¹ Schön, , Taxation and State Aid Law, EU Common market law review 1999, 911-936.Google Scholar

² See WTO cases. US- Treatment of Foreign Sales Corporations (WT/DS108/R, WT/DS108/AB/R, WTO/DS108/RW and WT/DS108/AB/RW).Google Scholar

³ See Commission Press Release on the 11 July 2001 announcing a “large scale State aid investigation into business taxation schemes” obtained from http://www.europa.eu.int/rapid . This initiative has resulted in 15 decisions that declared incompatible 15 tax schemes on 14 Member States.(see below)Google Scholar

⁴ Ehlermann, former Director General of Commission D.G. Competition, best expresses how the rules on State aids may interfere with national sovereignty: “State aid rules limit the freedom of governments, even of parliaments, to grant financial advantages to certain sectors of their economy, irrespective of the technique that may be used including tax and social security rebates. State aid is therefore a serious and highly sensitive interference in national sovereignty“. Ehlermann, State Aid Control in the EU : Success or Failure, Fordham International Law Journal 18/1995, 1212, 1218.Google Scholar

⁵ In the Philip Morris case (C-730/79, Philips Morris Holland BV v. Commission [1980], ECR 2671, para. 11), the Court adopted a test for determining the existence of distortions to competition: “When financial aid strengthens the position of an undertaking as compared with other undertaking competing in intra-Community trade the latter must be regarded as affected by that aid“. Van der Esch, Ayudas de Estado y Anti-Dumping, Noticias CEE 1987, 85 n. 33., supports this approach on the fact that State aids interfere with a system of competition among undertakings on the basis of their own efforts. Arpio Sanacruz does not consider the distortion to competition an element of the concept of aid but a condition of incompatibility with the common market. Arpio Santcruz, State Aids in EC law EUI Ph.D. Thesis 1996.Google Scholar

⁶ Case 30/59 Steenkolenmijnen [1961] ECR 1 at 19; C-173/73 Italian Republic v Commission (First Italian textiles) [1974] at paragraph 13; C-387/92, Banco Exterior de España [1994] ECR I-877 at 12; C-200/97 Ecotrade [1998] ECR I-907; C-295/97 Piaggio v Ifitalia and Ministero della difesa [1999] and Case C-143/99 Adria Wien Pipeline and Wietersdorfer & Peggauer [2001] ECR I-8365. In C-56/93 Belgium v Commission [1996] the Court found that a measure justified on commercial grounds is not a State aid even if it also pursues a political aim. In Case T-504/93, Tiercé Ladbroke SA v. Commission [1997] ECR II-923, the Court of First Instance stated that the causes or aims of the State measures fell to be appraised only in the context of determining whether such measures were compatible with the common market.Google Scholar

⁷ Case 30/59 Steenkolenmijnen [1961] ECR 1.Google Scholar

⁸ Instigated by the so-called “Monti Memorandum” of 1996, the EU process against harmful tax competition commenced when in 1997 the ECOFIN Council adopted unanimously a package of measures on direct taxation aimed at tackling tax evasion and the erosion of tax bases within the Union. Among them, a Code of Conduct for business taxation that sets forth the criteria to identify harmful tax measures. On 29 November 1999 a Group of Experts appointed to identify such measures within the existing tax regimes of the Member States presented a list of 66 tax schemes that were considered as having harmful effect. However, along 2000, States accorded to limit thmovement against harmful tax competition to three main areas -finance branches, holding companies and headquarter companies- and adopted a special set of guidelines to assess tax schemes in those three areas. Finally, on the ECOFIN Council on 3 June 2003, the so-called tax package was adopted, though the effects of the Code of Conduct are still non-binding. (Conclusions of ECOFIN Council). See PINTO (2003) “Tax Competition and EU Law“, Kluwer Law International.Google Scholar

⁹ Paragraph J of the Code of Conduct acknowledged that some of the measures covered by the Code might fall within the scope of the provisions on State aids in Articles 92 to 94 TEC (now 87 to 89). The Commission was asked to publish guidelines on the application of State aid rules to measures relating to direct business taxation. The Commission did so on December 1998 [Commission Notice on the application of State aid rules to measures relating to direct business taxation (O.J. C 384, 10.12.1998)]. It expressly stated that State aid provisions would also contribute through their own mechanism to the objective of tackling harmful tax competition and gave the criteria that would prevail in the application of State aids to tax incentives. In practice, the Commission gathered together criteria that already existed within the case-law of the Court of Justice or the practice of the Commission.Google Scholar

¹⁰ See judgement of the Court of First Instance in Ramondín [Joined cases T-92/00 and T-103/00 Diputación Foral de Málaga y Ramondín Cápsulas v Commission -hereinafter Ramondín-[2002] ECR II-1385, para. 10 et sub and Commission Decision in Spain – Newly established firms in Alava (OJ L 314/1, 18.11.2002)].Google Scholar

¹¹ The Dutch regime for international finance activities, also included within the Commission's investigation, provides for the possibility of creating a tax-free reserve to cover the risks connected to the financial activities up to a certain percentage of the total benefits [see C-51/2001 Netherlands – International Financing Activities (OJ L 180/52, 18/07/03) and MEUSSEN “National Report on Netherlands“ for the EATLP Conference on Tax Competition in Europe (2003.01.25) http://www.eatlp.org, Lausanne 2002].Google Scholar

¹² Commission Decision 96/369/EC of 13 March 1996 concerning fiscal aid given to German airlines in the form of a depreciation facility (OJ L 146, 20.06.1996). Though the final advantage was deemed to be a deferral of the tax payment, the immediate effect of the measure was a reduction in the tax base. It is interesting to note that the Commission in this decision considered that the beneficiaries had reduced their taxable income with respect to the amount that would normally be due absent the special provision‥Google Scholar

¹³ C-46/2001 France – centrales de tresoreries adopted 12/12/02 C/2002/4827/3.Google Scholar

¹⁴ Foreign commercial and industrial firms were exempted from corporation tax in Greece [E-4/2000 Greece – taxation of foreign commercial and industrial firms (Act no 89/97) (OJ C 108 on 4/5/2002).] Gibraltar exempt companies are not subject to corporate tax either [E-7/2000 Ex C-53/2001 United Kingdom – Gibraltar Exempt Companies]. In some cases, the beneficiaries were exempted from some indirect taxes. For example, Belgian coordination centres, apart from applying a different regime of calculation of the tax base are exempted from the “droit d'apport”, the “précompe inmobilier” and the “précompte mobilier” [C-15/2002 Belgium – Coordination Centres. (OJ L 282/25, 30/10/2003)]. C-15/2002 Belgium – Coordination Centers). Gibraltar Exempt Companies and Qualifying Companies are exempted from stamp duties [C-52/2001 United Kingdom – Gibraltar Qualifying companies and decision quoted] and companies established in Madeira do not pay local taxes, property tax and contribution fees [N-222/A/2002 – Portugal Zona Franca of Madeira for the period 2003-2006 approved on 11.12.2002].Google Scholar

¹⁵ E-1/98 Ireland – International Financial Centre and Shannon customs-free airport zone. Proposal for appropriate measures (OJ C 395/14, 18.12.98). C-55/2001 Finland – tax regime of captive insurance in Aland Islands (OJ L 329 of 5/12/02). C-52/2001 United Kingdom – Gibraltar Qualifying companies.Google Scholar

¹⁶ For the assessment of the advantage in cases involving positive benefits, the Commission practice and the Court case have developed a criterion: using the market as a benchmark. If it is understood that the recipient would have obtained the same conditions in the market, the measure is not considered a State aid (C-56/93 Belgium v Commission [1996] ECR I-723). On the contrary, if the undertaking has received a better treatment from the State than it would have achieved in the market, the measure is deemed to be an aid (C-142/87 Belgium v Commission-Tubemeuse [1990] and Spain v Commission [1994] and Air France [1996]). This “private investor principle“ becomes more difficult to evaluate in cases where the State “hides” behind a semi-public institution (XXIX Commission Report on Competition Policy). On the impossibility of using the market as benchmark in tax cases, see SCHÖN (1999), p.923.Google Scholar

¹⁷ See Belgium allegations in C-30/2002 Belgium – Tax ruling System for US FSC (adopted 24/06/03, not yet published) and C-15/2002 Belgium – Coordination Centres (quoted above at footnote 14). In similar terms, Netherlands argued that its regime intended the repatriation of benefits to the country (C-51/2001 Netherlands – International Financing Activities) and Ireland sustained that its scheme for foreign income was to bring back dividends to Ireland so as to help Irish unemployment considering that had the dividends not been repatriated, no tax liability would have arisen (C-54/2001 Ireland – foreign income [L 204/51, 13.08.2003]).Google Scholar

¹⁸ Jimenéz, Martìn, El concepto de ayudas de Estado y las normas tributarias: problemas de delimitación del ámbito de aplicación del art. 87.1 TCE, Noticias de la Unión Europea n 196/2001. The problem with this argument to validate tax incentives to attract new investment is that it implies a recognition that the operations are purely tax-driven, a result which is in principle contrary to the spirit of fair competition and common market. See CFI on Ramondin (quoted above at footnote 10) at para.67, and Decision on aid granted by the city of Hamburg (Commission decision 91/389/EEC of 18 July 1990 on aid granted by the city of Hamburg (O.J. L 2.8.91), where the Commission interpreted that “the institution of a system of ensuring that competition is not distorted means that undertakings should determine their location on the basis of autonomous decisions, i.e., not influenced or swayed by aid“(para. IV.2).Google Scholar

¹⁹ Paragraph 55 on C-30/2002 Belgium – Tax ruling System for US FSC adopted on 24/06/03, not yet published C-30/2002.Google Scholar

²⁰ The close link among the two conditions, provision of a benefit and existence of selectivity, has led some authors to analyze these two requirements together (See Martìn Jimenéz, Shön and Pinto, EU and OECD to Fight harmful Tax Competition: Has the Right Path Been undertaken?, Intertax 2/1998, 386-411). In this study I have chosen to analyze them separately to follow the criterion of the ECJ (See Case 143/99 Adria-Wien Pipeline).Google Scholar

²¹ Commission's Notice, para. 13 and 14.Google Scholar

²² Id.Google Scholar

²³ The exception based on the nature and general scheme of the tax system was first recognized by the ECJ in C-173/73, Italy v. Commission.Google Scholar

²⁴ Shön refers to the “ability to pay” principle as a general principle recognized in all European tax systems. He assures that “One should admit that only tax rules which try to describe the parameters of the tax basis according to the ‘ability to pay’ principle belong to its ‘nature and scheme'“(Shön, Op. Cit, p.927). Prof. Martín Jiménez considers that the principle of equality and non-discrimination in tax matters constitutes a better expression of this theory (Martìn Jimenéz, Op. Cit, p.17). In a recent decision the Commission has referred to the principles of equality and progressiveness as expressed in Article 31 of the Spanish Constitution when assessing the compatibility of some Basque Country incentives [Commission Decision on 11 July 2001, 2002/806/EC(OJ L 279/35, 17.10.2002)].Google Scholar

²⁵ Commission's Notice, para. 23 et seq.Google Scholar

²⁶ Bacon, State Aids and general measures, Yearbook of European Law 1997, 306–309. This author introduces the concept of proportionality within the concept of aid itself and not only as a means of measuring the exceptions of Article 87.2 and 87.3 TEC.Google Scholar

²⁷ E-3/2000 Sweden – tax regime of foreign insurance companies appropriate measures on Commission Recommendation SG (2001) D/289718, 12.07.2001; C-45/2001 France – headquarters and logistic centres. Press release on 16/05/2003; C-47/2001 Germany – foreign companies coordination centres (OJ L 177/17 16/07/2003); C-48/2001 Spain – Vizcaya coordination centres (OJ L 31/26 6/02/2003); C-49/2001 Luxembourg – Coordination centres (OJ L 170/20, 9/7/2003); C-50/2001 Luxembourg – Finance Companies adopted on 19/10/2002; C-51/2001 Netherlands – International Financing Activities (OJ L 180/82, 18/07/03); C-15/2002 Belgium – Coordination Centres.(OJ L 282/25 30/10/2003) and C-30/2002 Belgium – Tax ruling System for US FSC adopted 24/06/03, not yet publishedGoogle Scholar

²⁸ C-54/2001 Ireland – foreign income (OJ L 204/51, 13.08.2003).Google Scholar

²⁹ See CARRERO, CALDERON, Manuel, José (2003) “Análisis de la Normativa Española sobre Precios de Transferencia desde una PerspectivaInternacional„ Comunitaria y Constitucional“ (publication forthcoming), at p.37.Google Scholar

³⁰ OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD, 1995.Google Scholar

³¹ C-47/01 Germany – foreign companies coordination centres (OJ L 177/17, 16.07.2003).Google Scholar

³² C-15/2002 First Belgium Coordination Centre, C-49/2001 Luxembourg Coordination Centres and C-50/2001 Luxembourg Finance companies, C-48/2001 Vizcaya Coordination Centres. This affirmation is also important in relation to other objective methods of profit determination such as the used for fisheries (?).Google Scholar

³³ Imposition of certain objective thresholds relative to the capital of the parent company, to the existence of a minimum amount of investment in the country or the creation of certain number of jobs. See the conditions to apply the Belgian scheme for coordination centres, the Luxembourg schemes for coordination centres and financial companies, the Dutch scheme for financing activities and the Spanish scheme for coordination centres.Google Scholar

³⁴ “Where the domestic tax liability is greater than the tax paid in the foreign source jurisdiction, under an exemption system, no further tax is due. Therefore, where a specific tax exemption for foreign income is granted under a system where the general rule provides for a credit, this exemption constitutes a tax advantage and reduces the beneficiary company's tax burden” para. 33 of C-54/2001 Ireland – foreign income (OJ L 204/51, 13.08.2003).Google Scholar

³⁵ The Commission conclusion for the Irish tax scheme is that “ from the current financial year, corporation tax is 12.5% and that in principle, such rate is lower than those applied in those jurisdictions where the branched are established. Therefore, the Commission accepts that branch no longer confers an advantage on those companies” para. 39 of C-54/2001 Ireland – foreign income (OJ L 204/51, 13.08.2003).Google Scholar

³⁶ Para.81 on C-51/2001 Netherlands Intenational Financing Activities (OJ L 180/52, 18.07.2003): “Dans le cadre de l'analyse des aides d'État, l'avantage doit etre évalué uniquement au niveau national » Google Scholar

³⁷ The so-called “taxation cases” declared the incompatibility with GATT rules of the USA DISC regime and the territoriality principle of some European countries (GATT Doc. L/4422, L/4423, L/4424 and L/4425, 2 November 1976. Also published in INTERTAX 1977/1). Under the WTO, the fist time that a WTO panel assessed the existence of a tax subsidy was in Indonesia-Certain Measures Affecting the Automobile Industry (WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R) where the panel studied the effect of the Indonesian National Car Programme, a package of measures in favour of certain car producers that included exemption of tariffs and indirect taxes. However, a specific reference to the possibility of granting subsidies through taxes was first included under the Tokyo Round in the Illustrative List of Export Subsidies, due to the problems of interpretation that the so-called “tax legislation cases” had posed to Panels in 1976. Nevertheless, some authors defend that the inclusion of tax benefits within the discipline of subsidies had always been present in the negotiators’ intention, since a Working Party Report adopted in 1960 dealing expressly with the “Provisions of Article XVI:4” already included a reference to taxes. See Hufbauer and Erb, Subsidies in International Trade, Institute for International Economics, Washington 1984 and Jackson, John J., The world Trading System (Cambridge, Massachusetts 1989).Google Scholar

³⁸ Article 1.1 of the ASCM. See also Trebilocki, and Howse, , The Regulation of International Trade: Political Economy and Legal Order (1995).Google Scholar

³⁹ This disposition implies the recognition of sub-national entities with the power to enact measures that could come under the category of subsidies. In our case, it implies the existence of sub-national entities empowered to raise direct taxes, or at least, to grant certain kinds of incentives within the general scheme created by the central government.Google Scholar

⁴⁰ The notion of benefit was firstly proposed to limit the use of countervailing duties imposed by some States. Goetz, Granet and Schwartz, The Meaning of “Subsidy” and “Injury” in Countervailing Duty Law International Review of Law and Economics 1986, 17., were the precursors of the use of the notion of benefit to limit the scope of USA countervailing duty laws. It was held that subsidies do not distort competition if they do not provide with a special benefit to the recipients, placing them in a better situation than their foreign competitors. If competition was not distorted, there was no reason to impose countervailing duties. Also Diamond, Economic Foundations of Countervailing Duty Law, Virginia Journal of International Law 1989, 759,783. As interpreted nowadays, however, the prerequisite of benefit means that the “financial contribution“ should make the recipient “better off” than it would otherwise have been, absent that contribution. This understanding implied some kind of comparison with the appropriate marketplace. (Canada- Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R adopted on 2 August 1999, paragraphs 153 and 157 and United States-Imposition of Countervailing Duties on Certain Hot-rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom WT/DS138/AB/R, adopted on 10 May 2000, paragraph 68).Google Scholar

⁴¹ Brazil- Export Financing Programme for Aircraft WT/DS46/AB/R adopted on 2 August 1999, paragraph 157 (emphasis in original).Google Scholar

⁴² Article 1.1(a)(1)(ii) ASCM.Google Scholar

⁴³ See documents quoted in footnote 2.Google Scholar

⁴⁴ FSC AB Report, para. 90.Google Scholar

⁴⁵ Apart from a financial contribution and a benefit, Article 1.2 ASCM requires a measure to be specific to be considered as a subsidy.Google Scholar

⁴⁶ Article 2.1(a) of the ASCM.Google Scholar

⁴⁷ Article 2.1(c) of the ASCM.Google Scholar

⁴⁸ Article 2.3 of the ASCM.Google Scholar

⁴⁹ FSC AB Report, para.91.Google Scholar

⁵⁰ Hudec, Industrial Subsidies: Tax treatment of Foreign Sales Corporations, Draft for conference on transnational relations held in the European University Institute, Florence, in 13-14 September 2002 (book forthcoming).Google Scholar

⁵¹ AB Report paragraph 103.Google Scholar

⁵² “A tax treaty neither generates a tax claim that does not exist under domestic law nor expands the scope or alters the type of an existing claim. The extent to which a State levies taxes within the boundaries drawn by DTCs is determined exclusively by its own domestic law.(…) In contrast, DTCs may grant benefits.” Vogel Klaus Vogel on Double Tax Conventions 3^rd Edition 46 (Kluwer Law International 1997).Google Scholar

⁵³ Roy ROHATGI “Basic International Taxation”, 2002 (p.3).Google Scholar

⁵⁴ Green, , Antilegalistic Approaches to Resolving Disputes between Governments: A Comparison of the International Tax and Trade Regimes 23 Yale J. Int'l L. 79 (1998).Google Scholar