The European Commission has concluded that the Belgian “Excess Profit” tax scheme is incompatible with European state aid rules. The scheme, which had been in action since 2005, enabled multinationals to pay significantly lower taxes than other companies by reducing their corporate tax base in order to compensate for “excess profits” resulting from the very fact of being part of a multinational group.
Nevertheless, an in-depth investigation led by the Commission has now demonstrated that the scheme cannot be considered normal practice under Belgian company tax rules as it confers an unfair advantage on multinational companies. Moreover, it has been found to be incompatible with the “arm’s length principle” as laid out in EU state aid rules: even if a multinational does generate what might be considered “excess profits,” those profits should be shared between the companies in the group in a manner that corresponds with the economic reality and taxed in the relevant country.
The scheme was put on hold in February 2015 when the Commission opened its investigation. In the wake of the Commission’s decision, Belgium now has just two months to come up with a plan to recover the full amount of unpaid tax from the multinationals which benefitted from the scheme, estimated at € 700 million. At least 35 multinational companies, mostly European, are said to be involved.
Corporate taxation has been a hot topic in the EU in recent years, with numerous multinational representatives being called to the European Parliament to justify the way in which they declare and pay taxes and the Commission investigating multiple tax agreements across the EU.
The Commission’s continued interest in the topic was demonstrated by Commissioner Margrethe Vestager’s comments on the Belgian case, particularly regarding the need for care in applying measures aiming to counter double taxation: “contrary to what Belgium claims, the scheme can also not be justified by the need to prevent double taxation. The discounted profits are not taxed elsewhere. The scheme does not even require companies to demonstrate any evidence or even risk of double taxation. Instead of preventing double taxation, in reality the scheme gives a ’carte blanche’ to double non-taxation.”
The Commission will present a package of initiatives to tackle corporate tax avoidance on 27th January, aiming to ensure that companies pay taxes where they make profits and putting forward a European approach to implementing international tax governance standards. Multinationals will no doubt be eagerly awaiting its publication, which could well provide an indication of the Commission’s thinking in the context of its ongoing investigations. Nevertheless, while the details of the package remain uncertain, the Commission’s position on taxation has been increasingly consistent in recent months; the Belgian decision may simply be one in a long line of many to come.
Filippo Giuffrida Répaci