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Two Ships Colliding in the Night

Posted on September 26, 2016 by Gibson, Stuart

For more than a year, officials from the U.S. Treasury and the European Commission's Directorate of Competition have been engaged in a war of words over the commission's investigations into tax rulings granted years (sometimes decades) earlier by certain EU member states. When the dispute first flared up last year, officials from each side of the Atlantic met with their counterparts in an effort to understand the other's position and the reasoning behind it. Last May, when polite discussions had not quelled the dispute, Treasury Deputy Assistant Secretary (International Tax Affairs) Robert Stack observed that the U.S. and the commission were like two ships passing in the night.

Since then both sides have upped the ante. Earlier this month Treasury issued a white paper laying out in painstaking detail why the commission's state aid investigations ignore international transfer pricing rules, and why applying its rulings retroactively violates multiple laws and treaties. Within one week the commission fired back, directing Ireland to recover €13 billion in illegal state aid it had provided to Apple over the past 10 years, under tax rulings first issued a quarter-century ago.

Recently Stack and the leader of the state aid investigations, EU Competition Commissioner Margrethe Vestager, presented their positions to two different audiences in the United States. Stack defended the white paper in a presentation at the International Bar Association meeting in Washington. He said that Treasury had analyzed the 65 cases cited by the commission, and found no instance in which the commission had disagreed with the application of the arm's-length standard and thereby determined that a member had provided illegal state aid. He challenged the audience to read the retroactivity portion of the white paper, adding, "We have the better argument".

Vestager rebutted Stack's arguments during a panel discussion at Columbia University, where she was joined by one of her predecessors, Mario Monti (participating from Milan during the live-streamed event), and Nobel Prize-winning economist Joseph Stiglitz. They defended the investigations, the findings, and the retroactive application of the rulings. Stiglitz criticized the conduct of multinationals, which he accused of shirking their corporate responsibility to pay taxes by negotiating private tax rulings like the ones Apple won from Ireland.

The metaphorical ships that Stack mentioned in May appear to have collided.

Much of the recent criticism of the commission's cases has come from multinationals, which claim that their mere size should not expose them to greater scrutiny under the state aid rules. Seeming to address two U.S. criticisms at once, the commission recently announced an investigation into whether a Polish progressive retail tax regime that benefits small business enterprises over large ones confers illegal state aid (p. 1108.

It is one thing for an EU competition commissioner to be accused of targeting U.S. multinationals and misapplying state aid rules. It is quite another to stand accused of violating the commission's own code of conduct. According to documents released by the International Consortium of Investigative Journalists, Vestager's immediate predecessor, Neelie Kroes, did just that when she failed to disclose her interest in a Bahamian entity established to hold stock in the now-defunct Enron Corp. U.K. Home Secretary Amber Rudd is also implicated in the Bahama leaks release.

The OECD's base erosion and profit-shifting project continues its inexorable march to implementation. Mindy Herzfeld examines the progress of the BEPS project in light of growing criticism and questions whether the desired result could have been achieved through different, less disruptive means.


Stuart Gibson is editor of Tax Notes International.