SkatteNytt nr 9 2006 s. 538

Recension: EC State aid rules applied to taxes – An analysis of the selectivity criterion

Anmälare: Christina Moëll

Anmälan av: Mona Aldestam

Iustus Förlag, Uppsala 2005, 281 pp. ISSN 0282-2040, ISBN 91-7678-584-X.

1 Introduction

On 11 March 2005 Mona Aldestam defended her doctoral thesis ”EC State aid rules applied to taxes – An analysis of the selectivity criterion” at the Faculty of Law, Uppsala University, Sweden. Having been a member of the grading committee for her thesis and oral defence I hereby give a summarized presentation and evaluation of the thesis.

The review is structured according to the following outline: Section 2 deals with the subject of the thesis – its scope and delimitations. In Section 3 a presentation of the structure of the thesis is given. Section 4 is devoted to the aim and relevant questions posed by the author. In Section 5 some remarks are made in regard to the methodology chosen and the material used. Section 6 summarises the conclusions drawn in the thesis de lege lata and de lege ferenda. The review ends with some concluding remarks in Section 7.

2 The subject

The broader context of the subject is the State aid rules that are laid down in Article 87 to 89 of the EC Treaty. The focus is on the rules in Article 87(1) EC and their application to taxes. The research is further narrowed down to a study of the assessment of the selectivity criterion and the application of the derogation method. Article 87(1) reads:

”Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market (emphasis added).”

It is the phrase ”favouring certain undertakings or the production of certain goods” that constitutes the selectivity criterion. The crucial issue in applying Article 87(1) EC to a tax measure is thus to determine whether that measure works in favour of certain undertakings in the Member State, i.e. a derogation to the application of the tax system. The characteristics of such derogations are that they offer relief to the recipients of charges that are otherwise normally born by their budgets. It is the rule based on this criterion that is referred to as the derogation method.1 One of the points of departure for the thesis is then to determine more precisely what measures may constitute derogations in this context.2

Since the scope of the thesis is limited to a study of the derogation method and the selectivity criterion in Article 87(1) EC, the remaining criteria of Article 87(1) EC as well as Article 87(2) and (3) EC are dealt with only briefly and only to the extent that it has been considered necessary for an examination of the relationship among the different criteria of the article and for putting the rules in a proper context.3

The choice of subject inevitably puts the author in the challenging situation of having to deal simultaneously with two different fields of law: State aid law and tax law. The most obvious risk of embarking on such an expedition is that neither of the two perspectives will be sufficiently examined in depth. It is apparent from the text dedicated to the reader in the introductory chapter that the author herself is well aware of this danger.4 She clarifies that although readers knowledgeable in State aid law may find some parts superfluous or too detailed; these parts have been deemed necessary for those readers who are less informed in this field of law. The general impression though is that this delicate task has been carried out skilfully and that the thesis in regard to both State aid law and tax law contains enough analytical parts to avoid being too shallow.

The term seems to have been coined already by AG Darmon in his opinion in Joined Cases C-72 and 73/91 Sloman Neptun Shiffahrts AG v Seebetriebsrat Bodo Ziesemer der Sloman Neptun Schiffahrts AG 1993 ECR I-887.

Aldestam, p. 152–154.

Aldestam, p. 22.

Aldestam Section 1.7, p. 39.

3 The structure

The book is divided into two parts comprising seven chapters. In Part I (Chapters 1–3) the State aid rules are depicted from a more general perspective, while in Part II (Chapters 4–7) the focus is narrowed down to Article 87(1) EC applied to taxes.

Chapter 1 is the introduction to the thesis. Here, the subject, its aim and boundaries are presented. Furthermore, the author elaborates quite extensively on the material used for the research. Relevant previous research that has been carried out is accounted for and the structure for the subsequent parts of the book is described. The Chapter ends with some comments addressed to the reader.

In Chapter 2 an overview of Article 87(1) is given. The different criteria included in this article are described and divided into three categories concerned with: 1. the requirements placed on the donor of the aid 2. the required character and effect of the measure 3. the requirements placed on the recipient of the aid. Two of the more important principles governing the application of Article 87(1) EC – the effect principle and the market investor’s principle – are also briefly introduced. It is explained that the effect principle originates from the case law of the European Court of Justice in which the Court has stated that an assessment of the measure of State intervention should not be made with reference to its causes or aims but should be defined in relation to its effects. The market investor’s principle is also an outflow of the ECJ case law. It is described as serving the purpose of determining whether an undertaking receives an economic advantage which it would not have obtained under normal market conditions, or in other words if the transaction would have been pursued in a similar manner had the provider been a commercial actor.

Chapter 3 is devoted to provisions governing procedure, exemptions and categorization. Here Article 87(1) EC is placed into a somewhat larger perspective. The chapter provides an account of relevant procedural rules and the possibilities of having measures exempted according to various provisions in the EC Treaty.

The more specialized part of the thesis, Part II, begins with Chapter 4 which contains a description of the derogation method and how it was established. The author proceeds by analyzing what is currently considered a derogation. In addition, she examines the contribution of the tax expenditure debate to an improved understanding of circumstances under which a measure is considered a derogation. Some of the criticisms that have been made against the application of the derogation method are analyzed. The chapter also includes a discussion of possible alternatives to the derogation method and an analysis of the relationship between the selectivity criterion and the derogation method.

Chapter 5 contains an examination of the justification grounds for a derogation measure with reference to the nature or general scheme of the system. The aim here is to establish the current practice and to examine the possibility of justifying measures on these grounds. The chapter ends with an illustrative sketch showing the structure for the interpretation of the justification grounds.

In Chapter 6 an attempt is made to establish a benchmark for the derogation method and the consequences of the application of the system. In comparison to the previous chapters this chapter it is quite short, but it deals elegantly with some of the core issues of the thesis. Here it is concluded that to some extent the Commission seems to have been influenced by the tax expenditure debate in its assessments of justifying State aid measures on the basis of the nature or general scheme of the system. Furthermore, the author examines the current view of what is considered to be the point of departure in the application of the derogation method. She investigates whether it is a norm corresponding to what was considered a norm in the tax expenditure debate that is the point of reference or whether it is something else. She also deals with the question of when a measure is considered to constitute a ”true” derogation for the purpose of the application of Article 87(1) EC applied to taxes and she discusses the logic of the system in which these rules are applied. She questions whether the shortcomings of the system would be cured by an alternative way to view the application of the derogation method and the assessment of the selectivity criterion.

Chapter 7 is quite short (four pages). It contains some final comments.

4 The aim and relevant questions

The overall question asked is: When may a tax measure be classified as State aid? In order to find the answer to the question, the primary aim of the thesis is to identify the application of Article 87(1) EC to taxes and more precisely with regard to the assessment of the selectivity criterion and the derogation method. In addition to this de lege lata aim, a secondary purpose of the study is to explore this application of the rules de lege ferenda.

The author sets out to examine what exactly is currently considered to constitute a derogation from tax and what is currently considered to be the point of departure in the application of the derogation method. This overreaching purpose of the thesis is boiled down to several more specific questions, such as: Are there any options to applying the derogation method? What is the relationship between the application of the derogation method and the selectivity criterion? Are they currently considered to be separate assessments or are they considered fulfilled simultaneously?5

An additional purpose of the thesis is to examine the current possibilities for justifying the selective nature of the measure on the grounds of the nature or general scheme of the tax system. Furthermore the study aims to undertake an analysis of the logic of the current method of applying Article 87(1) EC to taxes, with regard to the application of the derogation method and the selectivity criterion. The intention is also to discuss other possible ways of viewing the application of these rules that would remedy any shortcomings detected in the system currently being applied.

In regard to presenting the aim and relevant questions for the thesis the author emphasizes that a distinction must be made between a political analysis on the one hand and a legal analysis on the other hand. She makes the following remarks: ”Needless to say, the EC State aid rules are of great political interest, and political pressure undoubtedly influences legal decision making. The existence of political influences may make a legal analysis difficult; nonetheless, the aim of this dissertation is to pursue a legal analysis.”6

It could be discussed whether this is a well chosen point of departure and it could even be argued that it is not possible to succeed in such a mission since law and politics are inevitably intertwined. This seems to be especially apparent in the field of tax law, for the very reason that taxes are often used as the very finest means to achieve a multitude of different political goals. It should be mentioned that the author elaborates further on the subject of law and politics in Chapter 2, but from a slightly different angle of approach. Here she indirectly touches upon the issue by referring to the ECJ’s statement that an aid measure will be judged by emphasizing its purpose.7 She draws attention to the fact that this may seem contradictory to another statement made by the Court that is also referred to in the thesis,8 namely that ”Article 92 (Article 87 EC) does not distinguish between the measures of State intervention concerned by reference to their causes or aims but defines them in relation to their effects.”9 Further confusion is added to the issue when the author explains that a distinction is made between a subsidy and an aid measure and that the aid measure is characterized by the fact that it aims to achieve a certain goal or objective, whereas a subsidy does not.10 This statement seems somewhat contradictory to the conclusion drawn by the author that ”In establishing whether or not an aid measure is incompatible with the common market, the message seems to be that the effect on the recipients is the important variable rather than the aim of the body granting the aid.”11

The purpose here is not to make any severe criticism of this delimitation made by the author, but mainly to give some examples as to the difficulties that it may lead to. It should be underlined however that fortunately the author has not been true to her aim to separate law and politics. On the contrary the relationship between State aid law, tax law and politics can be detected all throughout the thesis. Nevertheless it would no doubt have been interesting and valuable to know more precisely how the author intended to successfully separate political influences from a legal analysis in her research and which difficulties and obstacles that she expected to encounter in this regard.

Aldestam, p. 21.

Aldestam, p. 22.

Case 30/59 De Gezamenlijke Steenkolenmijnen in Limburg v High Authority of the ECSC 1961

ECR 1, p. 19. Aldestam, p. 52.

Aldestam, p. 41.

Case 173/73 Italian Government v Commission 1974 ECR 709, para 13. Aldestam, p. 41.

Aldestam, p. 52.

Aldestam, p. 52.

5 Method and material

When scrutinizing a doctoral thesis considerable attention is normally paid to the methodology chosen for the research project. In this thesis the Introduction contains a section with the title ”Method and materials” where one expects the author to have elaborated on the methodological issues. The section runs to 14 pages. The main part of the text however is devoted to the material. It begins with a description of the control system upon which the State aid system rests and the role played by the Commission in this system. It is explained that the Commission’s decisions within the area of State aid are an important source of law and that they are based on Commission case practice and on the case law of the European Court of Justice and the Court of First Instance, as well as on policy frameworks. The author clarifies that the Commission’s policy frameworks are the results of the long absence of more formal regulatory instruments and that although they are not formally binding, they are rules of crucial importance to everyone concerned with EC’s State aid rules. It is against this background that the author has found it appropriate to choose e.g. two Commission documents as sources for her analysis: the Commission notice on tax measures issued in 1998 and the report on the implementation of this notice, published in 2003. The section ends with an interesting overview of the tax expenditure debate and some reports published on this topic. The reason for including tax expenditure issues is that a method that is similar to the derogation method appears to have been, and still is, applied to identify tax expenditure.

Considerable attention is thus paid to the material on which the study rests. However, very little is however clearly expressed concerning the method used in this particular thesis. One could of course argue that there is a very close connection between method and material and that the method is more or less a result of the sources chosen for the research. The following statement made by the author may serve as an example of the close link between method and material in the thesis:

Aldestam, p. 32.

”In order to analyse the Commission’s notice on tax measures and the 2003 implementing report, some of the relevant judgments and decisions on which these documents are based are analysed. However, in situations in which this method has not proved to be sufficient to clarify the issue being discussed, other judgments of the ECJ and the CFI and Commission decisions ... are analysed. (emphasis added)”12

Nevertheless, it must be considered as a shortcoming that the methodology applied is somewhat unclearly expressed.

6 Conclusions de lege lata and de lege ferenda

Regarding the relationship between the application of the derogation method and the selectivity criterion, an analysis of relevant Commission decisions appeared to show that the application of the derogation method sometimes has been considered to fulfill the requirement of selectivity automatically, and sometimes not. In the latter case the application of the derogation method was supplemented by an assessment of whether or not the measure may be considered as a general measure.

Regarding the possibilities of justifications it was concluded that only measures based on objectives inherent in the system may be justified. Moreover, the author concluded that the possibility of justifying measures on the basis of objectives inherent in the system, in turn, appears to contain three different possibilities of justification: 1) if the measure is based on basic or guiding principles of the tax system, 2) if the measure is based on objective differences between tax payers, and 3) if the exemption follows from the logic or nature of the system.

The last of these tree possibilities of justification is considered as the most interesting for the purpose of the thesis. Regarding this ground for justification the analysis shows that it has been used in a couple of cases and the conclusion is drawn that the Commission has used this ground for justification to consider certain derogations justified because they were outside the scope of the tax system in question.

The author questions this application. The point of departure in applying the derogation method is the existing tax system and not a theoretical norm, as in the 1970s and 1980s tax expenditure context. It is within the competence of the Member States to determine the scope of the tax. Thus, measures that fall outside the scope should not be viewed a part of the existing tax system and should consequently not be considered as a ”true” derogation from the tax system. Moreover, if the measure should not be considered as a derogation it should not need to be justified.

Against this background a modified method for the application of the EC State aid rules to taxes is presented. According to this proposal the ground for justifying an exemption, on the basis that it follows from the logic or nature or the system, is transformed from a ground for justification to a subjective part of the derogation method. Furthermore, it is proposed that the application of the derogation method and the selectivity criterion always should be assessed separately.

7 Concluding remarks

As has been described above the study deals with EC State aid rules and it is limited to tax measures distorting competition within the Community. It does not cover tax measures that might distort competition between Member States and Non-Member-States (third countries). This is a good and relevant limitation since trade between EC Member States and third countries are not primarily covered by the State aid rules in Articles 87 to 89 EC. For such transactions with the ”outside world” it is instead WTO anti-subsidy law in Article VI and XVI of GATT 1994 and the Agreement on Subsidies and Countervailing Measures that applies. The WTO rules have been implemented into EC law in Council Regulation 2026/97.13 In WTO anti-subsidy law the concept of a ”subsidy” covers indirect transfers by governments which confer benefits on specific enterprises or industries. Such an indirect transfer could take the form of revenue forgone, for instance, if a government does not collect taxes which would otherwise have been due.14 The EC anti-subsidy legislation closely follows the WTO rules and it thus also deals with indirect transfers in the form of derogations from having to pay certain taxes. In Article 2 of the Council Regulation a subsidy is defined as i.e. ”government revenue that is otherwise due is forgone or not collected (for example fiscal incentives such as tax credits)...”.

Although there are of course important differences between EC State aid law and WTO anti-subsidy law there are also significant similarities. It is therefore somewhat remarkable that the book is completely silent as to the existence of the WTO rules. One would imagine that there might be interesting connecting points between the two sets of rules. Some lessons could probably also be learned from the WTO case law and the legal literature on the subject of WTO anti-subsidy law. It is quite conceivable that the very same scenario could simultaneously be the target of both WTO anti-subsidy law and EC State aid law and thus caught by the two different sets of rules. A situation could occur where a tax relief offered by an EC Member State is challenged by another EC Member State as well as by a third country that is a Member of the WTO. This would inevitably give rise to some interesting legal problems.

No objection should however be raised as to the decision not to include the WTO rules in the research. This would have expanded the subject well beyond any reasonable limits. The concluding comment is merely that the author should perhaps have drawn the reader’s attention to the existence of the WTO rules.

In sum, the book no doubt fulfils its aim of identifying the application of Article 87(1) to taxes, with particular regard to the application of the derogation method and the selectivity criterion. This is definitely an admirable achievement taking into consideration that the author has had to crisscross between two of the more complex fields of laws. In addition, it should be emphasized that the book is well written and the reasoning is generally clear and easy to follow. The overall assessment is that the book is an important and impressive contribution to the expanding literature in both EC State aid law and EC tax law. Against this backdrop it can be warmly recommended to scholars as well as practitioners dealing with either of the two fields of law and seeking to understand how the EC state aid rules apply to taxes.

Christina Moëll är verksam som universitetslektor vid juridiska institutionen, Lunds universitet.

Council Regulation (EC) 2026/97 of 6 October 1997 on protection against suzidised imports from countries not members of the European Community, OJ L288, 21 October 1997, p. 1–33.

See Article 1.1 (a)(1)(ii) in the Agreement on Subsidies and Countervailing Measures and for the interpretation of the concept of ”foregoing revenue other wise due” WT/DS108/AB/R, United States Tax Treatment for Foreign Sales Corporation, para 90.

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