Selectivity in State Aid Law and the Methods for the Allocation of the Corporate Tax Base, Jérôme MONSENEGO

Jérôme Monsenego

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This book is likely to contribute both to the resolution of ongoing cases relating to tax rulings issued by certain Member States and to the debate on the adaptation of tax rules to state aid law. The issues studied in the book concern both competition between economic operators and tax competition between Member States.

The author endeavours here to analyse the consequences of the selectivity criterion on three methods for the distribution between States of the tax base of corporate groups, when the latter are established in several Member States. Among these methods, one is used by all Member States (the arm’s length principle), another is used occasionally (tax safe harbours, or fixed margin systems), and another (a system based on an allocation formula) can be implemented either unilaterally or in a harmonised form, in particular in the context of the Common Consolidated Corporate Tax Base (CCCTB) project. Member States may also combine these methods in different ways (e.g. the profit split method), or apply them in other contexts such as the attribution of profits to permanent establishments. In this book, the author does not analyse the compatibility with State aid law of the rules in force in Member States. Nor does it address the specific case of cases pending before the European Courts, most notably the Apple case, which has contributed to strong reactions across the Atlantic. The level of analysis is more theoretical, with the author placing himself above current cases or the rules in force to provide a real analytical grid for the application of the selectivity criterion to the three methods for allocating the tax base.

The book is divided into two parts. In the first part, the author examines the preconditions for the analysis of tax selectivity that are common to all three methods of base allocation. This first part contains several analyses that are useful for the examination of the decisions taken by the European Commission on certain tax rulings. After an introductory chapter, the author goes on to analyse the reference framework for assessing the selectivity of tax measures (chapter 2). The question is fundamental : the more broadly the reference framework is defined, the less room for manoeuvre there is for Member States to tax taxpayers differently. Conversely, a narrowly defined benchmark will make it easier for Member States to adopt different measures for different categories of taxpayers. In the case of the taxation of multinational groups, this will include the question of whether such groups should be subject to the same rules as independent enterprises, or whether state aid law allows them to be taxed on the basis of different reference frameworks. The author highlights the specificities of multinational groups and the resulting needs for tax systems, but nevertheless concludes - in line with the analyses of the Court of Justice and the European Commission - that the reference framework must be broadly defined and include all the rules for the taxation of companies, whether or not they are members of a group. On the basis of an analysis of the sources of tax law, taking into account the ratione materiae as well as the ratione temporis aspects, the author also examines the delicate question of whether state aid law can, in itself, impose a material obligation on Member States as to the content of their tax systems. It is recalled that the European Commission has made this one of its main arguments, relying on the principle of non-discrimination inherent in Article 107(1) TFEU to conclude that Member States are obliged to apply the arm’s length principle even in the absence of such a principle in national tax legislation. The author’s argument, however, is that State aid law cannot be a substitute for national law, since the selectivity test has traditionally been applied under existing legislation. It would also be difficult, in practice, to impose an obligation on Member States as to the precise content of their tax rules. Similarly, the author rejects, in the following chapter, the idea that the market economy operator test may create an obligation for Member States to incorporate the arm’s length principle into their tax legislation, or to interpret that principle - where it exists in that legislation - in the light of the case-law applying that test (Chapter 3). This idea, also put forward by the European Commission, would be unfounded, since the market economy operator test is normally used for the assessment of an advantage, not for the assessment of selectivity. It has also been shown that the Court of Justice’s interpretation of the market economy operator test differs from the OECD transfer pricing principles as regards the scope given to the effects of the free market. The author notes several examples where the two sources respond differently to the same situation. Therefore, the market economy operator test would have no relevance in tax matters, except in situations where a State acts through tax measures but as an economic actor, as in the EDF case. Lastly, the first part concludes with an analysis of the concept of comparability. After suggesting that the objective of a corporate tax system is to tax the net income of companies, the author goes on to make a comparison between related and independent companies. Despite the important differences between them, the author concludes that, in light of the objective of the tax system, these two categories of taxpayers are in a comparable situation in law and in fact. This argument is central to the success of the actions brought by the European Commission against certain tax rulings considered too generous, but it has met with much criticism from the doctrine.

In the second part of the book, the author examines each method of allocating the tax base in the light of the selectivity criterion. The aim is not to analyse the application of these methods in practical situations, but rather to examine the intrinsic compatibility of each type of rule with State aid law, whether de jure or de facto selectivity is involved. The contribution of this second part therefore concerns both the test of compatibility with State aid law of existing rules and the choice of tax policy prior to a possible reform of group taxation. The book distinguishes between several types of situations where the question of selectivity arises, depending in particular on the answers given to the problems raised in the first part. The analysis of selectivity is applied to the arm’s length principle (chapter 5), tax safe harbours (chapter 6), as well as systems based on an allocation formula (chapter 7) composed of company-specific elements such as turnover, tangible assets and payroll (chapter 7). The analysis of potential justifications and the principle of proportionality completes this book (chapter 8). Throughout the second part, the author examines different attributes of the three base allocation methods, as well as various ways of legislating to implement these methods, leading to conclusions that will vary widely depending on the assumptions. While it is not possible to report here in detail on the different conclusions drawn by the author, three major lessons can be drawn from this second part: firstly, each method of tax base allocation has selective characteristics and can therefore be declared incompatible with State aid law. Secondly, a hierarchy can nevertheless be established between the different methods as regards their compatibility with the selectivity criterion. Of the three methods, the tax safe harbours in line with the arm’s length principle are least in conflict with the selectivity criterion; however, this method is limited in scope to intra-group transactions of low complexity, which makes it necessary to use other methods. A generally formulated rule introducing the arm’s length principle is the second least selective method, which is also applicable - at least in theory - to all intra-group transactions. On the other hand, tax safe harbours which do not comply with the arm’s length principle and pre-established allocation formulas are, on the other hand, more fundamentally in conflict with the selectivity criterion, which makes them difficult to justify by the nature or general scheme of the tax system. The author’s analysis here concurs with that of the Court in the Gibraltar case.

The author’s thinking, in strict compliance with the principles developed by the European courts, whose iron logic Professor Vanistendael stresses in his preface, will contribute by its depth and objectivity both to the resolution of the cases in progress and to the adaptation of tax rules to State aid law. For if the author chooses to place himself at a theoretical level, the scope of the book will be all the broader: whether it is a question of determining the reference system, the relevance of the market economy operator criterion for the analysis of tax measures, the study of comparability between independent enterprises and members of a group, or the reflections carried out on the justification and proportionality of a priori selective measures, the issues addressed are common to all Member States, and the reasoning set out will be relevant in many cases. It might be regretted that the author, having developed this analytical grid, does not apply it to current cases. This is probably a desire to preserve the objectivity and longevity of a work whose political implications go beyond the legal considerations relating to the scope of State aid law.

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Nizar Lajnef, Selectivity in State Aid Law and the Methods for the Allocation of the Corporate Tax Base, Jérôme MONSENEGO, November 2018, Concurrences N° 4-2018, Art. N° 88313, pp. 246-247

Publisher Wolters Kluwer

Date 19 June 2018

Number of pages 260

ISBN 9789041194138

Visites 181

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