Fiscal Aid Review and Cross-Border Tax Distortions

Abstract

International taxation was never the focus of the state aid prohibition foreseen by Article 107(1) TFEU. Indeed, the European judicature has made it clear that the application of state aid rules to measures relating to business taxation was essentially aimed at intra-state rather inter-state tax preferences. However, this does not preclude certain cross-border distortions of competition deriving from direct business tax measures to fall under the scrutiny of state aid rules. Under its effect-based doctrine, the European judicature has consistently held that the notion of state aid includes tax preferences having the effect of indirectly favouring certain undertakings by favouring certain productions or arrangements, except where the preference is justified from the nature and general scheme of the system. Moreover, the Commission practice first and the Court of Justice later have confirmed that the notion of selective aid includes certain tax preferences being selective irrespective of whether these are internationally harmful or not. Starting with his 1998 Notice on the application of state aid rules to direct tax measures, the Commission has been active in policing the tax regimes relating to the 1997 Code of Conduct on business taxation to tackle international tax competition. Against this background, the article provides a reasoned review of the application of state aid rules to international tax preferences and of the selectivity criterion. There is no reason not to carry out the analysis under the same criteria than the ones developed by the Court in reviewing tax discriminations or restrictions hindering the exercise of fundamental freedoms in the internal market, save where competition between undertakings is not affected. This parallel shall not, however, bring prejudice to the different nature and scope of state aid review. In examining the compatibility of fiscal aids with the internal market, the Commission enjoys a broader discretion, provided that it never produce results that limit or restrict the application of specific provisions of the TFEU such as the fundamental freedoms.