When governments in the United States decide to give special tax breaks to large corporations, the sky is the limit and no one can challenge that largesse. As Apple just learned to the tune of about $14 billion, things are different in the European Union.
The EU is much stricter about the tax benefits and other forms of financial assistance that can be given to companies. What is called state aid is not banned entirely, but it is supposed to be used only when it is “exceptionally justified” and does not distort competition.
Moreover, the European Commission can bring legal action when it believes that a member state has awarded state aid improperly, with the remedy being that the company has to give back the money.
Some state and local governments in the U.S. use procedures know as clawbacks to recover economic development assistance from companies that fail to meet job-creation or other promises they made to receive aid. The European Commission cases, by contrast, are not related to company performance but are instead based on an argument that the aid was illegitimate to begin with.
EU member states are supposed to get prior approval for state aid awards. Yet they often adopt practices, especially with regard to taxes, that the Commission may later decide constitute improper aid. That is what happened with Apple, which had received special rulings in Ireland dating back to the early 1990s that allowed it to avoid paying billions of euros in taxes in that country. Those rulings allowed two Irish subsidiaries of Apple that held valuable intellectual property licenses to exclude profits linked to those licenses from their taxable income in Ireland.
In 2016 the Commission challenged that arrangement and ordered Ireland to recover the aid. At the behest of both Apple and the Irish government, a lower court rescinded that order in 2020. The EU’s highest legal authority, the Court of Justice, just ruled the other way and put Apple on the hook for about 13 billion euros.
Legal disputes over state aid are common in the EU. Since 1999 the Commission has brought more than 300 challenges and forced companies to repay billions of euros. Yet it is also common for deep-pocketed corporations to appeal those decisions—and often they succeed. Amazon, for example, successfully appealed a ruling by the Commission against its tax deal with Luxembourg.
From what I can tell, the largest case prior to Apple in which a Commission challenge survived appeals was one in which the electric utility EDF had to pay back over 1 billion euros to the French government. When the Commission announced its action in 2015, the EU’s top competition regulator, Margrethe Vestager, was quoted as saying: “Whether private or public, large or small, any undertaking operating in the Single Market must pay its fair share of corporation tax. The Commission’s investigation confirmed that EDF received an individual, unjustified tax exemption which gave it an advantage to the detriment of its competitors, in breach of EU State aid rules.”
The Apple ruling reinforces the idea that special tax breaks are harmful both to competition and to fair taxation. We are a long way from that realization in the U.S., where tax deals and other incentives are widely treated as corporate entitlements.
Note: The Apple and EDF cases, along with much more, will be included in the forthcoming Violation Tracker Global.