At the inception of a new and potentially transformative type of tax enforcement, this Article reviews the goals underlying the prohibition on state aid and whether they properly encompass limitations on tax competition. To explore this question, this Article examines treaty text and structure, doctrine, and policy arguments for and against using state aid to curb tax competition. It concludes that the Commission’s expansion of state-aid doctrine to limit tax competition improperly constrains Member State tax autonomy, arrogates tax policy power to the unelected Commission, and increases legal uncertainty. This Article urges the Court of Justice to clarify that preventing tax competition is not an independent goal of state-aid enforcement, although limits on tax competition may arise instrumentally via a free-trade interpretation of the prohibition of state aid. Unlike the anti-tax-competition interpretation, the free-trade interpretation of the prohibition of state aid is well grounded in history, text, and regulatory guidance.
This Article does not argue that tax rulings cannot convey state aid. Nor does it argue that the Commission should abandon state-aid review of tax rulings. On contrary, states are capable of using rulings to impose different, and more favorable, tax rules than those available under domestic law. When states do so, they violate the long-standing free-trade conception of state aid. But it is crucial for legal certainty and the rule of law for the Commission and EU courts to propound clear and objective state-aid standards. Thus, it is important for the Commission to avoid substituting its own tax policy judgments for those of the Member States. The best way for the Commission to avoid overstepping its authority would be for it to return to domestic-law reference benchmarking in every case. While such a move would disable the Commission from preventing certain competitive tax practices (like that at issue in Gibraltar), this Article has argued that preventing tax competition is not a first-order goal of state-aid control.
That the Commission’s approach to tax state-aid enforcement has shifted from a nondiscrimination approach—do onto others as you do onto your own taxpayers—to a harmonization approach—do as the Commission prescribes—should be a cause for concern for all EU Member States, not merely the small ones often referred to as tax havens. Such an approach strips tax powers from the Member States. Future cases provide an important opportunity for the CJEU to limit the Commission’s discretion. In the pending appeals involving U.S. multinationals, especially Apple, the Court should reject the Commission’s proffered sui-generis arm’s-length standard for determining the income of multinationals. Instead, the Court should defer to the Member State’s own domestic law for calculating companies’ tax burdens.
Second, and more generally, the CJEU should reject the Commission’s attempts to impose its normative views of the proper tax base on the Member States. Instead, the Court reaffirm the importance of traditional selectivity analysis with its domestic-law reference base. The state-aid prohibition does not aim for equal treatment of all enterprises no matter what. Nor does it aim to ensure that Member State policies adhere to particular tax policies. Instead, the state-aid rules prevent states from deviating from their own law to confer benefits on select enterprises. The EU courts therefore should reject the Commission’s attempt to redefine selectivity as deviation from an external reference base.