The months long debate between the U.S. government and the European Union (EU) regarding transatlantic tax policy took another turn this week with the Department of the Treasury further clarifying its position on the ongoing tax investigations being conducted by the European Commission. ITI agrees with the Treasury Department’s analysis and with its key conclusion—the Commission’s state aid cases represent a threat to the transatlantic business environment and the larger principle of regulatory certainly on which economic actors rely.
Since 2014, the Commission has used its authority under state aid principles to examine tax arrangements reached between a number of companies and certain EU Member States. These investigations, led by the European Commission’s Directorate-General for Competition, have examined whether certain tax agreements violated “state aid” rules by allowing national governments to give unfair advantages to certain economic participants over others. Under EU law, the cases hinge upon whether the agreements generate broad economic benefit for the countries in question, which is allowable, or whether they bestow limited benefit to one or a small number of firms, which is not. These cases have received a great deal of attention, including at the highest levels of government on both sides of the pond.
The Treasury Department’s recent paper underscores why these cases have garnered so much attention—the Commission’s decisions represent a critical departure from past international tax law and procedure. The department asserts the state aid actions depart troublingly from prior EU case law and Commission decisions, impose unfair retroactive penalties and depart from norms of the international tax system.
Specifically, it notes divergent representations of long-held transfer pricing principles, such as the arm’s length standard, noting that no taxpayer could anticipate the shifts in standards used by the Commission in reaching its decisions. Considering the Commission’s unconventional and questionable approach, the Treasury Department asserts that proposed retroactive penalties should not apply to these cases. Instead, Treasury officials implore the Commission to continue to work through multilateral bodies such as the Organisation for Economic Co-operation and Development (OECD) to find coordinated approaches to solving the many vexing issues around cross-border taxation.
ITI has long argued that when it comes to taxes, everyone expects the system to be fair and predictable. Given the complex, global nature of modern business, companies deserve clear “rules of engagement” in their dealings with foreign governments, and assurances that they will not be subject to retroactive penalties for legal agreements they made with a country. It appears that the U.S. Treasury agrees. It is time to redouble efforts to achieve multilateral, sensible solutions to these problems. ITI would welcome the Commission coming to the table in this regard and stands ready to assist both it and the U.S. government, as well as the broader international tax community, in developing international tax practices that increase business certainty, promote innovation, and stimulate economic growth.