EU prepares for official tax-deal inquiry

The European Commission has defended its right to probe the tax arrangements offered to companies by individual countries ahead of the possible announcement next week of a formal state-aid investigation into Ireland and the Netherlands.

The Department of Finance and other authorities in Dublin have furnished the commission with details of tax arrangements entered into with particular companies over the last few months as part of the EU body’s ongoing examination of state aid. An update is expected from Brussels next Wednesday.

While the disclosure by computer giant Apple last year that it had profited from a special 2 per cent rate offered by Ireland is believed to have prompted the enquiry, the commission is only permitted to investigate tax rulings arranged with companies in the last 10 years. This could be particularly relevant to internet and social media firms which established presences here over the last decade.

In Brussels yesterday, a spokesman for European Competition commissioner Joaquín Almunia said the commission had been “information-gathering” for months from certain member states.

State-aid rules

“We have been gathering information on certain tax practices such as tax rulings and certain intellectual property regimes to check compliance with EU state-aid rules,” the spokesman said. He said the commission had previously engaged in similar enquires.

“There are many, many precedents of state-aid cases which deal with advantages, selective advantages, given to companies through tax advantages. State aid can be given in the form of subsidies, obviously, but also in the form of tax advantages. There are many precedents and this is also a well established principle of the case law of the court of justice.”

Issues of taxation fall outside the remit of the European Union, with the right for individual countries to set their own tax rate firmly entrenched in the EU treaties. However, the current enquiry is being undertaken by the Competition directorate-general of the European Commission, which is authorised to investigate any breach in state-aid rules.

Distort competition

While EU law prohibits state aid or grants by a member state which distort or threaten to distort competition, in certain cases it does permit state aid if it is deemed to promote economic development. At issue in the current enquiry is whether the decision by countries to grant specific tax arrangements to companies, such as the use of intellectual property tax breaks, grants a selective advantage to a group of companies.

The enquiry has focused ontax arrangements involving technical structures such as transfer pricing mechanisms and intellectual property which allow companies to reduce their tax bill in Ireland, with Dublin co-operating with commission officials in their enquiries over the last few months.

However, the commission is threatening to refer Luxembourg to the European Court of Justice for not furnishing officials with information regarding certain "letters of comfort" it gave to companies in 2011 and 2012, regarding specific tax arrangements, as well as its refusal to disclose details of the 100 largest companies that profit from Luxembourg's intellectual property tax regime.

The prospect of renewed pressure from Brussels on the issue comes as the OECD pursues a reform of global tax rules to counter aggressive tax avoidance by multinationals.