Behind the Scenes: Enemy of the State Aid

EU efforts to rein in abusive and unfair tax regimes were dealt a blow this week when the bloc’s top court struck down a decision by the European Commission. It highlights yet again a glaring weak point in how the Union does its business.

Margrethe Vestager is known for being quite a few things, thanks to journalistic tropes. They include being the inspiration for hit Danish political drama ‘Borgen’; the “tax lady” according to golf course owner Donald Trump; and a master of knitting.

The European Commission VP also happens to be arguably the most powerful EU official that has had the most say over how the bloc goes about its business, especially when it comes to dealing with huge multinational companies.

During her near-decade in charge of competition policy, Vestager has used the EU’s state aid rulebook to bring member states and the companies being offered ‘sweetheart deals’ to task, insisting that many agreements simply are not fair.

Mega companies like Apple and Amazon have been hit with Commission cases, ultimately winning reprieves from lower courts. But the European Court of Justice this week cast a serious shadow over the Dane’s quest for fairness.

BRUSSELS BEHIND THE SCENES is a weekly newsletter which brings the untold stories about the characters driving the policies affecting our lives. Analysis not found anywhere else, Sam Morgan helps you make sense of what is happening in Brussels. If you want to receive Brussels behind the scenes straight to your inbox every week, subscribe to the newsletter here.

Vestager’s logic is simple: some EU countries have offered big multinationals extremely attractive tax breaks in order to set up shop there, giving those companies an uncompetitive advantage.

Allowing firms that rake in huge profits from across the bloc to pay only marginal tax rates is not fair, the Dane and her ‘sweetheart deal’ taskforce have argued since 2013, when her team first went hunting for bad practice.

However, that logic has not translated into cast-iron legal arguments. Vestager’s squad successfully hit Ireland and Apple with a case that forced the government to recoup billions of euros in unpaid tax. But the iPhone-maker cried foul and it was overturned.

The Commission’s own appeal is still pending.

This week, a final decision from the ECJ essentially confirmed that the Commission had overreached in telling Luxembourg how it should do tax policy in another high-profile case, this time with Italian-American car group Fiat-Chrysler.

Initial reactions to this legal defeat, which the Commission says it is still studying, have largely been all doom and gloom. A “devastating” loss for Vestager; “a catastrophe”. Even the Dane herself tweeted it was “a big loss for tax fairness”.

This may indeed give governments legal precedent to offer even more enticing perks for big companies to set up subsidiaries, given that the pendulum of power has swung away from Brussels towards national capitals.

Or one could argue that Vestager’s work is already done. That by risking so much to launch these legal cases in the first place, her policies have already forced governments to change how they run their houses.

Since 2013 and now, nearly 140 countries signed up to the OECD’s global minimum tax rate of 15%, the political will for which was partly built by governments seeing which way the tax wind was blowing.

Countries are still drawing up plans on how to implement that deal. Even if the inevitable writing in of loopholes and exemptions does take place, the way corporations are taxed has been irrevocably changed.

The Luxembourg/Fiat case is not even as bad as it first seems. The court leaves the door open slightly for state aid matters—which are governed by the Commission—to influence tax policies—which are governed exclusively by member states.

That latter point, however, will continue to be a thorn in the side of the Union and the Commission may have missed its best chance to have more say over tax matters.

Green-eyed monsters

Some policy areas are totally EU-led, while most others are shared between all parties. Taxation is one of the areas where Brussels has very little say whatsoever.

National governments have slowly relinquished full control of areas like trade, energy and agriculture over the years, seeing the benefits that a harmonised approach can yield by working together.

But all attempts to do something similar with tax have come to very little. The EU has attempted to harmonise tax regimes and set standards but as far as affecting direct taxation and similar policies, it is all up to national governments.

An ongoing push to reform decades-old energy taxation rules is making slow progress and is nowhere near as ambitious as green groups would like it to be, while calls for an EU-wide tax on short haul flights or jet fuel have gradually faded away.

This is the root of so many problems, especially if you subscribe to the popular and hard-to-deny theory that money makes the world go around.

When the EU was figuring out how to repay its €800 billion pandemic warchest, ideas like a single-use plastic tax, carbon tax and even a sugar tax were bandied about. But when you need 27 countries to agree to that, you may as well just forget about it.

That is why the Commission missed a trick when it assessed those countries’ recovery fund plans, which was a key step in unlocking their slice of the €800bn pie.

Although Brussels made many recommendations to governments when poring over those shopping lists, in a similar way that the Commission doles out advice under the European semester, no big policy ultimatums were made.

Belgium, whose company-car tax perks are infamous, was advised to make changes in this sector and although there are pledges to ‘green the fleet’, no bigger changes can be expected anytime soon.

In much the same way that governments are not going to give up their foreign policy vetoes, tax will remain a jealously guarded area. It is something to bear in mind when there is criticism of EU initiatives for “lacking teeth” or being unambitious.

BRUSSELS BEHIND THE SCENES is a weekly newsletter which brings the untold stories about the characters driving the policies affecting our lives. Analysis not found anywhere else, Sam Morgan helps you make sense of what is happening in Brussels. If you want to receive Brussels behind the scenes straight to your inbox every week, subscribe to the newsletter here.