Brussels has been left grasping for fresh ways of addressing tax competition within the EU after its order for Apple to pay back €14.3bn in tax to Ireland was overturned in the bloc’s second-highest court in Luxembourg.
The annulment by the General Court was a bruising setback for the EU’s executive vice-president in charge of state aid, Margrethe Vestager, who caused a political sensation when she launched the high-profile investigation against Apple in the summer of 2014.
The European Commission said on Wednesday it was now turning towards an obscure and previously unused EU treaty article as it seeks fresh ways to crack down on aggressive corporate tax planning and circumvent member states’ vetoes over critical questions of tax policy. But policymakers and lawyers warned there are no easy options ahead for Brussels following the courtroom defeat.
“This is a huge setback — we are running into a brick wall when it comes to tackling this divisive problem of excessive tax competition between member states,” said Luis Garicano, a Spanish MEP and vice-chair of the Renew Europe group.
“With the state aid route now essentially dead, the commission is right to look at using internal market rules to get around the need for unanimity. It is the final bullet left, and they need to use it.”
The EU has long struggled to drive member states towards greater harmonisation in their corporate tax regimes given capitals’ insistence on unanimous decision-making in the area.
Attempts to agree a common corporate tax base have foundered, while a move in 2017 by former commission president Jean-Claude Juncker to sidestep the need for unanimity on tax came to nothing.
At the same time, public frustration with the small tax bills paid by big companies has grown, with multinational tech groups the focus of particular ire.
Several estimates have suggested that the EU loses more than €35bn a year from corporate tax avoidance. In her first term as competition commissioner, Ms Vestager sought to address the issue through a series of high-stakes probes into corporate tax arrangements that she said constituted illegal state aid.
The key test of her strategy was always likely to come in the courts — and now, in her second term, Ms Vestager is reeling from a series of defeats.
The EU lost last year on its ruling to order Starbucks to pay back €30m in taxes to the Netherlands on the grounds that officials were unable to provide enough evidence that showed the tax arrangements were illegal.
On Wednesday, the General Court said she had failed to show “to the requisite legal standard” that Apple had received an illegal economic advantage in Ireland.
The commission will need to decide whether to appeal against that decision, but legal experts warned it would face a difficult fight.
Alfonso Lamadrid, a partner at law firm Garrigues, said: “A commission appeal before the European Court of Justice would be an uphill battle. The judgment is carefully crafted on points of law and is in line with Court of Justice precedents, which place increased emphasis on the commission’s burden of proof.
“This outcome shows that the European system of judicial review works, no matter the nationality of the companies affected and the political interests at stake.”
Brussels insisted on Wednesday that, despite the court decision, it still had the wherewithal to keep pursuing cases. Paolo Gentiloni, EU economics commissioner, said: “A single ruling is not discouraging our commitment. I would say the contrary.”
Moreover, the commission has managed to make some of its arguments stick. The court has found, for example, that Fiat Chrysler received a preferential tax treatment and ordered it to pay back €30m in taxes to Luxembourg.
The commission is also examining other legal avenues. On Wednesday, it confirmed that it will look to Article 116 of the EU treaty and target tax schemes that constitute “distortions” in the single market.
This would open the way for laws to be introduced to correct such schemes under procedures that do not give single countries a veto. If relevant capitals failed to comply, the commission has the power to sue them at the European Court of Justice.
“It is true that [Article 116] has never been used, and that is the reason to use it in the right way,” said Mr Gentiloni. “Work is under way to clearly identify the cases from a political and legal point of view.”
However, diplomats warn that this alternative route is likely to face serious resistance from member states that have advantageous corporate tax schemes.
One EU diplomat said that the commission had sought to “apply the rules of the treaty on state aid to situations for which, quite simply, they have not been designed”. The solution would have to come from direct efforts to try to co-ordinate and shape national tax practices, including at the Organisation for Economic Cooperation and Development.
“The state-aid rules, fundamentally, are about the idea that someone has received special treatment,” the diplomat said. “That is the sense of state aid — that the state does something for someone that it doesn’t do for someone else. But tax conventions are applied to everyone.”
The courtroom setback comes as international efforts to tackle corporate tax avoidance face an uncertain future following the Trump administration’s decision to shelve its participation in global talks under the auspices of the OECD.
While the EU has vowed to introduce its own tax on big tech companies if international discussions remain stuck, member states are anxious that such a move could trigger a trade war with the US.
Valdis Dombrovskis, one of the commission’s executive vice presidents, warned on Wednesday that the broader questions hanging over corporate taxation have not gone away.
“Irrespective of this legal judgment, there is a fundamental question about tax fairness,” he said. “If anything, the issue of large multinationals paying their fair share of tax was made even more clear by today’s ruling.”