Vestager’s tax crusade faces judgment day

Rulings involving Apple, Fiat and Starbucks come into the spotlight.

EU competition chief Margrethe Vestager faces a white-knuckle ride over the next two weeks as her landmark tax rulings involving the likes of Apple and Starbucks take center stage at the European courts.

If the EU General Court in Luxembourg shoots down or undermines her crusade against sweetheart tax deals, it will deliver a major blow to the Dane’s political credentials, just before she is expected to take up an even more powerful position overseeing EU digital and antitrust policy.

On Tuesday and Wednesday, the court will hear arguments about the legitimacy of her decision in 2016 that Dublin should claw back €14 billion from Apple (€13 billion, plus interest) because of years of underpaid taxes. A number of Apple’s top executives, including Chief Financial Officer Luca Maestri, will attend. Then on September 24, the same panel of judges will deliver its verdict on the first decisions that were challenged in court, involving Fiat’s tax affairs in Luxembourg and Starbucks in the Netherlands.

It is difficult to exaggerate the importance of these court proceedings for Vestager because her steely reputation is heavily invested in the radical strategy of defining countries’ tax deals for multinational companies as illegal subsidies.

During her first five-year mandate (2014-2019) as commissioner, Vestager on seven occasions ordered member countries to recoup unpaid taxes from multinationals, zeroing in on “comfort letters” with which governments offered fiscal perks.

If the Commission wins, EU officials are likely to continue their tax campaign, as they have open cases involving rulings for Ikea, Nike (both in the Netherlands) and Finnish food and drink packaging company Huhtamäki (in Luxembourg) pending, and probably others in the pipeline.

The Commission’s big concern will be that it has lost an unusual string of cases in the state aid sphere in recent months, even one involving Belgium’s sweetheart tax deals. Importantly, however, the court ruling on Belgium endorsed the Commission’s fundamental right to tackle tax as a state aid matter — something questioned by EU countries and multinational companies.

Apple’s case will be closely watched by the U.S. Treasury department, which is arguing with the iPhone-maker that the disputed profits should have been taxed in the U.S.. The court rejected the U.S. government’s application to intervene in the case.

Vestager certainly has political support.

“We are satisfied with the outgoing European Commission’s tax policy record. When the Commission could act, particularly in the state aid cases, it was quite brave,” Chiara Putaturo, a policy adviser at charity Oxfam International said.

Putaturo said the Commission’s use of its state aid powers could pressure governments to negotiate fair tax reforms within the Organisation for Economic Cooperation and Development (OECD). The OECD is expected to draw up recommendations detailing which country has the right to tax and proposing minimum effective tax rates by the end of 2020, with the outlines of the architecture already agreed in January, Putaturo added.

Fiscal revolution?

The much-debated legal question at the heart of the Apple hearing will be whether the Commission was entitled to apply the “arm’s length principle” to transactions between Apple group companies in Ireland. The big suggestion is that Apple kept tax low in Ireland by inflating prices in intra-group transactions. The “arm’s length principle” is a way of judging whether the intra-group prices are in line with transactions between independent companies.

Ireland and Apple argue that the principle cannot be applied because it was not part of Irish tax law. But according to the Commission, the principle flows directly from EU law.

The judges could settle the matter one week later, as it had already been discussed during the Fiat and Starbucks hearings.

“If the court says that it inherently results from EU law that you have to treat independent companies and groups of companies the same way, that would be a big change in the thinking and functioning of international fiscal law,” said Raymond Luja, a tax law professor at Maastricht University.

EU rules would then automatically close loopholes that national authorities try to fix one at a time, he said.

During the Starbucks hearing, Ireland’s lawyer Paul Gallagher likened the Commission’s shifting interpretation of the arm’s length principle to the fictional character Humpty Dumpty, who chooses the meaning of words at his own discretion.

Commission lawyer Paul-John Loewenthal argued that there is only one arm’s length principle, and that it is used to determine to what extent a company was selectively granted an advantage — the criterion for EU state aid rules to kick in.

The court could avoid a decision on the principle, however.

“There are more factual elements the court could turn to in any of these cases that would not require it to rule on the arm’s length principle,” said François-Charles Laprévote, a competition lawyer at Cleary Gottlieb.

Laprévote said the Commission’s secondary line of arguments, which held that the tax rulings also favorably deviated from national law, risked running into the principle of administrative reality, as EU officials may not be sufficiently equipped to carry out numerous in-depth calculations and compare them to national tax law.

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