Identifying Illegal Subsidies

By Mason, Ruth | American University Law Review, January 1, 2019 | Go to article overview

Identifying Illegal Subsidies


Mason, Ruth, American University Law Review


INTRODUCTION

In 2016, the European Commission dropped a bombshell-it ordered the U.S. technology giant Apple to repay Ireland subsidies of $14.5 billion, plus interest. The Commission's decision enforced the prohibition on state aid found in the Treaty on the Functioning of the European Union (TFEU). The state-aid rules prevent European Union (EU) Member States from distorting market competition by granting subsidies that are protectionist or that operate as import or export subsidies.1 The Commission found that Ireland illegally subsidized Apple by allowing it to pay too little Irish tax.2

This Article uses controversy over Apple3 and other recent EU stateaid cases to explore a defect common to many anti-subsidy regimes that limit states' ability to use subsidies to interfere with private competition, including World Trade Organization (WTO) rules, softlaw agreements, and even the U.S. Constitution. Each regime applies not only to cash subsidies and regulation but also to taxation.4 Antisubsidy regimes typically rely on tax-expenditure analysis to identify subsidies delivered through the tax law or tax administration.5 Under this approach, a state confers a tax subsidy when it deviates from its own generally applicable domestic law or procedure to reduce taxes for particular enterprises, such as exporters or multinationals. Special tax reductions could take the form of reduced tax rates, tax deductions, tax credits, or the like. This tax-expenditure approach to identifying subsidies works well when both the domestic law baseline and the "special" or deviating provisions are readily identifiable.

But this Article argues that the approach becomes intractable when the subsidy reviewer and the accused state disagree over how to define the baseline from which tax expenditures (and therefore illegal subsidies) can be measured. This baseline problem is familiar to the tax-expenditure debate, and despite the enormous importance of the tax-expenditure concept to tax policy analysis, fifty years of study has brought little progress in finding a neutral tax baseline against which tax expenditures can be judged.6

As just one example, tax-expenditure analysis fails in cases involving "structural" tax rules.7 Structural rules are the background rules of the tax system, including the taxable unit, the accounting period, progressive tax rates, and the like. Under a tax-expenditure approach that relies exclusively on domestic law to formulate the baseline, the subsidy adjudicator would incorporate all structural rules into the baseline with the result that no structural rules would be regarded as tax expenditures, and, therefore, no structural rules would be regarded as conferring illegal subsidies. But an approach that regards all structural rules as permissible, no matter their actual effects on cross-border commerce, is underinclusive.8 At the same time, however, it is unclear how a subsidy adjudicator ought to handle structural rules under tax-expenditure analysis if such rules will not be automatically incorporated into the reference base.

This Article argues that the Commission's need to evaluate tax provisions that were not easily cognizable under traditional taxexpenditure analysis-including structural rules-led it to adopt a new approach to identifying illegal subsidies in recent cases. instead of evaluating Member State tax rules against a baseline consisting of the challenged state's own generally applicable tax law, the Commission began to evaluate Member State tax rules against external norms.9 In some cases, the Commission used an internationally accepted norm; in others, the Commission judged Member State taxes against its own view of good tax policy.

Failure to adequately explain its departure from the reference-law approach left the Commission vulnerable to criticism that it exceeded its institutional authority. Member States officials-especially those from the small states targeted for state-aid review-argued thatjudging national tax rules by reference to external benchmarks threatened tax diversity in the European Union and invaded the reserved tax powers of the Member States. …

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