mihalis Kekelekis and from two officials who wish to remain anonymous. I am, of course, solely responsible for the views expressed here.
 The text of the judgment can be accessed here:
 The text of the judgment can be accessed here: