Tax Analysts Blog

Exiting the EU: Fleeing the Vulgar Pride of the Brussels Empire

Posted on Feb 23, 2016

Hell hath no fury like a Brussels bureaucrat scorned. Consider European Union Competition Commissioner Margrethe Vestager. Questioned by BBC Radio 4's Today program on member states’ making “sweetheart deals about back taxes,” such as Google’s £130 million tax settlement with HM Revenue & Customs, which was announced January 22, Vestager responded, “It’s unfair. And sometimes it is also illegal state aid.” Pressed on whether she would investigate the Google deal, Vestager expressed an eager willingness. If someone were to write to the EU suggesting “maybe this is not as it should be,” Vestager declared, “then we will take a look.”

Vestager is the EU’s antitrust czar. And she is talking about investigating a tax settlement reached between Google and the U.K. authorities following a six-year audit that focused on two technical issues: (1) the amount of intercompany payments between the multinational enterprise’s U.K. and Irish subsidiaries; and (2) the treatment of stock option awards to employees. Why is an antitrust agency interested in the administrative resolution of a multinational enterprise’s tax dispute involving issues of transfer pricing and employee compensation? Vestager explained, “Everyone [should] have a fair chance of making it. If you are a small innovative company, well, the bigger one shouldn’t close the market.” In other words, Europe’s top antitrust official is concerned that Google’s heft may have allowed it to settle its U.K. tax dispute at terms that may not be available to a smaller rival. But a smaller rival is unlikely to have anywhere near the same amount at stake in any tax dispute. Moreover, under Vestager’s logic, any out-of-court settlement between a member state and a large business, in not just tax but also all other areas of public law, such as environmental or labor law, would be susceptible to review on competition grounds.

National governments may choose to settle rather than litigate disputes with businesses for a host of reasons, not the least of which may be weighing the likelihood of prevailing in court against the costs of expending litigating resources. The threat of a European Commission competition inquiry, however, would upend such a cost-benefit analysis, and rob any settlement of a sense of finality. To be sure, examining whether a tax settlement constitutes illegal state aid would break new ground under EU law. But Vestager is no stranger to extending the reach of the EU state aid rules.

Following in-depth investigations into member states’ tax ruling practices, launched in June 2014, Vestager concluded on October 21, 2015, that Luxembourg granted selective tax advantages to Fiat’s financing company and the Netherlands to Starbucks. She continues to look into whether tax rulings issued to Apple by Ireland and to Amazon by Luxembourg may have violated state aid rules. The fact that she was relying on a novel approach under EU law did not constrain her from applying that approach retroactively.

Brussels, now the de facto capital of the sprawling and imposing EU bureaucracy, had far humbler origins when in 1958 the founding members of the European Economic Community set up temporary offices there to house well-meaning officials charged with breaking down trade barriers within the emerging common market. But as with all bureaucratic endeavors insulated from electoral constraints, the pursuit of pragmatic economic goals quickly morphed into the pursuit of programmatic agency budgets. Public choice literature tells us that left to their own devices, policymaking officials will engage in empire-building: maximizing the trappings of office, and accumulating resources to pursue goals that represent their personal ideological commitments. And Vestager, along with other high, middle, and low-ranking EU officials ensconced in their plush EU offices in Brussels, seems to have done exactly that.

The actions of these unelected bureaucrats, reflected in regulations governing everything from product labels to recycling requirements, from maternity leave to migrants’ rights, have a profound and pervasive impact on the day-to-day lives of ordinary citizens of the member states. Indignation at what is perceived as imperiousness emanating from Brussels is driving the anti-EU movement in the United Kingdom, which has now scheduled a referendum on June 23 on whether to remain a member. In breaking with Prime Minister David Cameron and calling for the United Kingdom to leave the EU, London Mayor Boris Johnson underlined “the inability of people to kick out, at elections, the men and women who control their lives.

While Johnson’s statement may have been motivated by narrow political considerations — a desire to succeed Cameron as prime minister — it is rich in irony. During the heyday of the British Empire, at the turn of the last century, a few thousand civil servants in London’s Whitehall routinely made decisions with life-and-death consequences for millions in Asia, Africa, Oceania, Canada, and the Caribbean. Today, the United Kingdom has been reduced from an imperial power -- an empire on which the sun never set -- to little more than a province within the EU, a mere outpost of an empire run from Brussels. Leaving the EU may well impose significant financial costs. But like some of her former colonies, the country may conclude that those costs are worth paying for the privilege of being finally rid of the diktats of an unelected and unanswerable foreign bureaucracy.


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