Beyond BEPS and the Brexit: EU State Aid Investigations Intensify

While BEPS requirements and the drama surrounding the British exit from the European Union (EU) dominate the global business pages, a potentially more dramatic issue is unfolding in Europe: state aid investigations into prior tax agreements throughout the EU.

The European Commission (EC) has taken the position that previously legal tax agreements between individual EU countries and multinational corporations (MNCs) now qualify as unlawful state aid. This is not sitting well with MNCs, or US lawmakers and government officials. And, these disagreements could intensify, with some troubling consequences.

As Vertex Principal Senior for Tax Compliance George Salis writes in a freshly published World Finance article on the state aid investigations, “The EC’s final decisions ordering the Netherlands and Luxembourg to recover up to 10 years of tax revenue from Starbucks and Fiat, respectively, drew swift rebuke from US senators.” Leaders of the US Senate Committee on Finance wrote a letter to US Treasury Secretary Jack Lew voicing their reservations about the investigations, and Lew, in turn, expressed his own reservations by stating that the EC “appears to be pursuing unilateral enforcement actions that are inconsistent with, and likely contrary to, the BEPS project.”

The root causes of the problem run deep. Salis explains that the opposing viewpoints reflect fundamental differences between a European legal system based on civil law and a US legal system based on common law.

From a business perspective, state aid investigations are creating more uncertainty for CEOs, CFOs, treasurers and tax executives – at a time when they are already contending with uncertainty stemming from the global economic environment, BEPS compliance requirements, and the risks created by sharing more and more tax and financial data.

In his article, Salis delves deeper into the implications of this uncertainty, states why the leaders in the EC and US need to find common ground and frames the conflict by using a couple of clever analogies from game theory and chaos theory to explain it.