More on the European Commission’s Tax Rulings Investigation

June 17, 2015

I wrote last week about the European Commission’s (E.C.) investigation into multiple member states’ tax treatment of multinational corporations. This probe has expanded to include all member states’ tax rulings, with Estonia and Poland possibly facing legal action in the European Court of Justice if they do not respond to an injunction ordering them to release detailed records of their tax rulings within one month of June 8th, 2015. In light of this flurry of tax-related antitrust action, a discussion of what a tax ruling actually is seems in order.

A tax ruling, the E.C. explains, is a “comfort [letter] issued by tax authorities to an individual company on a specific tax matter.” Tax rulings do not hold statutory weight, but they enable companies to more accurately estimate tax and regulatory burdens, which in turn allows them to better price intra-company transfers. If a tax ruling has the effect of providing tax advantages to a specific company, the E.C. treats it as a violation of E.U. state aid law and the member state is subject to administrative or legal action.

E.U. state aid law prevents member states from providing advantages to specific companies in order to stifle the creation of state-sanctioned oligopolies and monopolies. The E.U. also prohibits companies from exploiting a dominant market position that already exists, though a dominant position itself is not an offence. Thus the scope of a tax ruling is delineated by restrictions on both the member state and the company involved: the company cannot attempt to use the request for the tax ruling or the ruling itself to exploit a dominant market position that it held before the issuance of the ruling; and the member state cannot give the company more market power by providing company-specific tax advantages.

In the cases of Estonia and Poland, it is likely that the E.C. is focused on the conduct of the member states and not that of specific corporations, as no corporations have been named in the investigation and the E.C. has not been shy about naming and targeting corporations for alleged anticompetitive behavior, opening 27 cases in 2015 alone. The battle between the E.U. and the two member states raises broader questions of European quasi-federalism, as both Poland and Estonia claim a state right to privacy in their quest to not reveal specifics of their tax rulings. This focus on state behavior does not preclude the possibility of further action against companies if evidence of anticompetitive behavior is uncovered in the rulings.

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