HomeEurope‘Devastating’ court loss cripples Vestager’s corporate tax crusade

‘Devastating’ court loss cripples Vestager’s corporate tax crusade

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Margrethe Vestager has faced down Donald Trump calling her a “tax lady” who hated the U.S. She has batted back complaints from the world’s biggest tech firm Apple over its tax affairs.

But the European Union’s antitrust chief fell at a crucial hurdle on Tuesday when the EU’s top court threw out her 2015 state aid case against Fiat’s tax deal with Luxembourg.

While Fiat’s €30 million in unpaid taxes is dwarfed by the €13 billion tax deal Ireland contracted with Apple, it’s the first case to get a final ruling from the EU courts. The court verdict is a shock because a lower court had confirmed the Commission view even as it knocked back decisions on Apple, Amazon and Starbucks.

Zach Meyers, a research fellow at the Centre for European Reform, said that Tuesday’s ruling was “devastating for Vestager’s broader strategy of using state aid laws to tackle aggressive tax practices.”

“Cracking down on sweetheart deals by using state aid powers was one of Vestager’s signature policies,” said Edmon Oude Elferink, a competition lawyer at law firm CMS.

Judges said on Tuesday that the Commission was wrong to assess Luxembourg’s tax deal as giving a “selective advantage” to Fiat and failed to take account of how Luxembourg tax law applies the so-called “arm’s-length” principle of how companies should treat their subsidiaries.

The Fiat case is one of nearly a dozen investigations that stemmed out of a tax task force set up in 2013 to hunt down sweetheart tax deals.

It was ambitious, taking on how Ireland, Luxembourg, the Netherlands and Belgium offered arrangements to multinational companies – most of them American, some of them Big Tech firms – and allowing them to funnel income from across the EU into an EU member country with low tax rates.

The ECJ ruling is “a catastrophe” for the Commission, said Cees Dekker, a consultant at Simmons & Simmons. “A key point is that judges said the Commission came up with its own version of the arm’s length principle instead of relying on Luxembourg’s law,” he said.

The high point was the 2016 order for Ireland to reclaim billions from Apple. Vestager made global headlines. Ireland appealed and won in 2020. The final ruling is still pending.

Vestager took a rare shot at judges on Tuesday, lamenting via Twitter that their Fiat decision was a “big loss for tax fairness.” She said in a statement that she would continue with her battle to make sure that “fair competition is not distorted” by favorable tax deals between governments and multinational corporations.

In some ways, Vestager has already won the political battle. EU countries that lured multinational firms with tax arrangements have largely changed their practices amid a big international push to clamp down on corporate tax avoidance.

The EU’s top court threw out Vestager’s 2015 state aid case against Fiat’s tax deal with Luxembourg | Julien Warnand/EPA-EFE

The legal battle, however, is lost. For lawyers, the court “brings legal orthodoxy” back to weighing government arrangements for companies, said Alfonso Lamadrid, a Brussels-based partner at law firm Garrigues. That means the Commission faces tighter conditions for how it can prove a government treats one firm better than others.

Socialist MEP Paul Tang, the chair of the European Parliament’s tax subcommittee, commiserated with a “painful moment for Vestager,” saying the court “doesn’t want to blame companies that benefit from an unfair but consistently applied tax system.”

He saw some glimmers of hope in the court ruling that doesn’t exclude the use of state aid in tax matters, saying it “leaves the door open to use competition rules when tax systems give companies an unfair, specific advantage.”

“And that happens all too often,” Tang said.

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