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State Aid -- Reaping the Fruits of Transparency

Posted on January 5, 2017 by Gibson, Stuart

As 2017 begins, it is useful to review the events of the past year and reflect on how they might presage future developments. In that context, 2016 might be called the year of state aid. Last year saw the culmination of lengthy investigations by antitrust lawyers at the European Commission into favorable tax rulings that European governments -- notably Ireland, Luxembourg, and the Netherlands -- had granted to large multinationals like Apple, Fiat, McDonald's, and Starbucks.

TNI's person of the year, EU Competition Commissioner Margrethe Vestager, sees state aid not as an EU power play, but as a product of ever-increasing tax transparency. Vestager told Tax Analysts that she views the state aid cases as a natural outgrowth of the disclosure of tax rulings that EU member tax administrations had sought to keep secret from the public, crediting whistleblowers and journalists with helping to bring tax rulings into the sunlight. Responding to criticism that her office is retroactively rewriting international tax law in Europe, Vestager countered that had her office known of the rulings earlier, it would have acted earlier. To critics who claim she is unfairly targeting U.S. multinationals, Vestager noted the irony in the fact that some of the most high-profile cases -- such as Apple -- grew out of hearings conducted by the U.S. Congress.

That irony is not lost on Edward Kleinbard, professor of law and business at the University of Southern California School of Law. Kleinbard coined the term "stateless income," to highlight sophisticated corporate tax planning that can, in some cases (like Apple), result in billions of dollars of income being taxed nowhere. In fact, before the European Commission began its state aid investigations, Kleinbard published a paper showing how a multinational like Starbucks could create stateless income.

Many in Europe and the United States have criticized the commission's work in the state aid cases. They include treasury officials in countries targeted in the state aid investigations, such as Irish Finance Minister Michael Noonan, as well as U.S. Treasury Secretary Jacob Lew. Noonan led efforts to persuade his country's parliament to appeal the Apple ruling to the European courts, despite the potential revenue windfall should Apple ultimately be held liable to repay the €13 billion in state aid. Lew has led U.S. opposition to the commission's work. On the eve of the release of the Apple ruling, his Treasury Department issued a white paper containing an exhaustive discussion of past state aid rulings and explaining why the current investigations depart from past practice.

If the state aid cases were spawned by greater transparency before 2016, then 2017 should see a veritable renaissance in investigations driven by wholesale disclosures of both personal and corporate tax and financial information. This is because disclosures during 2016 highlighted the most serious abuses of the current system. Most notable was the release of the Panama Papers, which showed how the rich and powerful use secrecy to avoid paying the taxes they owe. That release led, in turn, to calls for countries to create registries of beneficial ownership. Last year also saw the growth in countries agreeing to the OECD's common reporting standard, as well as to automatic exchanges of information. With the further exchange of country-by-country reports beginning in 2017, tax administrations will have a wealth of tax and financial information to begin investigations aimed at improving tax compliance.

Stuart Gibson is editor of Tax Notes International.