Understanding the Current European Tax Agenda
March 14, 2016
Introduction By: Diane Miller, Senior Vice President, Client Relations
It is not unheard of for companies to face legislative speed bumps, both nationally and globally. With ever-changing regulations, it’s important for your company to be able to keep up with the rules of the game for both Congress and any bodies of government of countries where your company is located.
As our FleishmanHillard colleague, Martin Bresson, explains, new European Commission rulings on state aid are reshaping the landscape among multinational companies and European Union national tax regimes.
This comes at a time, where the European Commission is also proposing far-reaching legislation in a so-called Anti Tax Avoidance Directive, which could directly impact companies doing business across the Atlantic.
Amid these rising tensions, the European Parliament is on top exploring the option to organize a joint hearing with multinational corporations at the stand with the US Senate and House of Commons. With these upcoming hearings a possibility facing US companies, it’s the right time to educate and prepare yourself around this shifting environment.
To learn more about this issue, don’t miss out on registering for our upcoming webinar featuring Martin Bresson, our Brussels based expert on EU tax and EU politics and Suzanne Rab, a UK based barrister with deep expertise in state aid issues. Join us on March 22nd at 10 AM EST.
Understanding the Current European Tax Agenda
By: Martin Bresson, Senior Advisor, FleishmanHillard
On the 21st of October, the European Commission announced that after investigations into the taxation measures that Holland had laid out for Starbucks, and in parallel, the measures that Luxembourg had laid out for Fiat/Chrysler, taxation incentives given to the companies were considered unlawful according to European Union (EU) regulations on state aid. Following this ruling, both Starbucks and Fiat/Chrysler will be required to pay back the millions in Euros that they had received in state aid.
State aid, selective advantages offered to companies to incentivize their relocation, is regulated and mostly prohibited within the European Union as it is perceived to threaten competition by favoring certain members and negatively affecting trade among the states.
What does this mean to the US?
In an American context, competition between states on which tax deals you can offer a company is not only legal, it’s encouraged for new jobs and economic growth for states and companies alike. It would be difficult to find a governor who hasn’t considered which deals would incentivize companies to his or her state, with the intent that these companies would bring in jobs and thereby voters.
Through an American filter, the European Commission’s rulings are therefore surprising and, at first glance, suggest that Europe has gone down a path that leads to slower growth. However, although EU procedure may be complicated and often in contrast with U.S. policy, this may not mean the EU is truly following a protectionist or anti- American agenda.
Is there logic to the madness?
Yes. But to understand the issue at its root, we have to go back to the foundation of the EU.
One of the many concerns the founding fathers of the EU had when establishing the Union was in creating a European Single Market—based on free movement of capital, goods, services, and labor. It would need to be based on market criteria: having companies allocate their resources where they would serve the overall market best.
In layman’s terms, the idea was to encourage equality between the larger, wealthier member states and the smaller, less financially stable member states.
To achieve this market, they prohibited most “state aid” in the treaty, outranking any rules on state aid made in individual member states, and left it to the Union’s executive arm to enforce these rules.
However, the founding fathers did not want the Union to be built as a full-fledged federation, so they came up with two options: preserve the member states’ powers to set individual state taxation rules or create common rules on the sole basis that unanimity had to be achieved to put these rules into place.
It is at this juncture between what each state wants to and can do with its tax system as such and what is possible when it comes to individual tax rulings versus what the treaty has set out for the wider EU community as unlawful state aid, that American companies like Fiat/Chrysler and Starbucks have been caught in the cross fire.
Is it all just political?
Yes and no— when the EU commission announced their investigations into tax practices of these states, a “political witch hunt” argument began surfacing in both Europe and the U.S.
There’s some truth to this argument and then, there’s not.
It is true that the European Commission’s focus on tax deals and tax payments by large corporations has come in the wake of the political fallout from the financial crisis with an increased public distrust of ‘large corporations’ and a great political sense of restaging a ‘fairness’ agenda. The focus on taxation and the political drive for this has, however, been relatively equal and impartial in the selection of which companies and/or countries have been investigated.
It is, of course, not solely coincidental that it is primarily small member states (Holland, Luxembourg, Ireland) that have been targeted so far—or indeed that it is by and large American companies that have been examined. However, this is not necessarily connected to a bias but instead speaks more to the fact that it has typically been smaller member states who have used tax incentives to draw FDI from companies who would, otherwise, not likely look to those countries. Similarly, the companies looking at these member states, who inherently use tax incentives as a factor in their location decisions, are U.S. based.
Why does this matter to you?
Consider whether your company falls into either or both of the following categories which will be affected by these current EU tax issues:
- Any company who has already invested in an EU country with a tax-decision tied to this investment and/or allocation can be charged with paying back the ‘unwarranted advantage,’ if investigated by the Commission
- Any company with plans to allocate or invest in particular EU member states based on tax incentives will need to reconsider the tax advantages tied to these investments and further investigate EU state aid legislation.
What should you do?
If you find your company may be dealing with this increasingly prominent issue, you can follow these tips to be proactive in addressing the issue.
- Contact a lawyer with EU state aid law knowledge—not just a tax adviser or specialist.
- Treat this as a predictable crisis coming your way and prepare to manage your brand accordingly, working with your communications team to create a crisis management plan.
- Consider the damage to your public affairs efforts, your government relations and your relationships with other key stakeholders. Work with your government relations team to prepare management of your public affairs and grassroots efforts accordingly.