Commission extends State Aid campaign to Belgian excess profit regime

What is the Commission’s latest target?

The European Commission has concluded, following an in-depth investigation, that the Belgian "excess profits" rulings system is in breach of EU state aid rules. In essence, such rulings allowed multinational entities in Belgium to reduce their corporate tax liability by reference to "excess profits" that supposedly resulted from the advantage of being part of a multinational group. No similar advantage was available to domestic Belgian groups and the Commission’s thinking on the matter was clear from its announcement of the initial investigation when it noted that "these tax rulings are often granted to companies that have relocated a substantial part of their activities to Belgium or that have made significant investments in Belgium".

The "excess profits" system allowed multinational companies to reduce their tax base for "excess profits" on the basis of an agreed ruling, typically for four years, subject to renewal. Under the rulings, the actual taxable profit of a multinational was compared to the hypothetical average profits a stand-alone company in a similar situation would have made. The supposed difference was deemed an "excess profit" and the multinationals tax base reduced by that amount. In practice, the Commission found that the actual profits of companies concerned was usually reduced by more than 50% and in some cases up to 90%.

The Commission’s investigation concluded that this system derogated both from normal Belgian corporate tax practice (providing multinationals able to obtain such rulings with a selective subsidy) and from the "arm’s length principle" (since even if the "excess profit" ruling were justified in an individual case, the saving should be shared between all group companies).

As such, the Commission has concluded that the system provided a selective advantage to companies which obtained a ruling in breach of EU state aid rules. The Commission’s decision will require Belgium to stop applying the regime and recover the full unpaid tax from at least 35 multinational companies that benefited from the regime. Belgium had already put the regime on hold since the Commission opened its investigation in February 2015, and no new rulings have been issued as from that date. The amount to be recovered from the beneficiaries is nevertheless substantial. The Commission estimates it at around €700m.

The Belgian Government is considering whether to appeal the Commission’s decision to the EU General Court. Beneficiaries of the regime may also be considering an appeal. Belgium’s Finance Minister further announced that as the regime has operated since 2005, the recovery operation is likely to be particularly complex, adding that his Department is in close contact with the Commission on this matter.

What other investigations are ongoing?

The Commission has already decided that Luxembourg and the Netherlands granted illegal state aid to Fiat and Starbucks in the form of selective tax advantages. Both cases concerned individual tax rulings. The Belgian case is the first case where, in the context of its ongoing tax ruling campaign, the Commission has reached the conclusion that an entire regime contains elements of state aid.

In addition, there are several other ongoing investigations into specific rulings granted in favour of other well-known multinationals (including McDonalds, Apple and Amazon). The Commission’s focus on state aid in a tax context has also seen announcements that it is investigating Gibraltar; and that it would extending its informal inquiries into the tax ruling practices of some member states to all 28 member states.

The leaked publication in late 2014 of 548 of the private tax rulings given by the Luxembourg tax authorities moved the issue firmly into the public domain. The Commission has naturally seized on this and confirmed that it will "examine it and evaluate whether or not this will lead to the opening of new cases".

Is state aid in the context of tax measures a new issue?

Not at all. In fact, it may come as a surprise that the issue was dealt with as early as 1974 in the Italian case Commission v Italy (C-173/73). In this case, the ECJ confirmed that tax measures were not excluded from attack as constituting illegal state aid. It is, therefore, perhaps something of a surprise that it has taken the Commission so long to focus on the potential for state aid to counteract domestic tax measures which adversely affect the single market.

What does the Commission need to show?

In all of these cases, the question of "selectivity" is the crucial issue. This not only requires the member state to have granted an advantage or benefit which entails a burden on state financial resources; it also requires the advantage or benefit to be selective, ie that it confers an advantage in comparison to other undertakings in a comparable legal and factual situation. It is worth noting, however, that this may involve a different focus when individual rulings are involved, compared to when a system of rulings is involved.

It will be easier to show that individual rulings confer a selective advantage once the issue has been dealt with of whether any benefit or advantage has been granted at all. Arguments about a system of rulings relating to the grant of a particular benefit have to focus on two questions: whether the advantage is at all selective, in relation to the class of taxpayers as a whole; and whether the selective advantage can be justified in some way. In practice, however, it may be far more difficult for the Commission to show that a member state has, in fact, illegally provided a particular individual taxpayer with an advantage entailing a burden on state financial resources, in the form of an overly generous tax settlement.

Taken together with the Organisation for Economics Co-operation and Development's (OECD) BEPS action plan, these developments have brought existing OECD rules and their application firmly into the spotlight. As an aside, one wonders whether the excess profits regime might also have been vulnerable to the OECD and Commission’s efforts to restrict harmful tax competition.

State aid versus discrimination?

It is worth noting the use by the Commission of state aid in this context as a means of challenging the Belgian rules. On the face of it, the rules as described appear to discriminate against the Belgian parent of a domestic group in comparison to the Belgian parent of a foreign group. However, since the fundamental freedoms in the EU Treaty do not prevent a member state from discriminating against domestic situations compared to foreign situations (reverse discrimination), the freedom of establishment would not appear to have been breached in this context.

It can be seen, therefore, that state aid potentially allows challenges to be made in an international context where there is no breach of the fundamental freedoms.

What next?

This appears to be further confirmation that the Commission is increasingly looking to use state aid as a mechanism to review member states’ tax systems in its self-proclaimed “fight against tax evasion and tax fraud”.

More generally, the impact of the Luxembourg leaks should not be underestimated. These revelations led to the proposal for a new Directive on the automatic exchange of tax rulings between EU member states on which political agreement was reached in October 2015.

According to the press release, the Commission now plans to launch a further package of initiatives to combat corporate tax avoidance within the EU and throughout the world. The package will be presented on 27 January 2016 and will also set out a coordinated EU-wide approach for implementing good tax governance standards internationally.