A tax that is levied at one level of government and does not apply to products and activities at a different level of government need not be selective.
A tax exemption normally confers a selective advantage, unless it is justified by the logic of the tax. Counterintuitively, a tax itself can be selectively advantageous if its scope is too narrow. As the series of judgments in the British Aggregates saga have taught us, a tax that does not apply to all competing products tilts the level of competition in favour of those products that are untaxed.
Identifying possible advantage in tax measures is a benchmarking or comparative exercise. In the case of tax exemptions, the tax itself is the benchmark. But when the tax simply has an excessively narrow scope, the benchmark is invisible. It has to be constructed by examining competitive relationships in conjunction with the explicit or implicit objectives of the tax.
A similar problem exists when authorities at different levels of government divide their tax competences. Then a tax that is levied at one level of government and applies to products or activities that fall within the jurisdiction of that level of government may not confer a selective advantage to competing products or activities that fall within the jurisdiction of a different level of government.
This was the issue with which the Court of Justice grappled in its judgment of 7 November 2019, in joined Cases C‑105/18 to C‑113/18, Asociación Española de la Industria Eléctrica (UNESA) and others.1
The Court of Justice had been requested to provide a preliminary ruling to a Spanish court in the context of a dispute between several electricity and hydroelectricity producers and the Spanish government concerning a tax on the use of inland waters for the production of electricity.
Because EU environmental directives require the protection of water sources and the sustainable use of water, Spain levied four different taxes to internalise the environmental costs resulting from the use of inland waters for the production of electricity:
1) a tax on the use of public water resources;
2) a tax on discharges into public water resources;
3) a tax on the advantage obtained from “regulation work” carried out by the state; and
4) a tax on advantages obtained from work carried out by the state other than “regulation work”.
The applicants had initiated legal action seeking annulment of a tax on the use of inland waters for the production of electricity in inter-community river basins. These are river basins which extend over the territory of more than one autonomous community.
The referring Spanish court sought guidance on whether the tax was compatible with the polluter-pays principle, the principle of non-discrimination and whether the tax could be considered to be State aid. This article does not review the part of the judgment that deals with the first two questions.
The Court of Justice recast the question of the referring court on State aid as follows: “(55) [Must] Article 107(1) TFEU … be interpreted as meaning that the fact that the tax on the use of inland waters for the production of electricity … is not due, first, by hydroelectricity producers operating within river basins encompassing a single autonomous community, secondly, by producers of electricity from other sources and thirdly, during the remaining consumptive uses of waters, constitutes State aid, within the meaning of that provision”?
In other words, the tax was levied only those hydroelectric producers that operated in more than one community. Excluded from its scope were producers within a single community, electricity generated from other sources of energy and producers of electricity that used water for purposes other than the generation of electricity. The Court of Justice declared the third part of the question as inadmissible because the referring Spanish court had not submitted sufficient information.
The concept of selectivity and the reference framework
In answering the first two parts of the recast question, the Court of Justice recalled at the outset the concept of State aid and the importance of selectivity with regard to tax measures.
“(59) Since the characterisation of a measure as State aid, within the meaning of that provision, requires all four conditions to be met, those conditions being cumulative, and the referring court asks the Court only about the condition relating to the selectivity of the tax on the use of inland waters for the production of electricity, the Court must examine that condition first of all.”
“(60) It is clear from settled case-law that in order to assess the selective nature of the advantage granted to the recipients by a national measure, it is necessary to determine whether, under a particular legal regime, that national measure is such as to favour ‘certain undertakings or the production of certain goods’ over others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which accordingly suffer different treatment that can, in essence, be classified as ‘discriminatory’”.
“(61) In order to characterise a tax as ‘selective’, the ordinary or ‘normal’ tax system applicable in the Member State concerned must first be identified and it must then be demonstrated that the tax being examined is a derogation from that system, in so far as it differentiates between operators who, in the light of the objective pursued by that ordinary tax system, are in a comparable factual and legal situation”.
“(62) In that regard, the determination of the reference framework has a particular importance in the case of tax measures, since the very existence of an advantage may be established only when compared with ‘normal’ taxation”.
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Electricity generated from other sources of energy
“(63) As regards, in the first place, the examination on the selective nature of the measure at issue in the main proceedings, which might arise from the fact that the tax on the use of inland waters for the production of electricity is not payable by electricity producers whose source of production is other than water, it must be found that while the tax criterion, relating to the source of production of the electricity, does not appear to derogate formally from a given legal reference framework, its effect is nonetheless to exclude such electricity producers from the scope of that tax.”
“(64) Since Article 107(1) TFEU defines State interventions on the basis of their effects, independently of the techniques used, it cannot, therefore, be excluded a priori that the criterion of imposing the tax on the use of inland waters for the production of hydroelectricity enables an advantage to be given, in practice, to ‘certain undertakings or the production of certain goods’ within the meaning of Article 107(1) TFEU by mitigating their tax burden in relation to those subject to that tax”.
“(65) It must, therefore, be determined whether the hydroelectricity producers subject to the tax at issue in the main proceedings and electricity producers whose source of electricity production is other than water are in a comparable situation in the light of the objective pursued by the tax at issue in the cases in the main proceedings.”
“(66) In that regard, it is apparent from the presentation of national law in the orders for reference, …, that the tax on the use of inland waters for the production of electricity is aimed at the protection and improvement of public water resources. It is not in dispute that only hydroelectricity producers use public water resources as a source of electricity production, which is likely to have an environmental impact on those water resources.”
“(67) It must, therefore, be found that electricity producers other than those using water as a source, which are not subject to the tax on the use of inland waters for the production of electricity, are not, in the light of the objective pursued by that tax, in a comparable factual and legal situation to that of electricity producers using water.”
“(68) While the referring court, which has sole jurisdiction to interpret national law, indicates that that tax … pursues, in the light of its essential characteristics and its structure, a purely economic objective, it should be observed that, in the absence of EU rules governing the matter, it falls within the tax competence of the Member States to designate bases of assessment and to spread the tax burden across the various factors of production and economic sectors”.
“(69) Consequently, a criterion for taxation connected with the source of production of electricity enables, as a rule, a Member State to apply a tax, such as that at issue in the cases in the main proceedings, only to electricity producers using water as the source of electricity production.”
Taxation at different levels of government
“(70) As regards, in the second place, the examination of the selective nature of the measure at issue in the cases in the main proceedings, which might arise from the fact that the tax on the use of inland waters for the production of electricity is not payable by hydroelectricity producers operating within river basins encompassing a single autonomous community, it should be observed that, in accordance with the case-law of the Court, the legal reference framework for the purposes of assessing the selectivity of a measure must not necessarily be determined within the territory of the Member State concerned, but may be that of the territory within which a regional or local authority exercises the powers conferred on it by the constitution or by law. Such is the case when that entity enjoys a legal and factual status which makes it sufficiently autonomous in relation to the central government of a Member State, with the result that, by the measures it adopts, it is that body and not the central government which plays a fundamental role in the definition of the political and economic environment in which undertakings operate”.
“(71) It is apparent from that case-law that the reference framework depends on the extent of the competence of the public authority which adopted the measure at issue.”
“(72) Similarly, it is apparent from the judgment of 21 December 2016, Commission v Hansestadt Lübeck (C‑524/14 P, EU:C:2016:971, paragraphs 61 and 62), that the relevant reference framework for examining the selective nature of a measure may be restricted to the legal regime adopted by an entity within the limits of its own powers.”
“(73) The selective nature of a measure cannot be examined without taking account of the legal limits on the powers of the public authority which adopted that measure.”
“(74) In the present case, the Spanish Government stated, both in its written observations and at the hearing before the Court, that the fact that the tax on the use of inland waters for the production of electricity is payable only by hydroelectricity producers using river basins extending over the territory of more than one autonomous community was justified by the territorial structure of the Spanish State, the powers of each administration, and the respective powers of the Central Government and the autonomous communities, which, as regards public water resources, develop their own legal regimes.”
“(75) The national legislature therefore adopted the national legislation establishing that tax, which applies only to the holders of administrative concessions in respect of river basins extending over the territory of more than one autonomous community, by exercising a power which is limited to those river basins alone.”
“(76) In those circumstances, and subject to verification of the division of powers which it is for the referring court to carry out, it is apparent that the relevant reference framework for examining the selective nature of any aid measure is the taxation of hydroelectricity production within river basins encompassing more than one autonomous community.”
“(77) In the light of the reference framework thus delimited, it must be found that hydroelectricity producers operating within a river basin encompassing a single autonomous community are not in a comparable situation to that of energy producers operating within river basins encompassing more than one autonomous community.”
“(78) It follows that the condition relating to the selectivity of the measure at issue is not met and that, consequently, there is no need to examine the other conditions referred to in paragraph 58 above.”
“(79) It follows from the foregoing considerations that Article 107(1) TFEU must be interpreted as meaning that the fact that the tax on the use of inland waters for the production of electricity, at issue in the cases in the main proceedings, is not payable, first, by hydroelectricity producers operating within river basins encompassing a single autonomous community and, secondly, by producers of electricity from sources other than water, does not constitute State aid, within the meaning of that provision, in favour of those producers, provided that the latter are not, in the light of the relevant reference framework and the objective pursued by that tax, in a comparable situation to that of hydroelectricity producers operating within river basins encompassing more than one autonomous community subject to that tax, which it is for the national court to determine.”
To put it simply, the central government did not have jurisdiction to tax hydroelectric producers operating within a single community. Those producers were taxed at regional level.
1 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=220357&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=934355.