Every world chess champion possessed his own unique playing style. Tigran Petrosian was dubbed “Iron Tigran” due to his impregnable defensive style. Anatoly Carpov’s positional style earned him the nickname “boa constrictor”. Jose Raul Capablana was known as the “human chess machine” because of the relentlessly accurate manner in which he bested his opponents.
Were Commissioner Vestager to play high-level chess, she would probably play like Mikhail Tal. The so-called “Magician from Riga” was a formidable world chess champion. Known for his creative attacking style, Tal was daring and unpredictable on the chess board. His dramatic combinational play allowed him to confuse and rattle his opponents, who would usually proceed to make errors and concede defeat.
The way the board is set these days, few areas of EU competition law are as topical as fiscal state aid. The household names involved in the tax ruling cases (e.g. Apple, Amazon, Starbucks), coupled with the transatlantic tensions to which they have occasionally given rise, have brought state aid policy to the forefront of Commissioner Vestager’s work.
Building on some noteworthy quotes by Mikhail Tal, this post will endeavour to make sense of the different moving pieces on the state aid chessboard, describe the current state of play and evaluate the Commissioner’s “checkmating” odds.
“I like to grasp the initiative and not give my opponent peace of mind.”
Commissioner Vestager “inherited” the ongoing wave of fiscal state aid questions from Commissioner Almunia. Under her stewardship, the wave morphed into a … tropical cyclone. Apart from the four investigations that had already been opened (Apple, Fiat, Starbucks and Amazon), Commissioner Vestager launched seven more probes and has so far concluded eight in total, all but one with a finding of state aid. In the meantime, DG COMP published a Notice on the Notion of State aid and a Working Paper on State Aid and Tax Rulings in 2016, while the Commission’s Legal Service has valiantly defended its decisions before the General Court.
The start of the Competition Commissioner’s mandate in November 2014 coincided with the well-known LuxLeaks scandal. An investigation conducted by the International Consortium of Investigative Journalists revealed that Luxembourg’s authorities had issued hundreds of tax rulings that helped drastically reduce multinationals’ tax burden. The names of the companies were made public and those included Pepsi, IKEA, Walt Disney and Deutsche Bank, among others. The findings attracted international attention and spurred a lively debate on tax avoidance practices.
Building on her predecessor’s work and capitalising on the fact that public opinion had soured on multinationals’ tax treatment, the Competition Commissioner seized the initiative and took swift and decisive action. Firstly, she launched an enquiry into the tax ruling practice of all EU Member States. Secondly, she opened investigations against Belgium for its excess profit rulings’ scheme (involving 39, mostly European, multinationals), and then also against Engie, McDonald’s, IKEA, Huhtamäki and Nike.
Unflinching in her resolve and undaunted by political pressure, she was not afraid to pit the Commission against American behemoths and European powerhouses. Moreover, certain Member States, most notably Luxembourg and the Netherlands, found themselves in DG COMP’s crosshairs more than once, while not even the … perennially departing UK managed to escape state aid scrutiny. In fact, in April 2019, a few days after the “initial” Brexit date, the Commission concluded that the United Kingdom “granted undue tax benefits to several multinational companies by allowing certain artificially diverted group financing income to remain outside the scope of the United Kingdom’s anti-tax avoidance provisions.” Uncompromising, yet always calculated, Commissioner Vestager has been using competition policy to actively influence the way Member States tax undertakings. Tackling tax avoidance is a laudable aim, but using competition policy to circumvent the failure to get political consensus is arguably illegitimate and a dangerous precedent to set.
“To play for a draw, at any rate with white, is to some degree a crime against chess.”
As the reader will doubtlessly know, the player with the white pieces makes the first move in a chess game. This gives her the initiative; it has also been shown statistically that white wins slightly more often than black. This first-move advantage therefore means that white can more easily go for the jugular. Any lesser ambition would be an offence to the game.
Commissioner Vestager is definitely playing to win. Moreover, the Commission does possess the first-move advantage, being able to initiate state aid investigations almost at will, and keeping its cards close to its chest as regards the timeline of their conclusion. The element of surprise is key in every “battle”, be it legal or otherwise. As many practitioners know, you might not hear from DG COMP for a long time and suddenly it’s…doomsday.
The Competition Commissioner, now Commission Vice-President as well, also wishes to send a strong political message. These cases are not just about competition between undertakings. They are also about inter-State tax competition, which needs to be fair. If the way to make it so necessitates the employment of the Union’s hard law apparatus, so be it.
Many of Commissioner Vestager’s relevant statements are telling. When adopting the negative decision against Belgium in 2016, she stressed that the state aid investigations can address distortions of competition, but that “to root out unfair tax competition in the EU, we need an effective combination of both legislative action and enforcement of state aid rules.” Furthermore, when announcing the negative decision against Amazon and Luxembourg, she emphasized that the “ultimate goal should of course be that all companies, big or small, pay their fair share of tax where their profits are earned,” but that the “enforcement of EU State aid rules alone cannot achieve this.”
Winning cases and sending a message is great. Sometimes, however, like in chess, you need to sacrifice a piece in order to create a mating attack. In fact, Mikhail Tal was most famous for his brilliant piece sacrifices that frequently led to spectacular checkmates.
A sound sacrifice, however, is one that gives the player some sort of compensation. Might we then view the McDonald’s state aid case as such a move? In September 2018, the Commission concluded that the non-taxation of certain McDonald’s profits in Luxembourg had not led to illegal State aid, as it was in line with national tax laws and the Luxembourg-United States Double Taxation Treaty. The reason underpinning the effective “double non-taxation” which had taken place in that case was a mismatch between Luxembourg and US tax laws, and not any special treatment by Luxembourg.
McDonald’s is the “one that got away”, being the only recent fiscal aid case so far where a finding of no aid has been recorded. Luxembourg, however, did not get away. A tactical piece sacrifice (closing the case) was followed by more important positional compensation for the Commission: Luxembourg, despite winning the case, agreed to close the loopholes that had allowed for double non-taxation. Commissioner Vestager in her relevant statement when closing the McDonald’s case had “very much welcomed” the fact that the Luxembourg Government was taking legislative steps to address the issue and to avoid such situations in the future. As a matter of fact, Luxembourg quickly adjusted its rules. It thus seems that a decision must have been made in Brussels that a sacrificed white … knight would not be missed if it helped the Commission edge towards victory. Does the latter, however, need to play flawlessly in order to win?
“Of course, errors are not good for a chess game, but errors are unavoidable and in any case, a game without errors, or as they say ‘flawless game,’ is colorless.”
The Commission is not infallible. Two out of the three decisions that have reached the General Court so far have been annulled, namely the Belgian Excess Profit and Starbucks decisions. The first annulment, in February 2019, was on “technical” grounds and focused on the erroneous identification of an aid scheme by DG COMP (see my analysis and summary here). The Commission has lodged an appeal against the General Court’s judgment. The second defeat, in Starbucks, stung more, with the Court concluding that “the Commission has not managed to demonstrate the existence of an economic advantage within the meaning of Article 107 TFEU.”
Still, its one victory so far, in the Fiat case, easily counterweighs the two aforementioned annulments. In that case, the General Court accepted, albeit in a nuanced manner, that the Commission was entitled to identify an arm’s length principle as a criterion for assessing the existence of State aid – and that the corresponding interpretation of the Forum 187 case was actually not far-fetched. This means that, should this judgment not be quashed by the ECJ on appeal, an arm’s length principle will have indirectly made its way into primary EU law (Article 107 TFEU). For those not familiar with the concept, the arm’s length principle originates from international tax law; it dictates that transactions between companies belonging to the same group should be valued as if they had been carried out between unrelated parties, each acting in his own best interest.
“You must take your opponent into a deep dark forest where 2+2=5, and the path leading out is only wide enough for one.”
The final quote by Tal, and my personal favourite, is rather self-explanatory. The way forward is not clear, neither for the Member States nor for taxpayers. The forest is indeed quite dark. This leads those entrapped to the only source of light, in our case the only source of legal certainty. This would be the EU law arm’s length principle (ALP), i.e. an arm’s length principle used by the Commission, now with the blessings of the General Court, as a tool to determine whether an advantage has been conferred on an integrated company.
And what does this arm’s length principle look like? For the time being, it bears a striking resemblance to the OECD’s arm’s length principle. Although both the Commission and the General Court have openly admitted that they cannot turn soft law (OECD Guidelines) into hard law (Article 107 TFEU), they have all but done so. In paragraph 66 of the final Starbucks Commission decision of 2015, it was stated that “the OECD TP Guidelines serve as a focal point and exert a clear influence on the tax practices of OECD member (and even non-member) countries” and that they “capture the international consensus on transfer pricing.”
Moreover, in paragraph 173 of its Final Notice on the Notion of State Aid, the Commission stressed that the OECD Guidelines “provide useful guidance to tax administrations and multinational enterprises on how to ensure that a transfer pricing methodology produces an outcome in line with market conditions.” More importantly, it stated that “if a transfer pricing arrangement complies with the guidance provided by the OECD Transfer Pricing Guidelines,” then “a tax ruling endorsing that arrangement is unlikely to give rise to State aid.” Unlikely, but not certain! In its 2016 Working Paper on State Aid and Tax Rulings, DG COMP further complicated matters when it asserted that its ‘focus is on cases where there is a manifest breach of the arm’s length principle.’ “Unlikely” and “manifest” are…slippery adverbs and adjectives. The line between exclusive EU competence and Member States’ tax sovereignty should be brighter.
The General Court’s recent rulings not only failed to provide more detailed guidance as regards the content of this “EU law ALP,” but they seem to have sealed the deal in favour of the OECD Guidelines (again, a soft law instrument which EU Member States can choose not to abide by). In paragraph 155 of its Starbucks judgment, the General Court emphasised that the OECD Guidelines “are based on important work carried out by groups of renowned experts, that they reflect the international consensus achieved with regard to transfer pricing and that they thus have a certain practical significance in the interpretation of issues relating to transfer pricing” (emphasis added). From Paris (OECD), to Brussels (Commission) and now to Luxembourg (General Court), the OECD’s appeal seems to be irresistible.
The game is certainly still on but, after the Commission’s Fiat victory before the General Court, we have entered the endgame. Will the Commission manage to deliver checkmate? It will be interesting to see if the EU’s very own “Magician from Glostrup” can pull this one off.