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E.U. Antitrust Probes Question Tax Carveouts

2 min readBy: David Dewhurst

European Commissioner for Competition Margrethe Vestager announced yesterday that the European Union (E.U.) would widen an investigation into member states’ tax policies, which she alleges aided international corporations in attaining selective taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. advantages. Countries under investigation include Estonia, Ireland, and Luxembourg, all of which rank in the top 15 on the Tax Foundation’s International Tax Competitiveness Index. Bloomberg reports:

Margrethe Vestager, the bloc’s antitrust chief, is seeking to throw the spotlight onto the tax affairs of multinationals across the E.U., potentially adding to probes targeting fiscal arrangements of Apple Inc. in Ireland, Starbucks Corp. in the Netherlands and Inc. and a Fiat SpA unit in Luxembourg…Estonia said it won’t share information containing corporate and tax secrets and questioned the legal grounds for the commission’s request.

E.U. member state tax rulings regarding intra-group transfers are supposed to be established according to the arm’s-length principle. The “arm’s length” principle states that transfers within a multinational must simulate transactions between unrelated companies. Vestager is concerned that member states are giving certain multinationals preferential treatment by not incorporating the arm’s-length principle into tax codes or conferring other selective advantages to companies that invest in, or otherwise favor, the member state in question.

This is not the first time that the European Commission (E.C.) has doubted the neutrality of member state tax provisions. Vestager is conducting an investigation into Belgium’s “excess profit” rule, which allows multinationals to deduct from their tax bill profits above the average of non-multinational competitors. And the current probe into tax loopholes has its roots in an investigation of Ireland’s tax treatment of Apple. Though rulings may take years, Vestager is showing signs of impatience, noting that she “had to ask member states twice—or more—to provide information” regarding their tax treatment of multinationals.

These probes raise questions regarding the power of E.U. institutions over their constituent nations. Estonia stated that the Commission on Competition, the E.U. antitrust authority, does not have power to auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. member state fiscal policies. But the Commission has replied, suggesting that noncompliance will lead to litigation in the European Court of Justice.

Whatever the outcome, the E.C. should be lauded for ensuring that tax policy treats all corporations fairly by eliminating carveouts for specific businesses and industries. But it should take care that its antitrust policy stays clear of making significant changes to a member state’s fiscal policy, which is tailored to that nation’s specific needs.