By singling out Apple over taxes, Brussels is abusing its own rules

Under EU rules it is illegal for countries to give financial help to some companies and not others in a way that distorts fair competition, writes Liza Lovdahl Gormsen.

State aid rules were originally designed to protect the internal EU market and avoid retaliation among member states.

The US Treasury, which last week began a vocal fight-back, believes the European Commission is bending these rules to breaking point to target the earnings of American companies.

Under international tax regulations these are predominantly taxed in the US where value is generated, although US rules allow taxes to be deferred until profits are repatriated.

With a decision in the investigation into Ireland’s tax arrangements with Apple expected this week, the stakes are high with possible retaliatory measures against European companies and concerns it will take its toll on investment in Europe.

The European Commission wants Europe to put its tax house in order and ensure companies pay their “fair share” of corporation tax. It’s a laudable ambition. Europe needs a level playing field that drives innovation and rewards excellence. Indeed, the Organisation for Economic Co-operation and Development (OECD) has made huge progress with its Base Erosion and Profit Shifting action plan by building global consensus.

However, the European Commission must not now undermine this by cutting corners. Its unorthodox use of State aid as a “tool” to drive reform threatens to undermine the rule of law with serious consequences for investment, growth and prosperity in Europe.

Despite progress to date, reforms are slow moving as member states within the EU retain the sovereign right to set their own tax laws and they need to agree new measures unanimously. Countries are, unsurprisingly, reluctant to cede autonomy over tax policy as it is a vital mechanism for responding to their individual economic needs.

To speed the process up, the Commission is attempting to use the “embarrassment and inconvenience” of state aid measures to strong-arm member states into falling into line. In addition to the Irish case, it has brought cases against the Netherlands, Luxembourg, and Belgium who stand accused of distorting competition by giving companies including Starbucks, Amazon, Fiat and McDonald’s beneficial tax treatment.

Putting to one side the appropriateness of using competition law enforcement to achieve political ends, the Commission is in uncharted legal waters using a novel and untested interpretation of EU state aid law.

According to the European Commission, these national tax authorities have allowed multinationals to gain an unfair advantage by using transfer pricing to reduce the profits they pay tax on. It suggests these prices have not been calculated at market rates, otherwise known as the “arm’s length principle”.

However, its reasoning is flawed. Firstly, the arm’s length principle is not a rule of international law and no member state is obliged to implement it in national law. Indeed, some countries, Ireland among them, have not implemented it.

To counter this, the European Commission is now claiming the concept has its roots in EU law and the principle applies irrespective of whether it exists in domestic legislation.

This is a novel theory with no case law to support it and the Netherlands, Luxembourg and Belgium have all appealed against their cases to the General Court in Luxembourg.

Secondly, the Commission’s new approach to transfer pricing and the arm’s length principle is at odds with the international standards set out by the OECD. OECD guidelines recognise transfer pricing is a notoriously inexact science which requires a degree of estimation and approximation.

The Commission, however, believes there is a precise formulation that it alone can determine and that any deviation from this may represent a breach of state aid rules. This undermines national tax authorities, creates uncertainty and threatens to make the EU the final arbiter in an area where it has no jurisdiction.

Thirdly, the European Commission has done little to prove whether or not the tax rulings in question had an impact on competition, which is at the essence of EU state aid law.

It has to show the arrangement benefited an individual company rather than being a result of how the system normally operates.

In trying to compare multinationals with standalone companies, the Commission ignores the fact transfer pricing rules only apply to multinationals and consequently will always show an advantage in favour of them i.e. they are not available to companies who don’t operate across international boarders.

If anything, by singling out a handful of mainly US firms and imposing significant retroactive recovery, the Commission risks distorting competition.

The Commission’s actions threaten to distort the delicate balance between EU state aid powers and member states’ fiscal sovereignty. It creates ambiguity and undermines confidence in the legal system. What’s more, attempting to apply rules after the fact amounts to harmonisation through the back door, and is dangerous for Europe.

This has been brought into sharp relief with the UK voting to leave the EU in large part due to fears over its expanding powers and unaccountability.

Those of us who believe in the vital importance of the EU and want to safeguard its long-term future must hold it to account to ensure it does not overreach its mandate and respects national sovereignty.

The EU’s respect for rule of law is a founding principle and rightly esteemed around the world. Companies investing in Europe do so on the certainty and stability it provides while member states and their citizens have the right to expect the primacy of their laws to be respected where they have not been specifically devolved to the EU.

Tax reform must be achieved through international consensus and legislation and not by the creative application of state aid rules to sidestep national legislation. There is simply too much at risk.