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December 21, 2015
Margrethe Vestager -- The Enforcer
by Amanda Athanasiou

Full Text Published by Tax Analysts®

Since Jean-Claude Juncker's European Commission took office November 1, 2014, Competition Commissioner Margrethe Vestager has been leading investigations into whether tax ruling practices of European Union member states constitute illegal state aid -- a role that, she says, requires a lot of patience.

Delmi Alvarez/ZUMA Press/Newscom (Delmi Alvarez/ZUMA Press/Newscom)"I always strive to be present as a person in whatever situation I am in," Vestager told Tax Analysts, adding that being responsible for decisions that influence many people requires one to understand various perspectives. "As a commissioner, you give directions and you often have the final say -- and that should make you listen carefully." Vestager often speaks of the importance of thorough deliberations and going the extra mile. And while she has pledged to listen to everyone "from the largest multinationals to the representatives of small firms," she is also committed to taking unhesitant action against companies receiving undeserved advantages.

Just four days after she took office, the International Consortium of Investigative Journalists (ICIJ) released hundreds of documents detailing tax rulings between Luxembourg and over 340 taxpayers, as well as negotiations between Luxembourg and PricewaterhouseCoopers LLP. The ICIJ described "comfort letters" it obtained as revealing secret deals to slash the global tax bills of multinational corporations.

The information revealed by the ICIJ didn't come as a complete surprise, since the documents had been used by France 2 television's Cash Investigation program in 2012 for a documentary on tax avoidance in Luxembourg, Vestager explained. But the information did demonstrate the importance of ensuring that the commission has access to member state tax rulings, she said. The commission is conducting impact assessment work on a requirement that companies disclose information on tax discipline on a country-by-country basis -- an idea that Vestager supports.

On November 20, 2014, Vestager announced that the commission would examine the rulings published by the ICIJ to determine whether new state aid cases were warranted. But Vestager remained committed to the completion of ongoing investigations into transfer-pricing-related tax rulings granted by Ireland to Apple Operations Europe and Apple Sales International, the Netherlands to Starbucks BV, and Luxembourg to Amazon EU Sarl and Fiat Finance and Trade Ltd. SA, even after the December 9 release of the ICIJ's second batch of data, which featured a broader representation of the Big 4 accounting firms as well as Walt Disney Co., Koch Industries, and Microsoft Corp.'s Skype unit.

After the release of this second cache of information, the commission announced that its state aid inquiries into tax ruling practices had been expanded to all member states. "We need a full picture of the tax rulings practices in the EU to identify if and where competition in the Single Market is being distorted through selective tax advantages," Vestager said, according to a December 17, 2014, press release.

While the LuxLeaks scandal didn't trigger the commission's investigation into the tax ruling practices of member states, the material helped raise public awareness about aggressive tax planning structures and will be used in the commission's assessments, according to Vestager. The U.K. House of Commons Public Accounts Committee hearing on Amazon, Google Inc., and Starbucks in 2012 was another important source of information, she said, offering similar praise for "the U.S. Senate's pioneering work investigating the tax planning schemes of U.S. multinationals like Apple."

In October, the commission's investigations into rulings by Luxembourg and the Netherlands regarding Fiat Finance and Trade and Starbucks, respectively, resulted in decisions that the countries had given selective tax advantages to the companies through rulings endorsing artificial methods of establishing taxable profits that failed to reflect economic reality. Luxembourg and the Netherlands were ordered to recover between €20 million and €30 million in unpaid tax from each company, the precise amount to be determined by the local tax authorities using a method established by the commission. During a November 9 meeting of the European Parliament's Economic and Monetary Affairs (ECON) Committee, Vestager said that the commission's decisions give clear advice on how the tax burden of the companies should be recalculated. "There is a lot of insight to be gained from that," said Vestager, who compared the prescribed methodologies to the OECD's work on preventing profit shifting through transfer pricing.

Vestager lists these two decisions as being among her greatest contributions to European tax transparency. They send a clear message that national tax authorities cannot give any company, however large or powerful, an unfair competitive advantage, she told Tax Analysts. But fair tax competition in Europe won't be achieved with state aid rules alone, Vestager cautioned. "The fight against tax evasion and tax avoidance can only be won with a combination of legislative action and competition enforcement."

This is not the first time Vestager has warned of the limits of state aid control. "Even though you have a hammer, not everything is a nail," she said during a September 17 address. "If we really want change, we also need more general measures to close the loopholes and to enable much more transparency when it comes to corporate taxation." She was speaking at a joint meeting of the Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (the TAXE committee) and the ECON committee.

Vestager has been a staunch advocate of an EU-wide common consolidated corporate tax base (CCCTB). At the outset of LuxLeaks, she said she hoped the work of the ICIJ would result in sufficient momentum to get a CCCTB passed. It would benefit not only citizens but also companies that are not engaged in aggressive tax planning, she said during a press conference following release of the first batch of ICIJ documents.

Vestager opposes enhanced cooperation among some member states regarding the CCCTB, citing the risk that other states may be scared away. Despite having instruments at her disposal to compel states to share information, including injunctions and infringement procedures, she believes that the commission at least needs CCCTB and automatic exchange of information on tax rulings to work in a dedicated, fast, and just manner. Vestager has also suggested that it may be necessary to provide guidelines for member states that explain in detail what is and is not permitted. "But for that, we need more case law," she added.

Asked at the November 9 ECON committee meeting whether BEPS could remove the need to expend further resources on promoting the CCCTB, Vestager said it could not. She emphasized the importance of the CCCTB not just for multinationals but also for smaller companies doing business in only a few member states, which could save money on tax advisers and auditors under a common tax base.


In February, the European Parliament launched the TAXE committee to investigate member state tax ruling practices. It quickly became apparent, however, that eliciting the necessary information from member states would be no easy feat. By September, over half of EU member states had refused multiple requests for information on their tax ruling practices by the committee, citing confidentiality concerns.

During the September 17 TAXE and ECON joint meeting, Vestager said she had initiated injunctions to get information from reluctant member states. "All member states are now cooperating with our inquiries," she said. Vestager added that, after deeper probes into tax rulings, "it seems the procedure for granting rulings in several member states actually does comply with OECD recommendations."

The commission has powerful tools to overcome member states' attempted refusals to cooperate, Vestager said. The state aid procedural regulation entitles the commission to request any information it deems necessary to investigate whether a member state's tax practice favors certain companies, she said, and the commission's communication on professional secrecy makes clear that member states cannot invoke professional secrecy to refuse these requests. "My job is to apply the state aid rules whenever there are doubts that tax rulings practices in EU countries comply with them -- I requested information from all EU countries to check this, and now they are all cooperating," Vestager explained.

Asked about the optimal balance between sufficient transparency to ensure fair competition and protection of confidential information, Vestager pointed out that there are EU rules to protect fiscal secrecy for taxpayers and that the commission is studying how companies can better specify where they have activities and pay taxes. "If more details are public, companies will think twice before they obtain illegal state aid," she added.

"TAXE wants us to be bold," Vestager said. Companies say they need to protect business secrets and fiscal secrecy; "that is why we are studying the impact that transparency would have on their business." According to Vestager, the TAXE committee's work shows that "a big Parliament majority works for more tax fairness in Europe" and thanks is owed to the chairman, Alain Lamassoure, and the co-rapporteurs, Elisa Ferreira and Michael Theurer, for their persistence in such an ambitious agenda.

Vestager voiced her support for the highest degree of transparency, not only between tax administrations but also toward the public. Maximizing transparency will establish market discipline with respect to corporate taxation and require companies to align taxes paid in countries where they have profits, with the added benefit of peer pressure on countries to abstain from unfair tax competition, she said.

Looking Ahead

Asked at the November 9 ECON committee meeting how she planned to process and prioritize the "thousands" of member state tax rulings now at the commission's disposal, Vestager said the commission is analyzing 300 rulings to find "obvious" cases that will provide the best learning experiences, particularly for member states and businesses.

While the commission has extended its inquiry into tax ruling practices to all member states, "this does not mean the commission will look at all individual tax rulings granted in the EU," Vestager said. She explained that the commission would target "sweetheart" deals that give selective advantages to particular companies. "I certainly hope and expect that member states and companies have got the message that artificial structures and transfer prices, as used in the Starbucks and Fiat cases, are illegal under state aid rules and will be followed up," she added.

Vestager declined to give any insight into the timing and nature of forthcoming decisions on Apple or Amazon. Although progress is being made in these investigations, "it is important that the appropriate time is taken to thoroughly assess both cases and judge them on their own merits," she said.

The tax ruling practice in Luxembourg is still a concern, although the country's cooperation has greatly improved, Vestager said. "We have requested some additional files regarding Luxembourg rulings which we are currently assessing," she added.

Asked about the predominant nature of inquiries and investigations underway, Vestager said the commission is analyzing individual tax rulings concerning transfer pricing arrangements, rulings that provide advance confirmation of the application of special tax measures, and taxpayer-favorable tax schemes. "In most cases, we see a combination of transfer pricing arrangements where companies try to shift profits from high-tax jurisdictions to low-tax jurisdictions via complex artificial structures," she said.

But the commission is looking beyond transfer pricing arrangements to examine structures as a whole, "something that certain member states tend to ignore." Vestager hopes, however, that the Starbucks and Fiat decisions will encourage states to correct this oversight.

Amanda Athanasiou is a legal reporter with Tax Notes International.
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